FINAL RESULTS FOR THE YEAR ENDED 31 JULY 2014

CHIEF EXECUTIVE OFFICER'S REVIEW

Overview

This has been a very positive year for our team and business. Although obviously time consuming in Q1 calendar 2014, our successful IPO funding round clears the way for us to concentrate on growing the business knowing the financial resources are in place to execute our plans. Key new hires have been added to an already experienced team; early customers have become enthusiastic endorsers of our technology; and there seems no better time to introduce ultra-low water cleaning to the world.

The issues of water scarcity and increased cost, particularly in our primary US market, are urgent and a daily feature in news bulletins. This has raised the profile and immediate relevance of water efficiency technologies, such as Xeros, in laundry applications, where efficient water use, combined with superior cleaning performance, presents significant potential benefits to our customers. In 2014, we have seen these benefits being endorsed by big, early adopter Commercial Laundry customers who also benefit from the innovative Xeros Sbeadycare® service model we deliver. This "one-stop-shop" service for all their laundry needs builds our brand as an all-round problem solver not simply as an innovation provider.

We have had several notable highlights this year: our successful admission to AIM in March 2014 raising £30 million before expenses; solid organic growth in our key market, notably Xeros now counts as customers four out of the five largest global hotel brands; confirmation of financial incentive programmes sponsored and funded by  major US utility companies including National Grid, Columbia Gas and Liberty Utilities; machine sales into further channels including  retail dry cleaning, fitness centres and the US military; confirmation of a €700,000 Eco-Innovation grant to drive early adoption in Europe.

The promising progress establishing and validating the Xeros offering in the US Commercial Laundry market, provides a strong foundation from which to further drive our bead cleaning technology in other markets as well as to build a first sustainable revenue stream. Our objective for the year ahead is to fuel this US Commercial Laundry success whilst driving visibility in further geographies and applications that will ensure Xeros polymer beads are sold widely in multiple major markets.

Financial Review

The Group achieved earned income of £315k for the year, which represents an increase of 485% on our 2012/13 income of £65k.  This income growth came mainly from the US business where 14 machines were installed and commissioned during the year.  The embedded future income from the income generating installed base of 17 machines as at 31 July 2014, based on contracted monthly payments, amounts to £870k. 

As previously indicated we expect our cash utilisation to accelerate over the coming years, as we continue to fund our R&D programmes alongside the Commercial Laundry working capital and start-up costs.  The increase in our net cash outflow from operations to £7.2m from £3.1m reflects the start of this acceleration, in line with our expectations.

The Group's cash position was strengthened during the year through our admission to AIM raising £30m before expenses.  At 31 July 2014, the Group had cash balances (including cash equivalents and investments in the form of term deposits) of £29.5m (2013: £8.5m) and remains debt free.  We therefore remain well funded as we continue to develop the business.

Strategy Summary

Our goal is to sell large quantities of high margin Xeros polymer beads across multiple industries. These beads will be recycled to provide additional revenue and promote our overall environment promise. Xeros beads will be bought and consumed by end customers in a variety of bead-consuming machines that will be deployed by the company directly (Commercial Laundry) or by corporate partners already well-established in those industries.  Underlying this goal and deployment strategy is our R&D capability which will continue to optimise bead cleaning performance and design the bead-consuming machines. This R&D capability will include demonstrating the technology in a pilot or demonstration phase, as necessary, to ensure corporate partnership and scale-up.

These strategic pillars have remained consistent since before our IPO but, as with any early stage technology, we realise the importance of remaining flexible in our approach to meet the dynamic demands and changes in the markets we seek to operate in. We keep under constant review the exact nature of our corporate partnering approach and will selectively prioritise the multiple potential market opportunities in order to maximise shareholder return.

Our Technology

Xeros bead cleaning is characterised by replacing the majority of water used in existing conventional washing with reusable and recyclable polymer beads. Through enhanced mechanical action, attraction and absorption the beads provide superior cleaning benefits whilst significantly reducing the consumption of water, energy and chemicals in the process. For instance, in commercial laundries we have proven reductions of up to 80% in water, 50% in energy (often 100% with our ambient temperature programmes) and 50% in detergent dosing.  Our R&D team continues to explore further multi-dimensional benefits through bead innovation and wash methods that go beyond this basic superior cleaning/savings promise. These innovations will begin to come on stream in 2015 to help accelerate adoption in our Commercial Laundry market as well as boost performance by the time we launch in the Domestic Laundry market.

The company filed 5 new patents in the year to 31 July bringing the current total to 33 patent families (covering 33 inventions).  We will continue to build and strengthen this portfolio as part of our strategy to develop layered protection of the overall Xeros bead cleaning system.

We continue to explore various bead re-use and recycling methods with our polymer suppliers sharing our goal to ensure no incremental polymer is produced as a result of our novel cleaning method nor any Xeros beads find their way into the waste stream.  In short, our goal is simply to "borrow polymer" from the supply chain for use in our novel method and then return that polymer back into the supply chain after its end-of-life with Xeros.

Commercial Laundry

We have focused on Commercial Laundry as our initial key market and the US as our first key geography.Our first product, the 25kg capacity machine, is a workhorse size for the OPL customer segment we target there. Xeros Inc, the Group's wholly owned US subsidiary, has developed from being a small exploratory team a year ago  to a team of 21 people targeting customers across the US in the commercial laundry sector, with key hires having significant experience in commercial laundry sales and operations. This team now operates from premises in Manchester, New Hampshire.

Our US sales strategy is to concentrate on large enterprise customers, in particular large hotel chains with potential to roll out the Xeros offering across significant estates. Such potential customers have internal approval processes that can make commitment to adoption of innovative technologies such as Xeros a slow process but in the US we now count as customers four out of the five largest global hotel chains. Since establishing these chains as customers, our focus has been on validating Xeros performance with hotel general managers within select hotel properties in order to build up an internal network of Xeros endorsers within those chains, thus providing a stronger foundation from which our sales team can enable wider roll-out. Two good examples are our installations at Hyatt Regency Hotel, Reston, Virginia owned by Host Hotel & Resorts Inc., a Real Estate Investment Trust (REIT) and at Comfort Inn, Danvers, Massachusetts, part of Choice Hotels International portfolio. Their endorsement of Xeros performance, savings and service look set to facilitate larger hotel property orders in the near term. 

Our "one-stop-shop" Xeros Sbeadycare® service model is also proving attractive to customers. The service provides customers with a single point of contact for all their laundry needs, from operator training and consumables supply through to co-marketing programmes. Customers subscribe to Xeros Sbeadycare® service for a minimum 5 year term which provides an embedded value of recurring income to the company that stretches well beyond a one-off machine sale. This fee-paying service model is supported by our remote monitoring technology, "Sbeadycare Pulse", that calculates the water and energy consumption by machine by wash cycle. This provides both the customer and Xeros with information to calculate the savings compared to a conventional machine to show the immediate value of the Xeros Sbeadycare® service monthly fee. Xeros will continue to drive this service model and develop the Pulse technology alongside it, providing value to customers and the company alike far beyond the traditional machine sales model.

We have also targeted high volume shirt laundry service dry cleaner chains in the US. Our large size 25 kg machine fits well with their larger facilities, and Xeros' cleaning methods resonate as a differentiator for their business on the high street. We intend to heighten our focus on this particular sector in the coming months.

Most recently, we sold our first machine to the US military who will evaluate Xeros technology for a number of classified applications.

Xeros has also seen incoming enquiries from equipment  distributors, several of whom we are now in discussions with regarding  them buying machines upfront in anticipation of demand in their particular regions of focus. Alongside these incoming enquiries, Xeros is now developing its own "forward channel partner" programme, which addresses the challenge of how we scale whilst ensuring the same level of customer satisfaction already achieved.

One further highlight in our US Commercial Laundry was the start of several US utility companies offering substantial financial incentives for customers investing in Xeros machines. The first of these programmes was announced by Liberty Utilities in May.  National Grid and Columbia Gas have recently announced similar programmes. These incentives mean Xeros customers receiving up to $28,000 towards the installed cost of a Xeros machine.

Looking forward, we see substantial opportunity to grow our US Commercial Laundry business having made strong progress with significant customers and potential target customers in the year. We aim to secure further orders from hotel groups; continue to expand Sbeadycare Pulse; secure further utility company incentive programmes; and start to scale up through distributors committed to expanding Xeros in their particular regions of focus.

Xeros will exhibit at the next global commercial laundry expo in June 2015 - Clean 2015. The show will be in Atlanta, one of the most expensive water cities in the US. We expect some key Atlanta hotels to have Xeros installed by then so businesses attending the Show should read about Xeros in their hotel rooms even before they visit our stand at the show.

While our sales efforts to date have primarily focused on the US market, we will look to drive sales in the UK.  All UK customers using Xeros machines have expressed satisfaction with the performance, in particular reduced throwaway linen from superior stain removal.  However, we need additional size machines to the 25 kg size to fit the smaller UK operations of many of our target customers. Developing our product range to include smaller sizes is the focus of our engineering team.  We will prioritise a 15 kg machine for launch in H2 2015 and are in the process of evaluating an 8 kg size for which we already have a late stage prototype.

We have recently been awarded a €700,000 Eco-Innovation grant from the EU to help us deploy both in the UK and beyond. This is particularly to support early stage market penetration of new technology and will assist our expansion in Europe in a similar fashion to the utility company incentives in the US market. We are exploring setting up a test market in Europe in 2015, seeing advantages for introducing Xeros technology given high water costs, demand for greener technology and assisted by Eco-Innovation grant support.

Our plans to develop the China market continue to be explored although our priority is the European market in the short term.

Domestic Laundry

Our deployment strategy in Domestic Laundry is to partner with a major machine manufacturer who will produce and distribute Xeros bead-consuming washing machines, leveraging their existing scale. Since the IPO publicity, we have seen inbound interest from a number of significant parties, both machine manufacturers and detergent companies, and discussions with them continue as we further optimise the technology. 

The most important first corporate partnership for bead innovation and supply is already in place with BASF. We continue to develop "Gen 2" polymer innovation with them and new patent filings are imminent.

This year we have built more machine prototypes for accelerated testing, explored multi-dimensional benefits beyond the core benefit of superior cleaning/savings, and filed further IP.  Most recently, we fielded our own independent research amongst US consumers nationwide. The results were very positive for Xeros compared to a leading US brand conventional washing machines used as a control. This research will further guide our development efforts as well as help frame the significant opportunity for potential partners.

In the next twelve months we aim to finalise our launch partner(s) and move to in-home machine testing, which is the next phase to optimise the machine design and will further confirm US consumer acceptance.

Beyond Laundry

The company has multiple patented opportunities beyond the laundry market. We have chosen to prioritise leather processing in 14/15, where we continue to make good technical progress at our shared research facility at the University of Northampton. Our plan is to secure innovation partners at both ends of the supply chain - big leather consumer brands and tanneries further upstream.

Overall

In summary, we have made significant progress in Commercial Laundry with the majority of the organisation fully focused on this first key market and proving ground for the technology generally. All our early adopter customers are extremely enthusiastic about the benefits they see in their laundries. This, together with the quality of the pipeline we have developed, particularly in hotels, provides a good foundation from which to build. The number of machines installed and committed to install in the USA stood at 37 on 31 July 14 (Europe 7) and we believe the combined total will exceed 80 by the end of the calendar year.

We will continue to invest in the success of the Xeros Sbeadycare® service model, particularly in the US; bead innovation and new machine sizes will come on stream for Commercial Laundry in 2015; Sbeadycare Pulse will be further developed and distributed; and, pending further market investigation, we will look to expand Commercial Laundry into at least one further country, Germany, in 2015.

Domestic Laundry and limited Beyond Laundry applications will be developed through our own innovation pipeline under our control and progress does not rely on early corporate partner commitment.

Such a positive year fuels the team's excitement for the future and motivates us on the road to our ultimate objective - to transform the conventional world of aqueous washing to Xeros bead cleaning.

Bill Westwater

Chief Executive Officer

21 October 2014