Final Results

Modern Water plc

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

Final Results

COVID19 and business model change leads to strong order book after transformational year

Modern Water today announces its audited final results for the year ended 31 December 2019.

Results

2019 has been another transformational year for Modern Water attributable to the shutting down of two subsidiaries, resulting in lower overhead from disposal of non-performing assets and reduced employees as we move to a more online equipment and consumables support service Company.

Highlights:

· Total 2019 revenue from continuing operations of £2.9m from 2018 £3.6m;

· EBITDA losses before exceptional items of £0.9m (2018: £0.5m);

· Administration costs reduced to £2.4m (2018: £2.5m);

· Operating loss of £1.6m (2018 £1m) after providing for Depreciation & Amortisation of £687k (2018: £483k);

· Sale of brine concentration plant to leading global producer of industrial chemicals;

· Largest-ever AMBC for Korea Salt Production Facility;

· Liquidation of Modern Water Services Limited;

· Liquidation of Modern Water Monitoring Limited;

· Sale of its largest single order for its Microtox® CTM to a customer in China.

Post Year-End Events:

Since the year end the following events have taken place:

· February: Oversubscribed £1.85 million placing;

· February: Appointment of Dr Nigel Burton to the Board of Directors;

· February: Agreement to join ecowaterOS consortium for real-time water monitoring, recovery, treatment and recycling;

· March: Appointment of Gerard Brandon to Chairman of the Board of Directors;

· March: Orders of water contamination detection consumables up 46% in Q1 2020 compared to Q1 2019;

· May: First Montana patented AMBC wastewater plant order from Ion Exchange (India);

· May: Montana Microtox® LX declared winner in China laboratory instrument award;

· May: Sichuan Province China orders Montana equipment.

Gerard Brandon, Chairman of Modern Water, said:

"While 2019 was a tough year financially for the Company, the structural changes were necessary to expose the opportunity to move from high-ticket sales, which had a high employee support cost, in desalinisation and the membrane divisions. The Company business model in 2020 has moved to a high volume, high margin recurring revenue strategy that has been in existence within the Water Monitoring division that was acquired in 2011.

Modern Water continues to retain a leadership position within the water contamination monitoring sector and is adding the latest technologies in ecommerce, logistics, comms, networking and data encryption which extends the global reach of the Company beyond the US, EU and Far East offices. With thousands of sites and hundreds of water systems installed over the last 30 years, the Company retains a Gold Standard lead in water monitoring. The strategic challenge through this COVID-19 pandemic is being met with the move to provide support services online, making it easier and safer to interact with customers while at the same time to increase the capacity of our equipment to provide surveillance against all sorts of contaminants and threats including viruses and pathogens.

The new platform gives us the ability to fully exploit the data the Company generates from different water systems across the world. Data analytics with the latest AI systems in collaboration with Company partners set Modern Water up for multiple revenue streams from equipment, consumables and predictive services for our existing and new clients coming online to manage their COVID-19 risk."

Further information on our products and technologies can be found in the Chief Executive's Report.

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

For further information:

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 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

Dear Fellow Shareholder,

I was appointed as Chairman on the 4th of March 2020 and have pleasure presenting the Company's report and results for the year ended 31 December 2019.

Our Business

Modern Water plc ("Modern Water", "Group" or "the Company") was established in 2006 to develop and commercialise water recovery technologies to counter water crisis problems arising from climate change and a growing global population. Having invested £20m over the last 14 years, the results comprise of a robust patent portfolio in cutting-edge technology, focused on monitoring of contaminated water and decontamination of wastewater, making recycling of water more efficient. Six countries across the world have legislated that Modern Water monitoring test systems are written into their environmental protection legislation.

After a fundamental review of the Company by the new Board, a collaboration development approach for new products and data support services, a revenue sharing commercial strategy and out-sourced equipment and reagent production was a necessity to reduce administration costs, increase revenue and build on the 30 year reputation of Modern Water's Microtox® water monitoring brand.

Results

2019 has been another transformational year for Modern Water attributable to liquidating two UK subsidiaries, Modern Water Services Limited and Modern Water Monitoring Limited. The liquidation resulted from the decision to withdraw from the Gibraltar Wastewater Project due to the lack of progress and to refocus on membrane projects outside the UK. This has resulted in lower overhead from disposal of non-performing assets and reduced employees as we move to a more online equipment and consumables support service Company.

Highlights:

· Total 2019 revenue from continuing operations of £2.9m from (2018: £3.6m);

· EBITDA losses before exceptional items of £0.9m (2018: £0.5m);

· Administration costs reduced to £2.4m (2018: £2.5m);

· Operating loss of £1.6m (2018: £1m) after providing for Depreciation & Amortisation of £687k (2018: £483k);

· Sale of brine concentration plant to leading global producer of industrial chemicals;

· Largest-ever AMBC for Korea Salt Production Facility;

· Liquidation of Modern Water Services Limited;

· Liquidation of Modern Water Monitoring Limited;

· Sale of its largest single order for its Microtox® CTM to a customer in China.

Post Year-End Events:

· February: Oversubscribed £1.85 million Conditional Placing;

· February: Appointment of Dr Nigel Burton to Board of Directors;

· February: Agreement to join ecowaterOS consortium for real-time water monitoring, recovery, treatment and recycling;

· March: Orders of water contamination detection consumables up 46% in Q1 2020 compared to Q1 2019;

· May: First Modern Water patented AMBC wastewater plant order from Ion Exchange (India);

· May: Modern Water Microtox® LX declared winner in China laboratory instrument award;

· May: Sichuan Province China orders Modern Water equipment.

Further information on our products and technologies can be found in the Chief Executive's Report.

Corporate governance

I believe that good corporate governance is important to support our future growth and the Board, which has extensive experience in publicly listed companies and running companies in the healthcare and environmental sectors, is committed to the highest standards.

Outlook

While 2019 was a tough year financially for the Company, the structural changes were necessary to expose the opportunity to move from high-ticket sales, which had a high employee support cost, in desalinisation and the membrane divisions. The Company business model in 2020 has moved to a high volume, high margin recurring revenue strategy that has been in existence within the Water Monitoring division that was acquired in 2011.

Modern Water continues to retain a leadership position within the water contamination monitoring sector and is adding the latest technologies in ecommerce, logistics, comms, networking and data encryption which extends the global reach of the Company beyond the US, EU and Far East offices. With thousands of sites and hundreds of water systems installed over the last 30 years, the Company retains a Gold Standard lead in water monitoring. The strategic challenge through this COVID-19 pandemic is being met with the move to provide support services online, making it easier and safer to interact with customers while at the same time to increase the capacity of our equipment to provide surveillance against all sorts of contaminants and threats including viruses and pathogens.

The new platform gives us the ability to fully exploit the data the Company generates from different water systems across the world. Data analytics with the latest AI systems in collaboration with Company partners set Modern Water up for multiple revenue streams from equipment, consumables and predictive services for our existing and new clients coming online to manage their COVID-19 risk.

Gerard Brandon

Chairman

24 August 2020

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 2019.

The Group comprises of two technology divisions focused on Membrane technology and Monitoring technology

Monitoring Technology

Modern Water is expert in technology to monitor toxicity, metals and environmental contaminants in water, soil, food and industrial process streams.

Toxicity

Modern Water is expert in the design, development and provision of analytical instruments and technologies for monitoring toxicity in water, soil, food and industry. Our systems use bioluminescent bacteria to perform biosensor testing that detects the presence of toxic substances.

Microtox® LX

The Microtox® LX analyser is an award-winning laboratory based, temperature-controlled, self-calibrating photometer that measures acute toxicity. With over 2,900 instruments sold worldwide, the Microtox® toxicity test system is the industry standard for rapid toxicity screening and analysis.

Microtox® CTM

The Microtox® CTM makes fully automatic, continuous, on-line testing a reality. It has broad range detection capabilities that provide rapid early warning of contamination by several thousand known chemicals. This enables containment measures to be actioned in time to protect against serious contamination events.

Microtox® FX

The Microtox® FX instrument has a combined detection capability that provides a very sensitive and rapid test to detect two of the most probable classes of agents, pathogens and toxic chemicals that may accidently or intentionally contaminate drinking water or wastewater. Microtox® FX's acute toxicity and ATP detection capabilities make it the ideal instrument for rapidly and accurately assessing if the quality of drinking water, from the source to the tap, has been affected by an incident.

Trace Metals

Modern Water is expert in the design, development and provision of analytical instruments for monitoring trace metals in water, soil, food and industrial process streams. Our systems use solid state electrodes to perform voltammetry for the analysis of metals in solution.

Our trace metal product range includes the portable PDV6000plus and an on-line, continuous system the OVA7000. Our technology is robust and reliable, can be operated by technicians anywhere in the world and is low maintenance. The portable, laboratory and online systems have a worldwide reputation for quality, reliability and ease of use, enabling customers to monitor pollutant levels, optimise their processes, minimise damage to the environment and protect the health of employees and communities at large.

Environmental Tests

Modern Water is expert in the design, development and provision of analytical instruments and technologies for monitoring specific environmental contaminants in water, soil and industry samples. Our systems selectively identify contaminants such as PCB, pesticides, hydrocarbons, toxins, metals and explosives.

The Group's Environmental Monitoring products include a range of portable fluorometers, strip tests, test kits.

The fluorometer range allows rapid field deployment as well as in-situ, real-time monitoring and products include the AlgaeChek, AlgaeChek Ultra, BODChek, PetroChek, PAH and BTEX.

The Group has a wide variety of test kits which include the following product ranges: Ensys; EnviroGard®, RaPID Assay® and QuickChek. The Group also developed the QuickChek brand to include a variety of strip tests which are used with a reader to give instant results.

The Group has launched a fully integrated eCommerce solution with back-office and logistics platform, allowing clients and partners access to pricing, quotes, and equipment specifications. It has a built-in knowledge centre where 30 years of water contamination monitoring domain expertise is available to all users. Dedicated account areas for clients and partners also provide dashboards showing the live and near-time state of water monitoring sites including up to date information on consumables.

Membrane Technology

The principal technology currently being commercialised by the Group is the AMBC ('All Membrane Brine Concentrator'). The AMBC is Modern Water's cost-effective and proven technology for brine concentration. The AMBC is an innovative solution which significantly reduces wastewater treatment requirements and maximises clean water reuse, by concentrating brine streams up to, and beyond, 160,000 mg/l.

During the year the Company was awarded its largest-ever AMBC order for a Korea Salt Production Facility working with our Chinese partner Sunup.

Group

The year in review was a difficult year for the Group. Despite making progress across a number of projects in the membrane division, progress was not quick enough to provide the liquidity required to continue with the existing business model. In particular despite the successful conclusion of the planning application for the Gibraltar Wastewater Project the continuing delays by the Government of Gibraltar in awarding the full contract had a material adverse impact on the Group's resources.

As a result in August 2019 two subsidiaries Modern Water Services Limited and Modern Water Monitoring Limited were placed in liquidation.

Despite the liquidity issues the Group made progress in China and a successful end to the year with the award of its largest order for Microtox CTM units in December and the award of its largest-ever AMBC order for a Korean Salt Production Facility working with our Chinese partner Sunup in November.

Strategy

Following the changes to the Board in February and March the Group undertook a strategic review of the Group and its business model.

The outcome of the review was to move to a revenue-sharing collaborative and partnership strategy to accelerate growth. The new business model adopted in 2020 is to continue the move to a high volume, high margin, recurring revenue model that has been in existence within the Water Monitoring division that was acquired in 2011. Examples of the new business model were Modern Water joining the EcowaterOs consortium in February 2020 and in March the signing of a contract with Integumen for the manufacture of reagents using a revenue sharing model.

In June 2020 the Group launched its new website. The updated website includes a fully integrated eCommerce solution with back-office and logistics platform, allowing clients and partners access to pricing, quotes, and equipment specifications. It has a built-in knowledge centre where 30 years of water contamination monitoring domain expertise is available to all users. Dedicated account areas for clients and partners also provide dashboards showing the live and near-time state of water monitoring sites including up to date information on consumables.

This new platform gives us the ability to fully exploit the data the Group generates from different water systems across the world. Data analytics with the latest AI systems in collaboration with partners set Modern Water up for multiple revenue streams from equipment, consumables and predictive services for our existing and new clients coming online to manage their COVID-19 risk.

Outlook

Following the liquidity issues in 2019 the Company concluded an over-subscribed placing in February 2020 raising a net £1.7m and in June 2020 the Company received £110,000 following the exercise of warrants granted as part of the February placing.

Together with the significant reduction in overheads the Group is now well placed with the resources required to execute its new strategy and business model.

Group Key Performance Indicators (KPIs)

The key performance indicators currently used by the Group are revenue, EBITDA and cash resources. The Group intends to establish other key performance indicators in due course once the Group's new strategy has matured sufficiently. The Group does not use and does not at present intend to use non-financial key performance indicators.

The Board reviews strategic, operational and financial information on a monthly basis to measure progress. The key financial performance indicators for 2019 excluding the discontinued operations, covered in more detail in the Financial Review and the financial statements, were:

· Revenue lower by 19% at £2.9m (2018: £3.6m);

· Gross profit reduced 28% to £1.5m (2018: £2.0m);

· Operating loss before tax, interest, depreciation, amortisation increased by 86% to £0.9m (2018: £0.5m)

· Cash outflow before financing and investing in 2019 was £0.5m (2018: £1.4m); and

· Cash as at 31 December 2019 was £0.2m (2018: £0.2m). 

As detailed below the comparatives have not been restated for the impact of IFRS 16.

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 to maximise the value of the patent portfolio of the Group.

Group Patent Portfolio & Intellectual Property

The Group has continued to file new patents to strengthen our portfolio in important markets whilst, as part of its active patent management, and has decided to abandon patent coverage in some strategically unimportant jurisdictions, thereby achieving cost savings.

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 2019 the Group employed 23 permanent staff (2018: 37), supplemented by contract staff as required.

Group Financial Review

Summary

The Group had £0.2m cash in the bank and a bank loan of £0.4m at 31 December 2019 (2018: £0.2m cash and a bank loan of £0.5m). The overall loss before interest, tax, depreciation and amortisation was £0.9m (2018: £0.5m).

The Group generated revenues of £2.9m in 2019 (2018: £3.6m). Total comprehensive loss was £2.1m (2018: £2.8m).

Cash Flows

The Group cash outflow from operating activities for the year was £0.5m (2018: £1.4m) and during the year a net £0.6m was raised through the issue of new equity.

Cash inflow from R&D tax credits was £nil (2018: £0.2m). Cash outflows comprised £0.03m on property, plant and equipment (2018: £0.1m), £0.1m on patents and product development (2018: £0.3m) and £0.4m on operating activities (2018: £1.4m).

Capital Raise

The Company undertook two capital raises in the year. In January the Company's brokers placed 9,038,000 shares to raise £589,470 before costs and in September they placed a further 11,335,746 shares raising £141,696 before costs.

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 £1.5m and has net cash out flows from operating activities of £0.3m. 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 2020 and beyond.

Post year end the Group received two significant cash injections. In February 2020 the Company raised a net £1.7m from a placing of shares and in June 2020 the Company received £110k from the exercise of warrants.

The forecasts support that the Group 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.

· Group overheads estimated to be reduced further from £2.4 m in 2019 to £1.8m 2020

· Small increase in revenue in Monitoring Division

· Increase in revenue from the Chinese market

· Increase in value and number of AMBC licences in 2020

· Barclays Bank plc loan repayments rescheduled from June 2020

As disclosed in Note 21 a covenant on the bank loan was breached as at 31 December 2019, but the bank has waived this breach, agreed to reset the covenant and agreed a revised repayment schedule.

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.

Possible risks for Monitoring Division sales:

• Delays of shipments are possible due to taxes and tariffs collections.

• Licences, registrations or certificates may be required to provide services in EU.

• Additional documentation to ship product from the UK to EU.

• Import/export documentation (commercial invoice) may be required for every shipment from the UK to EU.

• Possibly, customers may require import permits to receive goods from the UK.

• GBP value can further decline therefore margins may suffer.

However, all the above are at best speculation at the time of writing and the exact outcome is yet to be confirmed.

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.

COVID-19 risk

Management is constantly reviewing the impact of COVID-19 with clients and partners to assess manufacturing and supply of services stress. These include, but are not limited to, restrictions on the supply of materials that enable the Group to supply goods and services to clients. This review process is designed to provide advance warning to be able to manage impacts on the business and to assist clients meet their needs where reliance on the delivery of our goods and services from the Group is critical.

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 our 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 Group's 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.

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 21 August 2020 and signed on its behalf by:

Simon Humphrey

Chief Executive Officer

24 August 2020

Group Statement of Comprehensive Income

for the year ended 31 December 2019

Group and Company Statements of Financial Position

as at 31 December 2019

Group and Company Statements of Changes in Equity

for the year ended 31 December 2019

Group and Company Statements of Cash Flows

for the year ended 31 December 2019

Notes to the Financial Statements

1. General information

Modern Water plc is a public limited company incorporated and domiciled in England and Wales, whose shares are publicly traded on the Alternative Investment Market (AIM), a market operated by the London Stock Exchange. The registered office is 12th Floor, 6 New Street Square, London, EC4A 3BF.

The consolidated and Company financial statements of Modern Water plc (the 'Company') and its subsidiaries (together the 'Group') for the year ended 31 December 2019 were authorised for issue by the Board of Directors on 21 August 2020 and the statement of financial position was signed by the Chief Executive Officer (Simon Humphrey).

The principal accounting policies adopted by the Group and Company are set out below.

2. Summary of significant accounting policies

The principal accounting policies have been applied consistently throughout the current and prior year, unless otherwise stated, in the preparation of these financial statements.

2.1 Basis of preparation and changes in accounting policy and disclosures

The financial statements of Modern Water plc 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.

The preparation of financial statements in conformity with IFRSs requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 4.

Under Section 479A of the Companies Act 2006, exemptions from an audit of the accounts for the financial year ended 31 December 2019 have been taken by Aguacure Ltd (05893786), Cymtox Limited (05025552), MW Monitoring IP Limited (07810737), Modern Water Holdings Limited (07588452), Modern Water (Nominees) Limited (6013174), MW Monitoring Limited (7495046), Poseidon Water Limited (04598478) and Surrey Aquatechnology Limited (05698169). As required, the Company guarantees all outstanding liabilities to which the subsidiary companies listed above are subject at the end of the financial year, until they are satisfied in full and the guarantee is enforceable against the parent undertaking by any person to whom the subsidiary companies listed above is liable in respect of those liabilities.

2.1.1 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 £1.5m and has net cash out flows from operating activities of £0.5m. 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 2020 and beyond.

Post year end the Group received two significant cash injections. In February 2020 the Company raised a net £1.7m from a placing of shares and in June 2020 the Company received £110k from the exercise of warrants.

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.

· Group overheads estimated to be reduced further from £2.4m in 2019 to £1.8m 2020

· Small increase in revenue in Monitoring Division

· Increase in revenue from the Chinese market

· Increase in value and number of AMBC licences in 2020

· Barclays Bank Plc loan repayments rescheduled from June 2020

As disclosed in Note 21 a covenant on the bank loan was breached as at 31 December 2019, but the bank has waived this breach, reset the covenant and agreed a revised repayment schedule.

The Directors have considered the impact of Covid-19 and are closely monitoring the situation.

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.

2.1.2 Changes in accounting policy and disclosures

Changes in accounting policy

For the purpose of the preparation of these consolidated financial statements, the Group has applied all standards and interpretations that are effective for accounting periods beginning on or after 1 January 2019.

Other than IFRS 16, no new standards, amendments and interpretations have had a material impact on the Group.

Initial application of IFRS 16 'Leases'

As of 1 January 2019, the Group adopted IFRS 16 Leases which replaced IAS 17. IFRS 16 introduced a single, on-balance sheet accounting model for leases. As a result, the Group, as a lessee, is required to recognise right-of-use assets representing its right to use the underlying assets and lease liabilities representing its obligation to make lease payments.

The Group has applied IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application is recognised in retained earnings at 1 January 2019. Accordingly, the comparative information presented for 2018 has not been restated. The details of the changes in accounting policies are disclosed below.

The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, being the present value of minimum lease payments, and subsequently at cost less any accumulated depreciation and impairment losses. The value of the lease will be remeasured when and if terms of the lease change. The Group shall apply judgement to determine the lease term for some lease contracts where it is a lease that includes renewal options.

The Group has applied the exemption not to recognise right-of-use assets and liabilities for leases with less than 12 months of lease term when applying IFRS 16 to leases previously classified as operating leases under IAS 17.

Transition to IFRS 16

The Group adopted IFRS 16 using the simplified retrospective method of adoption with the date of initial application of 1 January 2019. The Group elected to use the transition practical expedient allowing the standard to be applied only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application. The Group also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option ('short-term leases'), and lease contracts for which the underlying asset is of low value ('low-value assets').

The effect of adoption of IFRS 16 is as follows:

New standards, interpretations and amendments not yet effective

Standards, amendments and interpretations that are not yet effective and have not been early adopted are as follows:

The Group is evaluating the impact of the new and amended standards above which are not expected to have a material impact on the Group's results or shareholders' funds.

2.1.3 Parent company financial statements

Modern Water plc has taken advantage of the exemption provided under section 408 of the Companies Act 2006 not to disclose the parent company statement of comprehensive income. The loss attributed to the parent company in the year was £7,785,000 (2018 loss of: £1,390,000).

2.2 Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries).

(a) Subsidiaries

Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if, and only if, the Group has:

• Power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee)

• Exposure, or rights, to variable returns from its involvement with the investee

• The ability to use its power over the investee to affect its returns

Generally, there is a presumption that a majority of voting rights results in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:

• The contractual arrangement(s) with the other vote holders of the investee

• Rights arising from other contractual arrangements

• The Group's voting rights and potential voting rights

The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary.

Acquisition costs are expensed as incurred.

If the business combination is achieved in stages, the acquisition date fair value of the acquirer's previously held equity interest in the acquire is re-measured to fair value at the acquisition date through profit or loss.

Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date.

Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with IAS 39 either in the profit and loss or as a charge to other comprehensive income.

Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity.

Goodwill is initially measured as the excess of the aggregate of the consideration transferred in relation to the fair value of the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in the statement of comprehensive income.

Inter-company transactions, balances, income and expenses on transactions between group companies are

eliminated. Profits and losses resulting from inter-company transactions that are recognised in assets are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

(b)  Transactions with non-controlling interests

The Group treats transactions with non-controlling interests as transactions with the equity owners of the Group. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of the net assets of the subsidiary is recorded in equity.

Comprehensive losses are attributable to non-controlling interests only to the extent the Group expects to recover them.

When the Group ceases to have control or significant influence, any retained interest in the entity is re-measured to fair value with the change in carrying amount recognised in the statement of comprehensive income. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. Any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to the profit or loss.

2.3 Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board that makes strategic decisions.

2.4 Foreign currency translation

(a) Functional and presentation currency

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The consolidated financial statements are presented in sterling (£), which is the Group's presentation currency and the Company's functional currency.

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income. Foreign exchange gains and losses that relate to borrowings and cash and cash equivalents are presented in the statement of comprehensive income within 'finance income or cost'.

(c) Group companies

The results and financial position of all the Group entities (none of which has the currency of a hyper-inflationary

economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

· assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position;

· income and expenses are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and

· all resulting exchange differences are recognised in other comprehensive income.

2.5 Property, plant and equipment

All property, plant and equipment is shown at cost less accumulated depreciation and impairment. Cost includes expenditure that is attributable to the acquisition of the items. Depreciation on assets is calculated using the straight-line method to allocate the cost of each asset to its residual value over its estimated useful economic life, as follows:

Leasehold improvements - remaining term of the lease

Plant and machinery - three to five years

Motor vehicles - three to five years

Office equipment - three to five years

Furniture, fixtures and fittings - three to five years

The assets' residual values and useful economic lives are reviewed, and adjusted if appropriate, at each balance sheet date.

Subsequent costs are capitalised only when it is probable that they will result in future economic benefits flowing to the Group and when they can be measured reliably. All other repairs and maintenance expenditure is charged to the statement of comprehensive income in the period in which it is incurred.

2.6 Intangible assets

(a) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net identifiable assets of the acquired subsidiary/joint venture/associate at the date of acquisition:

· goodwill on acquisitions of subsidiaries is included in 'intangible assets'; and

· goodwill on acquisitions of joint ventures is included in 'investments in joint ventures' and is tested for impairment as part of the overall balance

Separately recognised goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill related to the entity sold.

Goodwill is not subject to amortisation, but is tested for impairment annually to identify whether there have been events or a change in circumstances to indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset's fair value less costs to sell and the value in use. For the purposes of assessing impairments, assets are grouped at the lowest levels for which there are identifiable cash flows in Cash Generating Units (CGUs). The allocation is made to those CGUs or groups of CGUs that are expected to benefit from the business combination in which the goodwill arose. Due to the pre-revenue stage of most of the Group's technologies, value in use has been assessed based on the present value of applying the Group's technologies to potential contracts in the future and an assessment of the expected number of such contracts.

(b) Patents and trademarks

Separately acquired patents are recognised at cost. They have a finite useful economic life and are subsequently carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of patents over their estimated useful economic lives of 20 years from patent filing.

Trademarks are initially recorded at historical cost. They have a finite useful life and are subsequently carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of trademarks over their useful economic life of five years from filing.

(c) Development costs

Development costs identified as a result of a business combination are accounted for in accordance with IAS 38, brought on to the consolidated statement of financial position at the date of acquisition and amortised on a straight-line basis between 10 and 20 years.

(d) Research and development

Expenditure on research activities is recognised as an expense in the period in which it is incurred.

Any internally-generated development costs are recognised as an asset only if all of the following are met:

1) The technical feasibility of completing the intangible asset so that it will be available for use or sale

2) The intention to compete the intangible asset and use or sell it

3) The ability to use or sell the intangible asset

4) The ability of the intangible asset to generate probable future economic benefits

5) The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset

6) The ability to measure reliably the expenditure attributable to the intangible asset during its development

Where no internally generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. Internally generated intangible assets are amortised on a straight-line basis over three years.

Patented technology acquired as part of a business combination is recorded at the fair value on acquisition and amortised on a straight-line basis over the useful economic life of the asset.

R&D tax credits received are recorded as income in the corporation tax charge/benefit in the year the cash is received.

2.7 Impairment of intangible assets, investments, property, plant and equipment

Assets that are subject to amortisation or depreciation are tested for impairment when events or a change in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset's fair value less costs to sell and the value in use. For the purposes of assessing impairments, assets are grouped at the lowest levels for which there are identifiable cash flows. Due to the pre-revenue stage of most of the Group's technologies, value in use has been assessed based on the present value of applying the Group's technologies to potential contracts in the future and an assessment of the expected number of such contracts.

2.8 Investments

Investments are stated at cost less any provision for impairment. Investment assets are tested annually for impairment, see note 16.

2.9 Leases

Prior to 1 January 2019: Leases in which a significant portion of the risks and rewards are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the Statement of Comprehensive Income on a straight-line basis over the period of the lease.

Assets held under finance leases are recognised as assets of the Group at the fair value at the inception of the lease or if lower, at the present value of the minimum lease payments. The related liability to the lessor is included in the Statement of Financial Position as a finance lease obligation. Lease payments are apportioned between interest expenses and capital redemption of the liability. Interest is recognised immediately in the Statement of Comprehensive Income, unless attributable to qualifying assets, in which case they are capitalised to the cost of those assets.

Post 1 January 2019: Assets held under leases are recognised as assets of the Group at the fair value at the inception of the lease or if lower, at the present value of the minimum lease payments. The related liability to the lessor is included in the Statement of Financial Position as a finance lease obligation. Lease payments are apportioned between interest expenses and capital redemption of the liability. Interest is recognised immediately in the Statement of Comprehensive Income, unless attributable to qualifying assets, in which case they are capitalised to the cost of those assets.

Exemptions are applied for short life leases and low value assets, with payments made under operating leases charged to the Statement of Comprehensive Income on a straight line basis over the period of the lease.

2.10 Cash and cash equivalents

In the Cash Flow Statements, cash and cash equivalents comprise cash in hand and deposits held at call with banks.

2.11 Financial instruments

Recognition and derecognition

Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the financial instrument.

Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and substantially all the risks and rewards are transferred. A financial liability is derecognised when it is extinguished, discharged, cancelled or expires.

Classification and initial measurement of financial assets

Except for those trade receivables that do not contain a significant financing component and are measured at the transaction price in accordance with IFRS 15, all financial assets are initially measured at fair value adjusted for transaction costs (where applicable).

Financial assets, other than those designated and effective as hedging instruments, are classified into the following categories:

• amortised cost

• fair value through profit or loss (FVTPL)

• fair value through other comprehensive income (FVOCI).

In the periods presented the Group does not have any financial assets categorised as FVTPPL or FVOCI.

The classification is determined by both:

• the entity's business model for managing the financial asset

• the contractual cash flow characteristics of the financial asset.

All income and expenses relating to financial assets that are recognised in profit or loss are presented within finance costs, finance income or other financial items, except for impairment of trade receivables which is presented within other expenses.

Subsequent measurement of financial assets

Financial assets at amortised cost

Financial assets are measured at amortised cost if the assets meet the following conditions (and are not designated as FVTPL):

• they are held within a business model whose objective is to hold the financial assets and collect its contractual cash flows

• the contractual terms of the financial assets give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding

After initial recognition, these are measured at amortised cost using the effective interest method. Discounting is omitted where the effect of discounting is immaterial. The Group's cash and cash equivalents, trade and most other receivables fall into this category of financial instruments.

Impairment of financial assets

IFRS 9's impairment requirements use more forward-looking information to recognise expected credit losses - the 'expected credit loss (ECL) model'. This replaces IAS 39's 'incurred loss model'. Instruments within the scope of the new requirements included loans and other debt-type financial assets measured at amortised cost, trade receivables and contract assets recognised and measured under IFRS 15.

Recognition of credit losses is no longer dependent on the Group first identifying a credit loss event. Instead the Group considers a broader range of information when assessing credit risk and measuring expected credit losses, including past events, current conditions, reasonable and supportable forecasts that affect the expected collectability of the future cash flows of the instrument.

In applying this forward-looking approach, a distinction is made between:

• financial instruments that have not deteriorated significantly in credit quality since initial recognition or that have low credit risk ('Stage 1') and

• financial instruments that have deteriorated significantly in credit quality since initial recognition and whose credit risk is not low ('Stage 2').

'Stage 3' would cover financial assets that have objective evidence of impairment at the reporting date.

'12-month expected credit losses' are recognised for the first category while 'lifetime expected credit losses' are recognised for the second category.

Measurement of the expected credit losses is determined by a probability-weighted estimate of credit losses over the expected life of the financial instrument.

Trade and other receivables and contract assets

The Group makes use of a simplified approach in accounting for trade and other receivables as well as contract assets and records the loss allowance as lifetime expected credit losses. These are the expected shortfalls in contractual cash flows, considering the potential for default at any point during the life of the financial instrument. In calculating, the Group uses its historical experience, external indicators and forward-looking information to calculate the expected credit losses using a provision matrix.

The Group assess impairment of trade receivables on a collective basis as they possess shared credit risk characteristics they have been grouped based on the days past due. Refer to Note 19 for a detailed analysis of how the impairment requirements of IFRS 9 are applied.

Classification and measurement of financial liabilities

The Group's financial liabilities include borrowings, trade and other payables and derivative financial instruments.

Financial liabilities are initially measured at fair value, and, where applicable, adjusted for transaction costs unless the Group designated a financial liability at fair value through profit or loss.

Subsequently, financial liabilities are measured at amortised cost using the effective interest method except for derivatives and financial liabilities designated at FVTPL, which are carried subsequently at fair value with gains or losses recognised in profit or loss (other than derivative financial instruments that are designated and effective as hedging instruments).

All interest-related charges and, if applicable, changes in an instrument's fair value that are reported in profit or loss are included within finance costs or finance income.

2.12 Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in, first-out (FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labour and other direct costs but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Provisions, if necessary, are made for slow-moving, obsolete and defective inventories.

2.13 Share Capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds.

2.14 Employee benefits

(a) Pension obligations

The Group has a defined contribution pension plan for directors and staff. The scheme is administered by an insurance company to which the Group pays fixed contributions and the Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.

(b) Share-based payments

Share-based incentive arrangements are provided to directors and employees. The Group operates a number of share-based payment schemes under the Modern Water plc Incentive Plan (MWIP) which is described in note 8.

The fair value of the services received in exchange for the share-based payment is recognised as an expense with a corresponding credit to equity, where the payment is equity-settled, if cash settled then the cost is accrued in the statement of financial position. Where equity-settled the total amount to be expensed over the vesting period is determined by reference to the fair value of the options and bonus shares granted at the date of grant using either a Black-Scholes or Monte Carlo pricing model. Where cash-settled the total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted at the date of grant and then reassessed at each subsequent reporting date using the Black-Scholes model. The annual charge is modified to take account of awards granted to employees who leave the Group during the performance or vesting period and forfeit their rights to the share options and in the case of non-market related performance conditions, where it becomes unlikely they will vest.

The grant by the Company of share-based payments to the employees of subsidiary undertakings in the Group is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity.

(c) Warrant Liability

In January 2019 we issued to Turner Pope Broker warrants to purchase an aggregate of 9,578,000 shares of our common stock at a price of 6.50 and 9.75 pence. We accounted for the Turner Pope warrants as non-cash liabilities and estimated their fair value using Black Scholes model. The key component in determining the fair value of the Turner Pope Warrants and the related liability was the market price of our common stock, which is subject to significant fluctuation and is not under our control. 

2.15 Taxation

The current income tax charge is calculated on the basis of the tax laws applicable to the current year and enacted or substantively enacted at the statement of financial position date in the countries where the Company's subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation, and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination, which at the time of the transaction affects neither the accounting nor the taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax is realised or the deferred income tax liability is settled.

Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

2.16 Revenue

Revenue arises mainly from the sale of goods and services, licence and maintenance fees, engineering contracts and royalties.

To determine whether to recognise revenue, the Group follows a 5-step process:

1 Identifying the contract with a customer

2 Identifying the performance obligations

3 Determining the transaction price

4 Allocating the transaction price to the performance obligations

5 Recognising revenue when/as performance obligation(s) are satisfied.

The Group often enters into transactions involving a range of the Group's products and services, for example for the delivery of goods, licences and maintenance fees. In all cases, the total transaction price for a contract is allocated amongst the various performance obligations based on their relative stand-alone selling prices. The transaction price for a contract excludes any amounts collected on behalf of third parties.

Revenue is recognised either at a point in time or over time, when (or as) the Group satisfies performance obligations by transferring the promised goods or services to its customers.

The Group recognises contract liabilities for consideration received in respect of unsatisfied performance obligations and reports these amounts as other liabilities in the statement of financial position. Similarly, if the Group satisfies a performance obligation before it receives the consideration, the Group recognises either a contract asset or a receivable in its statement of financial position, depending on whether something other than the passage of time is required before the consideration is due.

(a) Sale of goods

Revenue from the sale goods for a fixed fee is recognised when or as the Group transfers control of the assets to the customer. Invoices for goods or services transferred are due upon receipt by the customer.

For stand-alone sales of goods that are neither customised by the Group nor subject to significant integration services, control transfers at the point in time the customer takes undisputed delivery of the goods. When such items are either customised or sold together with significant integration services, the goods and services represent a single combined performance obligation over which control is considered to transfer over time. This is because the combined product is unique to each customer (has no alternative use) and the Group has an enforceable right to payment for the work completed to date. Revenue for these performance obligations is recognised over time as the customisation or integration work is performed, using the cost-to-cost method to estimate progress towards completion. As costs are generally incurred uniformly as the work progresses and are considered to be proportionate to the entity's performance, the cost-to-cost method provides a faithful depiction of the transfer of goods and services to the customer.

(b) Licence fees

For sales of licences that are neither customised by the Group nor subject to significant integration services, the licence period commences upon delivery. For sales of licences subject to significant customisation or integration services, the licence period begins upon commencement of the related services.

(c) Maintenance contracts

The Group enters into agreements with its customers to perform regularly scheduled maintenance services on goods and licences purchased from the Group. Revenue is recognised over time based on the ratio between the number of hours of maintenance services provided in the current period and the total number of such hours expected to be provided under each contract. This method best depicts the transfer of services to the customer because: (a) details of the services to be provided are specified by management in advance as part of its published maintenance program, and (b) the Group has a long history of providing these services to its customers, allowing it to make reliable estimates of the total number of hours involved in providing the service.

(d) Engineering contracts

The Group enters into contracts for the design, development and installation of its technology in exchange for a fixed fee and recognises the related revenue over time. Due to the high degree of interdependence between the various elements of these projects, they are accounted for as a single performance obligation. When a contract also includes promises to perform after-sales services, the total transaction price is allocated to each of the distinct performance obligations identifiable under the contract on the basis of its relative stand-alone selling price.

To depict the progress by which the Group transfers control of the systems to the customer, and to establish when and to what extent revenue can be recognised, the Group measures its progress towards complete satisfaction of the performance obligation by comparing actual hours spent to date with the total estimated hours required to design, develop, and install each system. The hours-to-hours basis provides the most faithful depiction of the transfer of goods and services to each customer due to the Group's ability to make reliable estimates of the total number of hours required to perform, arising from its significant historical experience constructing similar projects.

(e) Royalties

Royalty income is recognised as revenue on an accruals basis in accordance with the substance of the relevant agreements as agreed targets are met/sales are made. Royalty revenue is recognised on the basis of royalty statements provided by distributors.

2.17 Exceptional items

Exceptional items are disclosed separately in the financial statements where it is necessary to do so to provide further understanding of the financial performance of the Group. They are material items of income or expense that have been shown separately due to the significance of their nature or amount.

3. Financial risk management

The Group is subject to a number of financial risks, principally market risk (interest rate risk and foreign exchange risk); credit risk; liquidity risk; and capital risk. The Group's policy aims to mitigate these risks though a conservative approach to treasury management:

(a) Market risk

(i) Interest risk

The Group's interest rate risk arises from variable interest rates on finance income and investing cash flows from the cash deposits. The Group's policy is to invest in fixed interest term deposits, thereby mitigating uncertainty over the future interest receipts. As the Group has no borrowings it only has limited interest rate risk.

(ii) Foreign exchange risk

During 2019 the majority of the Group's costs were in pounds sterling and US dollars therefore it was appropriate to hold funds in pounds sterling and US dollars. The Group does also have a major supplier who invoices in Australian dollars, but the FX conversion is executed at the time of any transaction. In addition to sterling and US dollar accounts, the Group maintains Euro, RMB and OMR accounts for customer receipts and to hold currency to hedge against future commitments in those currencies. The principal exchange rates used by the Group in translating overseas profits and net assets are set out in the table below.

(b) Credit risk

The Group is exposed to credit risk from placing significant deposits with counterparties. The Group's policy is to restrict counterparties to institutions that are Moody's A rated when the deposit is placed; ratings can change during the term of the deposit. Cash balances by counterparty credit rating are listed in note 19. Additionally the Group is exposed to credit risk from customers. This risk is mitigated in the Monitoring Division through new customers being required to pay in advance for their first purchase. Customer's seeking credit undergo a credit application process and are subject to credit limits. Accounts receivable balances are monitored and actively managed on a regular basis.

(c) Liquidity risk

The Group's liquidity risk arises from cash being on deposit with counterparties and therefore not available at short notice to meet requirements. The Group's policy is to maintain rolling cash flow forecasts and place cash on deposit with a range of maturity dates to meet forecast liquidity requirements. The maximum duration for a term deposit is 12 months from the date of deposit.

(d) Capital risk

Capital risk relates to the long term funding requirements for the Group. The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. At the Group's current stage of development it is appropriate for it to be wholly funded by equity. As the Group develops, this capital structure will be reviewed.

4. Critical accounting estimates and judgements

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results.

Significant management judgements

The following are the judgements made by management in applying the accounting policies of the Group that have the most significant effect on the financial statements.

(a) Recognition of maintenance and engineering contract revenues

As revenue from maintenance agreements and engineering contracts is recognised over time, the amount of revenue recognised in a reporting period depends on the extent to which the performance obligation has been satisfied. Recognising revenue for engineering contracts requires significant judgment in determining the estimated number of hours required to complete the promised work when applying the hours-to-hours method described in Note 2.16(d).

(b) Capitalisation of internally developed intangibles

Distinguishing the research and development phases of a new customised software project and determining whether the recognition requirements for the capitalisation of development costs are met requires judgement. After capitalisation, management monitors whether the recognition requirements continue to be met and whether there are any indicators that capitalised costs may be impaired (see Note 2.7(d)).

(c) Deferred tax recognition

The extent to which deferred tax assets can be recognised is based on an assessment of the probability that future taxable income will be available against which the deductible temporary differences and tax loss carry-forwards can be utilised. In addition, significant judgement is required in assessing the impact of any legal or economic limits or uncertainties in various tax jurisdictions. For further details please see note 11.3 of the Notes to the Financial Statements.

(d) Going Concern

The Directors have carried out a review of forecast cash flows and have concluded that the going concern basis is justified in preparation of the financial statements. Judgement has been made in assessing the appropriate assumptions to be used in carrying out this review. For further details please see note 2.1.1 of the Notes to the Financial Statements.

(e) Classification of warrants

The classification of warrants issued requires judgement as to whether they should be recognised as debt or equity. In making this assessment the Directors consider the terms of the warrants in accordance with the requirements of IAS 32, in particular applying judgement as to whether or not the "fixed for fixed" test in the Standard is satisfied. See Note 24.3 for further details.

Estimation uncertainty

Information about estimates and assumptions that may have the most significant effect on recognition and measurement of assets, liabilities, income and expenses is provided below. Actual results may be substantially different.

(a) Estimated impairment of non-financial assets and goodwill

In assessing impairment, management estimates the recoverable amount of each asset or cash generating unit based on expected future cash flows and uses an interest rate to discount them. Estimation uncertainty relates to assumptions about future operating results and the determination of a suitable discount rate (see Note 2.7). Also see Note 16 for details in relation to investments.

(b) Acquired intangible assets

The Group is carrying significant intangible assets (patented technology and research and development) arising from business combinations in prior years, in accordance with the accounting policy stated in note 2.6. Estimation of the fair values of intangible assets acquired through business combinations requires assumptions as to replacement cost, value, future useful economic life and future cash flows for impairment tests. There is a high degree of judgement required in making these assumptions which impact both the initial fair value acquired and the carrying value as at the balance sheet date.

(c) Share-based payments

The fair value calculation of share-based payments requires several assumptions and estimates. Their details are included in note 8. Such assumptions and estimates could change and could affect the amount recorded.

Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which depends on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share option or appreciation right, volatility and dividend yield and making assumptions about them. The Group initially measures the cost of cash-settled transactions with employees using a Black-Scholes model to determine the fair value of the liability incurred. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 8.

(d) Inventory provisions

Management estimates the net realisable values of inventories, taking into account the most reliable evidence available at each reporting date. The future realisation of these inventories may be affected by future technology or other market-driven changes that may reduce future selling prices.

5. Segmental analysis

5.1 Reportable segments

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.

Revenue is recognised either at a point in time or over time when (or as) the Group satisfies performance obligations by transferring the promised goods or services to its customers.

The Monitoring Division recognised £2,822,000 (2018: £3,646,000) from sale of goods and services and £nil (2018: £nil) revenue from royalties on a point in time basis.

The Membrane Division recognised £119,000 (2018: £nil) from the sale of technology licences, engineering services and operating contracts on a services transferred over time basis.

5.2 Geographical information

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

The Group has non-current assets in two countries (2018: two), 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.

5.3 Major customers

Within the Monitoring Division no one customer represented more than 10% of revenue (2018: None greater than 10%). In the Membrane Division, revenue was earned from one customer in 2019 (2018: Revenue from four customers).

6. Administrative expenses by nature

7. Employee benefits expense

Other benefits include recruitment fees, private health insurance, life insurance and income protection and redundancy costs.

Key management personnel is considered to be the executive director.

The aggregate amount of emoluments, excluding employers pension contributions, paid to the executive director in respect of qualifying services was £143,931 (2018: £143,931). The highest paid director received £143,931 (2018: £143,931), excluding pension contributions. There were no gains made by directors on the exercise of share options (2018: £nil). No money was received by directors under long term incentive schemes (2018: £nil). The executive director, who was also the highest paid director, in total received £nil in cash bonuses relating to 2019 performance (2018: £nil). The Group paid £13,749 (2018: £13,749) to the executive director in respect of money purchase pension schemes. Total remuneration for non-executive directors was £69,000 (2018: £90,000).

In addition to the above costs for permanent staff, the Group utilises the services of contract and agency staff as circumstances require.

8. Share-based payment plans

The share-based payment plans are described below. The number of shares issued under these plans is limited to 10% of the issued ordinary share capital of the Company.

The Group incurred a £5,000 (2018: £168,000) share-based payment charge of which a charge of £5,000 (2018: £21,000) was recognised in the Company's Statement of Comprehensive Income for its employees and £nil (2018: £147,000) to the employees of subsidiary undertakings. The charge for equity-settled share-based payments to the employees of the Company's subsidiaries of £nil (2018: £147,000) is recognised as a capital contribution in the Company's statement of financial position (note 16).

Modern Water plc Incentive Plan (MWIP)

The original MWIP was adopted on 1 June 2007 and contained provisions relating to the making of awards in the form of options and conditional awards of ordinary shares (to be received once performance conditions are satisfied). It had a 10 year life, so a new MWIP was adopted in September 2017 containing the same provisions.

(a) Options (Excluding EMI options)

Under this scheme share options are granted to management. Certain awards are granted with an exercise price equal to the market price on the date of the grant, others at nil exercise price. The options may be exercised after three years from date of grant. Options expire after 10 years and, in certain circumstances, are forfeited if the option holder leaves the Group before the options vest. The movement in the number of share options is below:

The fair value of the equity-settled share options granted is estimated as at the date of grant using a Black-Scholes model, taking into account the terms and conditions upon which the options were granted. No options were granted in the year.

The weighted average remaining contractual life for the share options outstanding at 31 December 2019 is five years and six months (2018: seven years and three months). The weighted average exercise price for options outstanding at the end of the year was 20.96p (2018: 8.20p).

(b) Conditional share awards

There were no Conditional share awards outstanding as of 31 December 2019 (2018: Nil).

(c) Enterprise Management Incentives (EMI) options

Under this scheme share options are granted at nil exercise price to senior management. The options may be exercised after three years to the extent that certain market and non-market performance criteria are met. The extent to which the award will vest depends on performance against these performance criteria, if these are not met the options lapse. Options expire after 10 years and, in certain circumstances, are forfeited if the option holder leaves the Group before the options vest. The movement in the number of EMI options is set out below:

The fair value of the award is estimated as at the date of award using Monte Carlo (where there are market conditions) and Black-Scholes models (where there are no market conditions), taking into account the terms and conditions upon which the shares were awarded. The weighted average fair value of EMI options granted during the year was 6.77p (2018: 9.5p). Inputs into the model used for the options granted in 2019 and prior year are below:

9. Auditor's remuneration

10. Finance income and costs

11. Taxation

11.1 Tax on loss on ordinary activities

11.2 Reconciliation of the total tax charge

The tax on the Group's loss before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to losses of the consolidated entities as follows:

11.3 Deferred tax liabilities

12. Discontinued operations

On 28 August 2019 Modern Water Services Limited and Modern Water Monitoring Limited 100% owned subsidiaries of the Group were liquidated. The liquidation resulted from the decision to withdraw from the Gibraltar Wastewater Project due to the lack of progress and to refocus on membrane projects outside the UK.

Total Loss for the discontinued operations was 2019 (£583k); 2018 (£1,456k).

Net cash used in operating activities for the discontinued operations were 2019 £573k; 2018 £1,224k.

Results of discontinued operations were as follows:

13. Earnings per share

Basic

Basic (loss) per share is calculated by dividing the income / (loss) attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year.