Final Results

29 March 2018

Modern Water plc ("Modern Water" or "the Company")

FINAL RESULTS

Modern Water (AIM:MWG), the owner of leading technologies for water and wastewater treatment and the monitoring of water quality, today announces

full-year results for the 12 months ended 31 December 2017

Key points

Operational

· The first sale of an AMBC technology licence for a full-scale application in India

· The first sale of an AMBC technology licence in China

· The first sale of an FO desalination technology licence in China

· Microtox® technology certified in Mexico and Taiwan

Financial

· Revenue decreased 3% to £3.5m (2016: £3.6m);

· Gross profit declined 5% to £1.8m (2016:£1.9m);

· Operating loss before tax, interest, depreciation, amortisation was £2.8m (2016: £2.5m) excluding goodwill impairment.

· Total comprehensive loss for the year was £5.0m (2015: £2.2m)

· Cash outflow before financing in 2017 was £2.2m (2016: £2.1m); and

· Cash as at 31 December 2017 was £0.5m (2016: £1.1m).

Commenting on the results, Alan Wilson, Non-Executive Chairman of Modern Water, said:

"Modern Water made good headway in 2017, with three Membrane technology licences sold, further reorganisation instigated in the Monitoring Division, a successful share placing executed, the appointment of a new, widely respected, non-executive director and significant progress with our substantial wastewater treatment project in Gibraltar. The Board is optimistic that 2018 will see further progress in building Modern Water into a successful and sustainable business."

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 For further information:

Notes to editors

Modern Water owns, installs and operates broad based membrane systems using world-leading Forward Osmosis (FO) membrane technologies; supplies packaged seawater Reverse Osmosis (RO) desalination systems; supplies wastewater treatment solutions; and develops and supplies advanced systems for water monitoring. Its shares trade on AIM.

Modern Water's patented forward osmosis (FO) technology's benefits include lower energy consumption and a reduction in environmental impact in a variety of industries. With a sales presence in almost 60 countries, the Group's Monitoring division includes a leading real-time continuous toxicity monitor and trace metal analysers for monitoring the quality of drinking water.

www.modernwater.com 

CHAIRMAN'S STATEMENT

Alan Wilson

Modern Water made good headway in 2017, with three Membrane technology licences sold, further reorganisation instigated in the Monitoring Division, a successful share placing executed, the appointment of a new, widely respected, non-executive director and significant progress with our substantial wastewater treatment project in Gibraltar.

Revenue for 2017 was flat at £3.52m (2016: £3.63m) which, on a maintained Gross Margin, generated a loss (excluding exceptional items) of £3.14m (2016: £3.05m) on ordinary activities. Administration costs were also held flat at £4.40m (2016: £4.41m), whilst cash burn during the year amounted to £2.22m (2016: £2.09m).

Our Membrane Division continued to make good progress, more than doubling 2016 revenues to £0.37m (2016: £0.15m) due to technology licence sales in India and China as well as AquaPak revenues in Oman. By the year end, our All-Membrane Brine Concentrator (AMBC) pilot plant was operating successfully on a second site in India, with plans for a third underway, all with different clients and a first AMBC plant in China was being fabricated. We expect these will lead to further increases in AMBC sales during 2018.

In the Monitoring Division, the Board took a strategic decision in the summer of 2017 to terminate the contract of our Chinese distributor in favour of pursuing a multi-channel sales approach. This decision was taken in order to diversify our risk in what is one of our most important markets. Although we are pleased with progress, the transition continued through the year end and delayed some sales into 2018 (order book at year end of £0.26m). As a result, China revenues reduced by some £0.54m and consequently our Monitoring Division recorded a decline in sales to £3.15m (2016: £3.48m) and generated a loss before exceptional items of £0.92m on ordinary activities (2016: £0.37m).

During May, the Company issued 15.9 million new shares in Modern Water, which successfully raised £1.75m in an accelerated book build. This injection of capital has been put to good work in providing additional working capital in support of general operations and it also allowed us to invest in the re-development of a key product in the Monitoring Division, which is currently progressing well.

In December, we announced the appointment of Dr Piers Clark as a non-executive director. Piers is widely respected in the water treatment industry and it is a testament to Modern Water's progress that we were able to attract an individual of his calibre to the Board. He has already made a positive contribution to the Company.

Post year end, we were pleased to announce that the Joint Venture between Modern Water and Northumbrian Water was awarded an Advance Works Contract by H.M. Government of Gibraltar. This covers the design and survey works required to achieve final planning and environmental approvals for the design, build and operation of a wastewater treatment plant. On final award, Modern Water will be responsible for the design and build of the treatment plant and Northumbrian Water will be responsible for operating and maintaining the plant for 20 years post-build.

Given the fresh impetus we see in China through our new distributors for Monitoring products, the planned launch of a new Monitoring product later in the year, the progress we see in AMBC and Forward Osmosis technology licence sales, plus the opportunity we have secured in Gibraltar, the Board is optimistic that 2018 will see further progress in building Modern Water into a successful and sustainable business.

STRATEGIC REPORT

Simon Humphrey

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 2017.

Strategy: Membrane Division

The Company has continued to pursue its key strategic goals and has made clear progress in the commercialisation of its technologies. During the year, it became clear that our All-Membrane Brine Concentrator (AMBC) was creating very significant interest in our target markets of India and China and this technology became the key focus for the Membrane Division.

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.

In February 2017 we announced our first All-Membrane Brine Concentration (AMBC) project. Our partner in India, Advent Envirocare Technology PVT Ltd ("Advent Envirocare"), was awarded a contract to treat the wastewater for a textile dyeing company in India. The project incorporates Modern Water's patented AMBC technology.

In April we closed the first sale of our Forward Osmosis (FO) desalination technology in China. Our partner, Hangzhou Water, is supplying a 500m3/d FO desalination plant to Sijiao Island using Modern Water's patented forward osmosis technology.

In November we announced the first sale of our proprietary AMBC technology in China. Modern Water's AMBC technology will be built into an existing facility to treat flue-gas desulphurisation wastewater produced by a power station in this key region. The project will be executed in conjunction with Hangzhou Sunup Environmental Science and Technology Co., Ltd ("Sunup").

During the period, we also delivered, installed and commissioned our first AquaPak™ desalination unit in Oman and are now providing consulting services for a follow-on project.

Our Indian partner, Advent Envirocare, has also secured two further paid for trials of our technology with new industrial clients. The first has already been successfully completed and work has commended on the second. We are hopeful that these additional pilots will lead to further contract awards in 2018.

We believe this progress made in 2017 demonstrates that the technologies we have developed are attractive in the geographies and industries we have targeted.

Gibraltar Wastewater Treatment Project

Post the year end, 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 Services Limited ("Northumbrian Water"), covering the design and survey work required for final planning and environmental approvals, as well as preliminary site works.

As previously reported, Modern Water is responsible for the design and build portion of the contract, which was tendered at £22m in 2014. Northumbrian Water will be responsible for the operation and maintenance of the plant for 20 years following completion.

Strategy: Monitoring Division

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.

During 2017 we decided to terminate the agreement with our main distribution partner in China, in order to establish a wider network of distributors across the country, providing access to significantly more sales opportunities in the medium to long term. The transition resulted in a short term reduction in revenue from the Chinese market in 2017, contributing to an overall disappointing financial outcome for the Division. However, we can report that the Monitoring Division entered 2018 with a strong order book in China and a healthy sales pipeline from its new distributors.

During the year, significant investment has been made in product development and a new online trace metal monitoring system is due to be launched before the end of the year. It was also exciting to see our Microtox® technology certified by both the Mexican Authorities and Taiwanese Environmental Protection Agency as the approved method for the determination of acute toxicity in waste water, fresh water, sea and brackish water.

Recurring revenue from service contracts and reagent sales was £1.0m in 2017 (2016 £1.1m).

Capital Raise

A £1.75m share placing (£1.61m net of costs) was completed at 11p in May 2017 and was supported by management, new institutional shareholders and high net worth individuals. This, together with the £500k receivables facility in place since December 2016, and a new £500k facility from Barclays, gives us the resources to reach cash flow breakeven without compromising our ambitious investment and development plans.

Outlook

The publicity accompanying our first AMBC sale generated significant interest for this product and it has subsequently been trialled by two further potential clients in India and also sold to a partner in China. This success with the AMBC gives us confidence that our revised strategy of licensing our expertise to industrial partners is the correct one and we expect to announce further partnerships and contracts across the Membrane Division during 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.

The key challenge for the Company in 2018 is to close out the many commercial opportunities we are seeing and to sign additional partners to increase the geographic spread of our technology.

Our team of highly qualified and experienced professionals is fully aligned and focussed on achieving our key objectives. We are confident that we will capitalise on the successes of 2017 and ensure a successful outcome for 2018 and beyond.

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. In 2017 we achieved progress against our goals and will continue to focus on these elements to drive future growth. In 2017 the key milestones reached were:

The first sale of an AMBC technology licence for a full-scale application in India

The first sale of an AMBC technology licence in China

The first sale of an FO desalination technology licence in China

Microtox® technology certified in Mexico and Taiwan

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 2017, covered in more detail in the Financial Review and the financial statements, were:

· Revenue decreased 3% to £3.5m (2016: £3.6m);

· Gross profit declined 5% to £1.8m (2016:£1.9m);

· Operating loss before tax, interest, depreciation, amortisation was £2.8m (2016: £2.5m) excluding goodwill impairment.

· Total comprehensive loss for the year was £5.0m (2015: £2.2m) after the impairment of Goodwill

· Cash outflow before financing in 2017 was £2.2m (2016: £2.1m); and

· Cash as at 31 December 2017 was £0.5m (2016: £1.1m).

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 £165,000 (2016: £200,000). The Group has benefited from the HMRC R&D tax credits scheme with the receipt of £184,000 in cash from claims made in 2017, related to R&D expenditure in 2016. The Group will submit claims for the recovery of 2017 R&D expenditure to HMRC in 2018.

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 86 (2016: 89) 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 13 granted patents (2016: 13) and Modern Water has 6 (2016: 5) innovative wastewater treatment patents. Altogether the Group holds 105 granted patents (2016: 107) with a further 42 pending applications (2016: 22).

Group Resources

Modern Water continues to view its employees as a community, not just a workplace, 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 2017 the Group employed 41 permanent staff (2016: 44), supplemented by contract staff as required.

Group Financial Review

Summary

The Group had £0.5m cash in the bank and no debt at 31 December 2017 (2016: £1.1m cash). It has subsequently agreed a £0.5m loan facility with Barclays Bank and a trade receivables facility of £0.5m remains in place and is unutilised. During the year the Group as a whole continued to incur losses, reflecting the early stage of commercial roll out of the Membrane Division. The Monitoring Division also slipped back into losses after a change in distribution strategy in China delayed revenue, but it did end the year with an order book of £260,000. The overall loss before interest, tax, depreciation and amortisation widened to £2.8m (2016: £2.5m). The change was primarily due to delayed revenue in the Monitoring Division's China operations.

The Group generated revenues of £3.5m in 2017 (2016: £3.6m). Total comprehensive loss was £3.5m before a goodwill impairment charge (2016: £2.2m).

Cash Flows

The Group cash outflow for the year was £2.2m (2016: £2.1m) and during the year a net £1.61m was raised through the issue of new equity.

Cash inflow from R&D tax credits was £0.2m (2016: £0.5m). Cash outflows comprised £0.2m on property, plant and equipment (2016: £0.1m), £0.1m on patents (2016: £0.1m) and £1.9m on operating activities (2016: £2.0m).

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 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: recovery of profitability to a level similar to 2016.

· Membrane Division: number of technology licences sold more than doubling vs 2017.

· Gibraltar Waste Water Treatment Plant: full contract commences during 2018.

· R&D tax credit receipts from HMRC of a broadly similar amount to 2017.

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

· Continued availability of a £0.5m credit line secured on Modern Water Inc.'s trade receivables;

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.

Scaling up the technology

The Group's Membrane Division and certain monitoring products are not yet well established commercially. They have been developed over recent years and whilst the proving of the technology is largely complete there remain significant risks associated with commercialising technology and a portfolio of new products. There are technology and procurement risks in scaling up the products through to large scale commercial deployment. The Group seeks to mitigate these risks through the use of partners with proven manufacturing and fabrication capabilities, rather than developing in-house capabilities, and through the development and operation of pilot plants prior to full commercial deployment.

Additionally there are risks related to developing the optimum contract, royalty and licensing models to derive value from the products. The Group manages these risks through employment of executives and senior management with significant experience both in the water industry and in the development and growth of early stage companies.

Intellectual Property (IP) protection

The Group's ability to generate value from its products depends in part on the development and protection of its IP. The Group assigns significant resources, both internally through the Company's General Counsel and technical staff, and externally through patent attorneys, to enhance and protect its patented and non-patented IP.

Recruitment and retention of key personnel

The Group's directors and employees are highly qualified and experienced. Recruiting and retaining key staff is critical to the overall success. Knowledge and experience of the Group's products and customer base is retained by a relatively small number of individuals. The risk of staff loss is mitigated through its HR policies, competitive remuneration (including the Modern Water plc Incentive Plan), performance appraisals and training.

Health and safety

There are inherent health and safety risks with the deployment of the core membrane and monitoring products. The mitigation of any health and safety events involving the Group's products is key to the strategy for growth. The Group mitigates its health and safety risks through its Group Health and Safety Policy, which includes regular reporting to the Board and to the Management Team.

Capital risks

It may be desirable for the Company to raise additional capital by way of the further issue of Ordinary Shares to enable the Company to progress through further stages of development. Any additional equity financing may be dilutive to shareholders. There can be no assurance that such funding, if required, will be available to the Company.

Financial risks

These risks and mitigating controls are described in note 3 to the Accounts.

The Strategic Report was approved by the Board of Directors on 29 March 2018 and signed on its behalf by:

Simon Humphrey

Chief Executive Officer

29 March 2018

GROUP STATEMENT OF COMPREHENSIVE INCOME

Year ended 31 December 2017

GROUP STATEMENT OF FINANCIAL POSITION

As at 31 December 2017

GROUP STATEMENT OF CHANGES IN EQUITY

Year ended 31 December 2017

GROUP STATEMENT OF CASH FLOWS

Year ended 31 December 2017

NOTES TO THE FINANCIAL STATEMENTS

1. Authorisation and basis of preparation

The board of directors approved these results on 29 March 2018. The financial information set out above is abridged and does not constitute the Group's statutory financial statements for the year to 31 December 2017. Statutory financial statements for the year ended 31 December 2017 have been reported on by the Group's auditors. The report for the year ended 31 December 2017 was un-modified.

The principal accounting policies have been applied consistently throughout the year, unless otherwise stated, in the preparation of these financial statements. The financial statements of Modern Water plc ("the Company") have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU, IFRS Interpretations Committee (IFRIC) interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention.

2. Segmental analysis

The chief operating decision-maker is deemed to be the Board, for whom monthly financial Information is provided by division to gross profit and direct overheads; below this financial information is reported in a consolidated Group format. For management reporting purposes the Group is organised into two operating segments (i) membranes; and (ii) monitoring, which matches this divisional split.

Administrative expenses which are directly attributable to the two main operating divisions (comprised of business development, sales, operations and technical expenditure) are reported as expenditure in the respective division. However, a significant proportion of the Group's expenditure (legal, marketing, finance, facilities and directors' expenditure) is managed and reported centrally. As the commercial activities of the Group develop, this financial information is expected to evolve.

Geographical information

The Group operates in four main geographical regions, based on customer location.

The Group has non-current assets in five countries (2016: four), based on location of the assets.

Assets and liabilities are presented to the chief operating decision maker in a consolidated Group format. Assets and liabilities are not currently presented by segment, because they are managed centrally. As the commercial activities of the Group develop this financial information is expected to evolve.

Major customers

Within the Monitoring Division no one customer represented more than 10% of revenue (2016: One customer was £603,000 representing 17%). In the Membrane Division, revenue was earned from five customers in 2017 (2016: 100% from one customer).

3. Administrative expenses by nature

4. Intangible assets

5. Notice of Annual General Meeting

Notice is hereby given that the Annual General Meeting of Modern Water plc will be held at 10.00am on 25 April 2018 at the offices of Modern Water plc, Bramley House, The Guildway, Old Portsmouth Road, Guildford, GU3 1LR.

6. Availability of Annual Report

Copies of the full statutory accounts will be posted to shareholders at least 21 days before the Company's Annual General Meeting and may be obtained from the date of posting from the registered office of the Company office at Bramley House, The Guildway, Old Portsmouth Road, Guildford, GU3 1LR, as well as from the Company's website at www.modernwater.com.