TIDMMYX TIDMMYXR
RNS Number : 7444Y
MyCelx Technologies Corporation
13 May 2019
The information contained within this announcement is deemed by
the Company to constitute inside information as stipulated under
the Market Abuse Regulations (EU No. 596/2014) ("MAR"). This inside
information is now considered to be in the public domain.
13 May 2019
MYCELX TECHNOLOGIES CORPORATION
("MYCELX" or the "Company")
Final Results for the year ending 31 December 2018
MYCELX Technologies Corporation (AIM: MYX), the clean water
technology company providing patented solutions for the Oil and Gas
market and commercial industrial markets worldwide, is pleased to
announce its audited results for the year ended 31 December
2018.
Highlights
Financial
-- Total revenue increased 96% to $27.0 million (FY17: $13.8 million)
-- Achieved EBITDA of $5.6 million (FY17: $0.5 million)
-- Gross profit increased by 88% to $14.1 million (FY17: $7.5 million)
-- Net profit of $3.1 million (FY17: net loss of $1.2 million)
-- Total operating expenses up 18% year on year as MYCELX
invested in staff and resources to support the Company's rapid
growth trajectory
Operational
-- Saudi Arabia
o Three contract extensions with current customer
o Two new contracts with an existing customer and a new
customer
-- Australia
o First sale into LNG industry in Australia
-- Canada
o System sale in onshore oil production market
Post period
-- Successful $1.8 million fundraise to support continued growth in the Company's core markets
-- Successful trials in Canada mean MYCELX is well placed to
capitalize on EOR opportunities in-country and globally
Outlook
-- Near term focus remains converting extensive pipeline of
opportunities in Saudi Arabia into purchase orders in 2019
-- Leverage first installation in Nigeria and increase business
development efforts in West Africa
-- Continue to adopt an opportunistic approach to media sales in
markets outside of oil and gas
Tim Eggar, Chairman of MYCELX Technologies Corporation said:
"I am very proud of what we as a business achieved during 2018.
We were able to increase our revenue by 96% and record our most
successful financial year to date, whilst also maintaining a strict
focus on capital discipline.
Our continued focus on maintaining a customer focused approach
yielded significant results during the period, particularly in
Saudi Arabia. We improved our operational capability in Saudi
considerably, which enabled us to respond to our customers' needs
much more quickly and seek out longer term and more consistent
revenue generating opportunities.
We also benefited from a higher oil price environment, which saw
international oil and gas companies increase their levels of
investment in new and existing upstream and downstream
opportunities. This played an important role in our ability to win
new contracts and further deliver orders from our extensive
pipeline."
Connie Mixon, Chief Executive Officer of MYCELX Technologies
Corporation said:
"2018 saw MYCELX successfully deliver on its growth strategy and
achieve record results in the process. We outperformed our initial
expectations considerably and further increased our footprint in
key target markets, such as Saudi Arabia where we deployed our
rapid response business model.
We continue to make progress in regions outside the Middle East
and see West Africa, Australia and North America as important
markets for us, due to their need for first-rate water treatment
capabilities to optimise operational performance through increased
production. In West Africa, the Company's unique technology has
demonstrated that it can achieve superior water quality meeting
regulatory standards compared with other options, and our first
installation in Nigeria in 2018 will serve as a reference point for
this. We continue to believe that EOR operations in North America
are one of the largest opportunities for MYCELX and we are working
hard to convert our pipeline into orders in this highly lucrative
market.
Our recent fundraise means we are well-funded to execute our
ongoing work commitments and to convert our new business
opportunities into commercial orders. I believe we are poised to
not only be successful in oil and gas but in commercial and
industrial markets as well. I look forward to keeping all our
stakeholders updated on developments over the course of 2019."
For further information please contact:
MYCELX Technologies Corporation
Connie Mixon, CEO Tel: +1 888 306 6843
Kim Slayton, CFO
Cantor Fitzgerald Europe - NOMAD and Broker
David Porter Tel: +44 20 7894 7000
Richard Salmond
Celicourt Communications
Mark Antelme Tel: +44 20 7520 9266
Jimmy Lea
Notes to Editors
MYCELX is a revolutionary oil-free water technology company
solving the world's toughest oil removal problems in the oil and
gas industry. The systems are based upon scientific breakthrough
for a completely different approach to permanent oil removal. The
Company created the patented MYCELX polymer using innovative
molecular cohesion for removing oil from water far beyond what
conventional systems have ever achieved. MYCELX systems remove oil
to critically low levels in a much smaller physical footprint than
conventional systems and in a virtually fail-safe process.
www.mycelx.com
CHAIRMAN'S STATEMENT
EXCEPTIONAL RESULTS, OPERATIONAL EXCELLENCE, DETERMINATION TO
UNLOCK FULL POTENTIAL
The results in 2018 were the most successful so far in MYCELX's
history, underpinned by the better than anticipated Rapid Response
System deployments in Saudi Arabia. MYCELX's ability to respond to
our customer's unpredictable needs has come down to two major
factors - the foresight to invest in our Saudi Arabian rental
fleet, which can be deployed rapidly, and proactively pursuing
business development opportunities. It should be noted that the
significant turnaround in the Company's position over the last two
years, with 241% greater revenue and converting a $3m loss into
similar sized net profit, has been achieved with the same equipment
asset base and a streamlined workforce. These results are a credit
to our CEO, Connie Mixon, and her team.
FINANCIAL & OPERATING PERFORMANCE
The Company's ongoing drive to unlock our full potential has
been multi-faceted. We have challenged ourselves to take on bigger
and more complex projects, thereby broadening our service offering
to an ever-increasing potential customer base. At the same time, we
have strived to make our assets work harder for us by optimising
our operational performance. Lastly, we continue to promote the
technological superiority of our product suite via trials and
strategic partnerships, in order to gain greater industry adoption
of our cost-effective and performance enhancing solutions.
The improvements in operational excellence that the Saudi team
have made in the last eighteen months is best seen in the
impressive speed with which we are now able to install and
demobilise systems in Saudi Arabia. What once may have taken a week
is now achieved in less than 48 hours. This speed improvement
opened up new opportunities to respond in this inherently
unpredictable market. Our results exceeded our initial revenue
forecasts by $10m and this is largely down to the fact that it is
difficult to predict rapid response emergency projects in Saudi
Arabia, which can have a major impact on revenue. Whilst the
Company continues to seek out longer term, more consistent, revenue
generation, and to diversify its geographic base, the operational
excellence of the Saudi team means that we are well positioned to
take advantage of any future emergencies when they arise.
UNLOCKING OUR FULL POTENTIAL - Core Markets
Our primary goal remains the industry adoption of MYCELX as a
new standard for water treatment. This would be a key step towards
our overall determination to unlock MYCELX's full potential. We
have identified our core focus markets as Saudi Arabia, North
America, Australia and Nigeria, namely countries where treated
water quality is a regulatory requirement and/or a performance
imperative.
Saudi Arabia's "Vision 2030" programme, and its focus on
environmental protection and reducing the wastage of precious
resources such as water, is perfectly aligned to MYCELX solutions.
Our team in Saudi has capitalised on this increasing regulatory
environment and sought out opportunities to deploy our rental fleet
to respond more quickly to clients' needs as they demand smarter
solutions to solve their water challenges. The desire to generate a
fourth economy pillar in the form of tourism has resulted in a
focus on what is being discharged into precious water resources.
MYCELX technology is trusted in other protected eco-systems such as
the coastguards for the Galapagos Islands, and we are exploring
ways to increase awareness of our spill products in Saudi Arabia as
a means of further diversifying our product range. We see the
recent acquisition of a majority stake in SABIC by Saudi Aramco as
a huge opportunity given our existing strong reputation within
SABIC and Saudi Aramco's world class operating philosophy.
We believe that our RE-GEN media product is a game-changer for
the EOR market globally and have seen excellent operational results
both in Nigeria and Canada. The potential to leverage our first
installation in Nigeria into a broader footprint will be a focus of
our business development efforts in West Africa. With the
successful results from that installation demonstrating the
significant cost reduction of being able to treat and discharge
produced water into the shallow waters as well as the potential
enhancement to production efficiencies, this becomes a launchpad
for further penetration into this lucrative market. In Canada, we
won a small but important project, whilst our continued successes
with in-field trials and studies with leading EOR producers is
honing in on a retrofit solution for a sizeable portion of the EOR
market. The growing complexity of oil reservoir recoveries across
the globe is inevitable and with that trend comes harder to treat
produced water. Canada is at the forefront of dealing with such
enhanced techniques and the produced water solutions that become
the preferred method of choice there are likely to then become a
standard globally.
Other Markets
The full potential of MYCELX technology is not limited to the
oil and gas sector. Given the Company's size and bandwidth we focus
on the oil and gas market as the most lucrative for our current
suite of products. However, there are already existing markets for
MYCELX products in related (Shipping and Maritime) and entirely
separate industries (Manufacturing, Air Filtration, Pool & Spa,
Bilge Water and Stormwater). The Company has worked on updating
product lines and identifying channel partners that will help
expedite market adoption and generate greater media sales from a
more diverse range of customers. The Company is fully aware of the
broad applicability of MYCELX to many different industries and
adopts an opportunistic approach to dedicating sufficient bandwidth
to exploit these markets.
KEY METRICS & OUTLOOK
The Company outperformed its key metrics and did so whilst
preserving its cash position. Revenue exceeded initial projections
by $10m and is a 96% improvement on 2017. EBITDA performance was
$5.6m, an improvement of over 10 times the figure for 2017. Our
exceptional performance is largely due to our ability to win
back-to-back lucrative projects for the rental fleet. For the first
time since 2013 we are pleased to report a net profit of $3.1m. The
improvements in operational excellence and the creativity of our
team to apply our technology in new applications to meet more
complex water treatment challenges places the Company in a strong
position to chase down future material opportunities. The Company
will continue to address the upstream market, utilising its lease
model as the door opener to full scale excursion management
systems. While not compromising our core market focus, the business
development plans are in place to sell MYCELX products into other
market sectors where the Company can capitalise on the breadth of
its technology to address air and water treatment needs in
commercial and industrial markets globally.
BOARD OF DIRECTORS COMPOSITION
This year saw some changes in the composition of your Board of
Directors with the departure of Swinton Griffith from the Board of
Directors after six years of service. I would like to express my
gratitude for his long-standing commitment to the Company both as a
Non-Executive Director and Chairman of the Audit Committee. We are
fortunate to have been able to secure André Schnabl as a
Non-Executive Director, Chairman of the Audit Committee and Senior
Independent Director, with effect 1 January 2019.
TRIBUTE
The Company owes its existence and core purpose to the vision of
John Mansfield Sr, who we sadly lost at the end of the year. It was
John's and Hal Alper's vision that MYCELX would become a new
standard in the water treatment industry and he was extremely proud
of the progress that the Company has made towards that goal. It is
this drive and passion borne out of our significant water treatment
expertise that will help ensure that our Company continues to
thrive.
OUR STRATEGIC REPORT
The business review, future developments and principal risks and
uncertainties have been included in the strategic report.
CHIEF EXECUTIVE'S STATEMENT
MYCELX achieved record results in 2018 with revenue up 96% year
on year, EBITDA of $5.6m and net profit of $3.1m, to a large extent
as a result of our Rapid Response deployments in Saudi Arabia.
During the period, the Company successfully delivered on its growth
strategy and capitalised on short term opportunities and service
and lease renewals for its operating systems in the Middle East.
Strong recurring media sales and sales of other smaller but
important reference projects in Australia and Canada also added to
the Company's successful year.
In recent years, the Company was repositioned to be able to
respond to projects that produce near-term revenue. Our strategic
plan is offering clients a cost saving option for rapid response
systems when water treatment issues arise due to unexpected plant
upsets. This short-term rapid response service has been
historically dominated by haul-off companies and is a vital
component of managing loss time production in petrochemical plants.
The contracts the Company secured accounted for a major portion of
our revenues in 2018. In addition to the rapid response projects,
the Company renewed operating leases for terms from 12 to 24
months. While MYCELX's revenues were primarily underpinned by our
continued success in the Middle East, progress was also made in
other regions with sales in Australia and Canada that will serve as
references for specific applications for treatment of onshore
produced water and at LNG facilities. The Company also experienced
strong recurring media sales due to a full year of a more robust
oil and gas market.
OPERATIONAL PERFORMANCE
The Company continued its customer focused approach and was able
to create opportunities with existing and new clients, which was
the foundation of our strong financial performance this year. We
sought to reposition our resources to take advantage of need-based,
near term opportunities in the Middle East while pursuing options
with strategic partnerships in other regions. As a result, our
focus this year was mainly on Saudi Arabia, Nigeria, North America
and Australia. These regions have a need for superior water
treatment, driven by a variety of factors. Whilst a major portion
of our revenues came from the rapid response model, we made
significant headway with positioning ourselves for future long term
project wins by executing an Enhanced Oil Recovery trial in Europe
and conducting ongoing trials in Australia, leveraging products
that provide solutions for difficult to treat groundwater.
Middle East and North Africa (MENA)
Our MENA team set another record with the number of
installations in one year surpassing 2017. But it wasn't just the
number of projects that was impressive, the value and the level of
complexity increased because the team rose to the challenges it was
presented with. The results from MENA show that we have made our
assets work harder than before and with equipment utilisation rates
in excess of 90%, we reached a maximum level of activity given our
existing rental fleet. The critical hurdle to winning the most
lucrative contracts was overcoming the initial set up time. By
adopting a performance optimising approach, the team in Saudi
Arabia has brought the installation and demobilisation time down
from a week to between 24 - 48 hours. This step change improvement
opened up new larger emergency water challenges where the end user
could not wait any more than a couple of days for a system to start
to remove the problems being faced. Once installed, our small
footprint system would be able to treat at greater volumes per hour
than even the largest fleet of haul off trucks that could be
mobilised within Jubail. Our solution was more cost effective,
safer from an EHSS perspective and in line with "Vision 2030"
aims.
During the year, we successfully completed the largest and most
complex projects we have ever undertaken. We developed a new
application based on our core technology called DSG (Dilution Steam
Generator) Safeguard. This system was the largest temporary
process/waste water treatment system installed in Saudi Arabia to
date. No other rapid response system was able to cope with the
levels of oil loading (% levels), temperature (>100 degrees
Celsius), VOC loading >50,000ppm and consistently meet
regulation effluent at a rate close to 200m(3) /hr. Because of this
system the SABIC affiliate where it was installed was able to
continue to produce instead of shutting down for 10-14 days for
unscheduled maintenance. This represented a cost saving to the end
user that was greater than $30m just in terms of production losses.
This project was part of the three back-to-back
installations/demobilisations that the team successfully undertook
in the second half of the year. At each of these installations we
were faced with greater than expected inspec conditions and
maintained perfect outlet specifications for the duration of the
projects.
The superior water treatment capability of MYCELX is aligned
with Saudi Arabia's initiatives to safeguard the environment and
reduce waste. At the same time, regulations are becoming more
stringent and enforced more rigorously. This provides the ideal
environment for MYCELX's superior technology. There is a long term
Saudi goal for 100% recycle or reuse of valuable water and other
waste streams. Our collaboration with local waste management
companies will help to ensure that we will be involved in this
exciting and growing market.
West Africa: Nigeria
Our first sale in Nigeria was of significant strategic
importance to the Company because it created a footprint for MYCELX
in a region where producers and regulators are searching for a new
standard in water treatment. Producers require higher quality
treated water for operational purposes to enhance production and
regulators want to establish more stringent environmental
regulations and to enforce proper disposal processes. MYCELX's
unique technology has demonstrated that it can achieve the desired
water outlet specifications and meet and exceed both parties'
requirements.
On the back of a successful trial in 2016, a contract for a
MYCELX system was secured in 2017. It was delivered and installed
in June 2018. The system has been in continuous operation, allowing
the client to meet immediate discharge requirements ensuring robust
performance and reliable ongoing production. MYCELX's advanced
technology has proven that it can cost effectively solve the
client's current and future water challenges. The Company is
currently looking to engage with the Department of Petroleum
Resources in Nigeria, that regulates and enforces limits for
overboard discharge, to seek final approval for the MYCELX system
to meet their stringent requirements. The system which includes
MYCELX's RE-GEN solution is integral to the client's plan to use
its produced water for secondary or enhanced oil recovery
techniques. There is significant strategic benefit in MYCELX having
a system operating in Nigeria, as it serves as a reference point
for all the benefits our technology could potentially provide to
producers in the area.
Other key geographic regions: North America and Australia
The Company's legacy media sales were stronger than 2017 due to
a full year of a robust oil and gas market. Underpinning the sales
was our offshore installations in the Gulf of Mexico as well as
other clients deploying our media in manufacturing and other
non-oil and gas related markets.
In Canada, the Company installed a system for an operator to
treat water during Steam Assisted Gravity Drainage (SAGD)
production. While the project was a smaller installation, it serves
as a reference for MYCELX's technology in SAGD operations which is
very prevalent in Canada. MYCELX's RE-GEN has been able to reliably
treat oil to below 10mg/L and remove solids above 7 micron under
all conditions. Prior to MYCELX's trial, all previous technologies
had failed to achieve the necessary results. The success of this
installation places MYCELX in a strong position for a sale at that
facility in the future. In the US Permian Basin the Company teams
with a strategic partner to deliver frac-grade water on demand
ensuring no interruption to ongoing operations.
The Company continues to believe the ability to treat
polymer-laden water during Enhanced Oil Recovery (EOR) operations
is one of the largest opportunities in the future. With the
increase in oil price many producers are reinvigorating trials and
working toward transitioning their fields to EOR to increase
production. MYCELX's RE-GEN media is extremely effective in
treating polymer-laden produced water removing the associated
contaminants to lower levels than the competition without removing
the polymer. The Company ran a trial in Europe with a producer
looking to move to EOR production furthering our profile in this
lucrative market.
In Australia the Company made a sale into the LNG industry in
2018 and continued to support its business expansion in-country.
Sales were made into the mining industry for heavy equipment
washdown as well as recurring media sales for the offshore
production activity. The market in Australia for treating difficult
groundwater is a new area for MYCELX and we intend to pursue those
opportunities aggressively into the future.
SAFETY
Our continuing success is based on our people, and their safety
and that of those people around us is central to everything we do.
As we increase the number of installations, we have put in place
action plans to ensure that these standards are upheld across the
whole portfolio of projects. We have engineered the design of our
systems to ensure that operating them is simple and safe.
LOOKING TO THE FUTURE
MYCELX had a very good year, far surpassing revenue projections
with the success of the Rapid Response model. Given the number and
inherent unpredictable nature of rapid deployment, these contracts
kept the Middle East and Houston teams engaged through year end
executing two projects in Q4. The Company aims to continue the
Rapid Response offering with the expectation of converting these
projects into longer term contracts as it has done in the past. To
support and accelerate our growth in the Middle East the Company
has engaged several strategic partners who work with us in
different areas of business from sales and marketing to vendor
relations. We expect to continue to work with our partners to grow
our business and footprint in this important, robust market into
2019 and beyond.
The Company is committed to pursuing the enormous opportunity in
treating water during Enhanced Oil Recovery operations. We are
engaged with global producers transitioning to EOR and expect to
sell our RE-GEN media to clients globally who are in need of high
performance and loss production mitigation. Operational excellence
is key to the economics of EOR production and RE-GEN provides the
performance that enables producers to meet their goals better than
the competition. In 2019 we expect to increase our engagement with
large EOR producers advancing the uptake of our proven technology
advantage.
The pursuit of market sector and geographic diversity is a focus
for the Company that will be carried throughout 2019 and
beyond.
The diversity program was initiated in 2017 and the Company
spent 2018 refreshing specific non-oil and gas products that the
Company has already sold in commercial and industrial markets
globally. Strong channel partners were chosen to give us access to
marketing and sales platforms with access to the markets we wanted
to pursue such as pool and spa, air filtration, spill products and
bilge water and stormwater. We will continue to support this
initiative to harvest the full value and broad range of
applications of our unique technology.
Given the nature and timing element of our Rapid Response
offering to manage unexpected upsets, precision of forecasting is a
distinct challenge. Conversion to longer term contracts is
important as well as chasing our opportunity pipeline in oil and
gas in other geographic regions. Our goal for 2019 is to ensure we
manage our growth trajectory to ensure profitability, and devote
the necessary resources to sustain the momentum while using our
strategic relationships and channel partners to enhance our
diversification profile.
MYCELX enters 2019 with the knowledge that it is a stronger and
more capable solutions provider. As mentioned, the lucrative
emergencies that made 2018 an exceptional year are difficult to
predict and can come all at once - such as the three back-to-back
projects.
At its core, MYCELX is a technology business with exceptional
expertise gained through onsite, real-time water treatment
experience. The Company will continue to use its knowledge to
innovate and commercialise next generation technology to meet its
customers' current and future needs. In 2018, our experience was
that once we solved one water challenge for our customers they
often asked us to help with other water issues. Our solutions are
more reliable and cost effective than outdated conventional methods
and gradually we have started to obtain local regulatory and
industry recognition of our new standard of water treatment. The
oil and gas and petrochemical industries continue to integrate
MYCELX technology into their critical, real-time processes and we
expect the other market sectors we have resourced this year to add
to our success into the future. The Company is confident its
technology has its role in achieving sustainable water treatment
for years to come. The Board of Directors and Company management
are committed to ensuring MYCELX technology reaches its full
potential as the global industry standard.
Statements of Operations
(USD, in thousands, except share data)
For the Year Ended 31 December: 2018 2017
Revenue 26,952 13,751
========== ==========
Cost of goods sold 12,892 6,285
========== ==========
Gross profit 14,060 7,466
========== ==========
Operating expenses:
========== ==========
Selling, general and administrative 9,264 7,772
========== ==========
Depreciation and amortisation 438 422
========== ==========
Total operating expenses 9,702 8,194
========== ==========
Operating profit (loss) 4,358 (728)
========== ==========
Other expense
========== ==========
Loss on disposal of equipment (3) (14)
========== ==========
Interest expense (85) (89)
========== ==========
Profit (loss) before income taxes 4,270 (831)
========== ==========
Provision for income taxes (1,200) (327)
========== ==========
Net profit (loss) 3,070 (1,158)
========== ==========
Profit (loss) per share - basic 0.16 (0.06)
========== ==========
Profit (loss) per share - diluted 0.15 (0.06)
========== ==========
Shares used to compute basic profit (loss) per
share 18,802,981 18,773,764
========== ==========
Shares used to compute diluted profit (loss)
per share 20,003,251 18,773,764
========== ==========
The accompanying notes are an integral part of the financial
statements.
Balance Sheets
(USD, in thousands, except share data)
as at 31 December: 2018 2017
Assets
========= =========
Current Assets
========= =========
Cash and cash equivalents 4,866 5,171
========= =========
Restricted cash 525 525
========= =========
Accounts receivable - net 8,225 2,436
========= =========
Unbilled accounts receivable 20 398
========= =========
Inventory - net 4,708 3,085
========= =========
Prepaid expenses 228 254
========= =========
Other assets 42 33
========= =========
Total Current Assets 18,614 11,902
========= =========
Property and equipment - net 8,536 8,755
========= =========
Intangible assets - net 788 837
========= =========
Total Assets 27,938 21,494
========= =========
Liabilities and Stockholders' Equity
========= =========
Current Liabilities
========= =========
Accounts payable 2,912 982
========= =========
Payroll and accrued expenses 1,950 570
========= =========
Deferred revenue 125 192
========= =========
Note payable - current 86 89
========= =========
Other current liabilities 153 14
========= =========
Total Current Liabilities 5,226 1,847
========= =========
Note payable - long-term 1,739 1,832
========= =========
Total Liabilities 6,965 3,679
========= =========
Stockholders' Equity
========= =========
Common stock, $0.025 par value, 100,000,000 shares
authorised, 18,807,617 and 18,787,617 shares
issued and outstanding at 31 December 2018 and
2017, respectively. 470 470
========= =========
Additional paid-in capital 40,544 40,456
========= =========
Accumulated deficit (20,041) (23,111)
========= =========
Total Stockholders' Equity 20,973 17,815
========= =========
Total Liabilities and Stockholders' Equity 27,938 21,494
========= =========
The accompanying notes are an integral part of the financial
statements.
Statements of Stockholders' Equity
(USD, in thousands)
Additional
Paid-in Accumulated
Common Stock Capital Deficit Total
Shares $ $ $ $
========== ===== ========== =========== =======
Balances at 31 December 2016 18,770 469 40,325 (21,953) 18,841
========== ===== ========== =========== =======
Issuance of common stock, net
of offering costs 18 1 6 - 7
========== ===== ========== =========== =======
Stock-based compensation expense - - 125 - 125
========== ===== ========== =========== =======
Net loss for the period - - - (1,158) (1,158)
========== ===== ========== =========== =======
Balances at 31 December 2017 18,788 470 40,456 (23,111) 17,815
========== ===== ========== =========== =======
Issuance of common stock, net
of offering costs 20 - 8 - 8
========== ===== ========== =========== =======
Stock-based compensation expense - - 80 - 80
========== ===== ========== =========== =======
Net profit for the period - - - 3,070 3,070
========== ===== ========== =========== =======
Balances at 31 December 2018 18,808 470 40,544 (20,041) 20,973
========== ===== ========== =========== =======
The accompanying notes are an integral part of the financial
statements.
Statements of Cash Flows
(USD, in thousands)
For the Year Ended 31 December: 2018 2017
Cash flow from operating activities
======= =======
Net profit (loss) 3,070 (1,158)
======= =======
Adjustments to reconcile net profit (loss) to
net cash provided by operating activities:
======= =======
Depreciation and amortisation 1,239 1,205
======= =======
Loss on abandonment or expiration of patent - 22
======= =======
Loss from disposition of equipment 3 14
======= =======
Stock compensation 80 125
======= =======
Change in operating assets and liabilities:
======= =======
Accounts receivable - net (5,789) (495)
======= =======
Unbilled accounts receivable 378 (304)
======= =======
Inventory - net (2,082) 670
======= =======
Prepaid expenses 26 (128)
======= =======
Other assets (9) 3
======= =======
Accounts payable 1,930 325
======= =======
Payroll and accrued expenses 1,380 145
======= =======
Deferred revenue (67) 192
======= =======
Other current liabilities 139 (422)
======= =======
Net cash provided by operating activities 298 194
======= =======
Cash flow from investing activities
======= =======
Payments for purchases of property and equipment (492) (5)
======= =======
Payments for purchases of intangible assets (23) (53)
======= =======
Net cash used in investing activities (515) (58)
======= =======
Cash flows from financing activities
======= =======
Net proceeds from stock issuance 8 6
======= =======
Payments on notes payable (96) (85)
======= =======
Increase in restricted cash - (25)
======= =======
Net cash used in financing activities (88) (104)
======= =======
Net (decrease) increase in cash and cash equivalents (305) 32
======= =======
Cash and cash equivalents, beginning of year 5,171 5,139
======= =======
Cash and cash equivalents, end of year 4,866 5,171
======= =======
Supplemental disclosures of cash flow information:
======= =======
Cash payments for interest 92 89
======= =======
Cash and non-cash payments for income taxes 1,128 306
======= =======
Non-cash movements of inventory and fixed assets (459) 565
======= =======
Management considered the effect of exchange rate changes on
cash and cash equivalents held or due in foreign currency and
deemed it immaterial to the statement of cash flows.
The accompanying notes are an integral part of the financial
statements.
Notes to the Financial Statements
1. Nature of business and basis of presentation
Basis of presentation - These financial statements have been
prepared using recognition and measurement principles of Generally
Accepted Accounting Principles in the United States of America
("U.S. GAAP").
Nature of business - MYCELX Technologies Corporation ("MYCELX"
or the "Company") was incorporated in the State of Georgia on 24
March 1994. The Company is headquartered in Duluth, Georgia with
operations in Houston, Texas, Saudi Arabia and the United Kingdom.
The Company provides clean water technology equipment and related
services to the oil and gas, power, marine and heavy manufacturing
sectors and the majority of its revenue is derived from the Middle
East and United States.
2. Summary of significant accounting policies
Use of estimates - The preparation of financial statements in
conformity with U.S. GAAP requires management to make judgements,
estimates and assumptions that affect the application of accounting
policies and the amounts reported in the financial statements and
accompanying notes. Estimates and underlying assumptions are
reviewed on an ongoing basis. Revisions to accounting estimates are
recognised in the period in which the estimate is revised. The
primary estimates and assumptions made by management relate to the
useful lives of property and equipment, volatility used in the
valuation of the Company's share-based compensation and valuation
allowance on deferred tax assets. Although these estimates are
based on management's best knowledge of current events and actions
the Company may undertake in the future, actual results ultimately
may differ from the estimates and the differences may be material
to the financial statements.
Revenue recognition - The Company's revenue consists of
filtration media product, equipment leases and equipment sales.
These sales are based on mutually agreed upon pricing with the
customer prior to the delivery of the media product and equipment.
The Company recognises revenue when it satisfies a performance
obligation by transferring control over a product or service to a
customer.
Revenue from filtration media sales is billed and recognised
when products are shipped to the customer. Revenue from equipment
leases is recognised over time as the equipment is available for
customer use and is typically billed monthly. Revenue from services
is recognised at the point the service is provided and is typically
billed monthly. Revenue from long-term contracts related to
construction of equipment is recognised over time, usually a period
less than one year, as value and control of the asset is
transferred to the customer. Revenues on sales in which equipment
is pre-fabricated and stocked in inventory are recognised upon
shipment of the equipment to the customer.
Sales tax charged to customers is presented on a net basis
within the consolidated statements of operations and therefore
recorded as a reduction of net revenues. Shipping and handling
costs associated with outbound freight after control over a product
has transferred to a customer are accounted for as a fulfillment
cost and are included in cost of revenues.
The Company's contracts with the customers state the final terms
of the sales, including the description, quantity, and price of
media product, equipment (sale or lease) and the associated
services to be provided. The Company's contracts are generally
short-term in nature and in most situations, the Company provides
products and services ahead of payment and has fulfilled the
performance obligation prior to billing.
The Company believes the output method is a reasonable measure
of progress for the satisfaction of its performance obligations,
which are both satisfied over time and at a point in time, as it
provides a faithful depiction of (1) performance toward complete
satisfaction of the performance obligation under the contract and
(2) the value transferred to the customer of the services performed
under the contract.
Our contracts with clients often include promises to transfer
multiple products and services. Determining whether products and
services are considered distinct performance obligations that
should be accounted for separately versus together may require
significant judgment. Judgment is required to determine stand-alone
selling price ("SSP") for each distinct performance obligation. We
develop observable SSP by reference to stand-alone sales for
identical or similar items to similarly situated clients at prices
within a sufficiently narrow range. In situations where an
observable SSP does not exist, the residual method is applied and
requires significant judgment.
All equipment sold by the Company is covered by the original
manufacturer's warranty. The Company does not offer an additional
warranty and has no related obligations.
Unbilled accounts receivable represents revenues recognised in
excess of amounts billed. Deferred revenue represents billings in
excess of revenues recognised. Contract retentions are recorded as
a component of accounts receivable.
See Note 13 for disaggregation of revenue by geographic region.
Timing of revenue recognition for each of the periods presented is
shown below:
31 December 31 December
2018 2017
US$000 US$000
Equipment leases recognised over time 5,503 1,550
=========== ===========
Consumable filtration media, equipment sales
and service recognised at a point in time 21,449 12,201
=========== ===========
Total revenue 26,952 13,751
=========== ===========
Cash and cash equivalents - Cash and cash equivalents consist of
short-term, highly liquid investments which are readily convertible
into cash within ninety (90) days of purchase. At 31 December 2018,
all of the Company's cash and cash equivalent balances were held in
checking and money market accounts. The Company maintains its cash
in bank deposit accounts which, at times, may exceed federally
insured limits. At 31 December 2018 and 2017, cash in non-U.S.
institutions was $13,000 and $73,000, respectively. The Company has
not experienced any losses in such accounts.
Restricted cash - The Company classifies as restricted cash all
cash whose use is limited by contractual provisions. As of 31
December 2018 and 2017, restricted cash included $500,000 cash on
deposit in a money market account as required by a lender (see Note
9) and $25,000 in a Certificate of Deposit to secure the Company's
corporate credit card.
Trade accounts receivable - Trade accounts receivable are stated
at the amount management expects to collect from outstanding
balances. The Company provides credit in the normal course of
business to its customers and performs ongoing credit evaluations
of those customers and maintains allowances for doubtful accounts,
as necessary. Accounts are considered past due based on the
contractual terms of the transaction. Credit losses, when realised,
have been within the range of the Company's expectations and,
historically, have not been significant. The allowance for doubtful
accounts at 31 December 2018 and 2017 was $300,000 and $32,000,
respectively.
Inventories - Inventories consist primarily of raw materials and
filter media finished goods as well as equipment to house the
filter media and are stated at the lower of cost or net realisable
value. Equipment that is in the process of being constructed for
sale or lease to customers is also included in inventory
(work-in-progress). The Company applies the FIFO method (first in;
first out) to account for inventory. Manufacturing work-in-progress
and finished products inventory include all direct costs, such as
labour and material, and those indirect costs which are related to
production, such as indirect labour, rents, supplies, repairs and
depreciation costs. A valuation reserve is recorded for slow moving
or obsolete inventory items to reduce the cost of inventory to its
net realisable value.
Prepaid expenses and other current assets - Prepaid expenses and
other current assets include non-trade receivables that are
collectible in less than 12 months, security deposits on leased
space and various prepaid amounts that will be charged to expenses
within 12 months. Non-trade receivables that are collectible in 12
months or more are included in long-term assets.
Property and equipment - All property and equipment are valued
at cost. Depreciation is computed using the straight-line method
for reporting over the following useful lives:
Buildings 39 years
Leasehold improvements 1-5 years
==========
Office equipment 3-10 years
==========
Manufacturing equipment 5-15 years
==========
Research and development
equipment 5-10 years
==========
Purchased software 1-5 years
==========
Equipment leased to customers 3-10 years
==========
Expenditures for major renewals and betterments that extend the
useful lives of property and equipment are capitalised.
Expenditures for maintenance and repairs are charged to expense as
incurred. Depreciation expense includes depreciation on equipment
leased to customers and is included in cost of goods sold.
Intangible assets - Intangible assets consist of the costs
incurred to purchase patent rights and legal and registration costs
incurred to internally develop patents. Intangible assets are
reported net of accumulated amortisation. Patents are amortised
using the straight-line method over a period based on their
contractual lives which approximates their estimated useful
lives.
Impairment of long-lived assets - Long-lived assets to be held
and used, including property and equipment and intangible assets
with definite useful lives, are assessed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If the total of the
expected undiscounted future cash flows is less than the carrying
amount of the asset, a loss, if any, is recognised for the
difference between the fair value and carrying value of the assets.
Impairment analyses, when performed, are based on the Company's
business and technology strategy, management's views of growth
rates for the Company's business, anticipated future economic and
regulatory conditions, and expected technological availability. For
purposes of recognition and measurement, the Company groups its
long-lived assets at the lowest level for which there are
identifiable cash flows, which are largely independent of the cash
flows of other assets and liabilities. No impairment charges were
recorded in the years ended 31 December 2018 and 2017.
Research and development costs - Research and development costs
are expensed as incurred. There was no research and development
expense for the years ended 31 December 2018 and 2017.
Advertising costs - The Company expenses advertising costs as
incurred. Advertising expense for the years ended 31 December 2018
and 2017 was approximately $nil, and is recorded in selling,
general and administrative expenses.
Rent expense - The Company records rent expense on a
straight-line basis for operating lease agreements that contain
escalating rent clauses. The deferred rent liability included in
other current liabilities in the accompanying balance sheet
represents the cumulative difference between rent expense
recognised on the straight-line basis and the actual rent paid.
Income taxes - The provision for income taxes for annual periods
is determined using the asset and liability method, under which
deferred tax assets and liabilities are calculated based on the
temporary differences between the financial statement carrying
amounts and income tax bases of assets and liabilities using
currently enacted tax rates. The deferred tax assets are recorded
net of a valuation allowance when, based on the weight of available
evidence, it is more likely than not that some portion or all of
the recorded deferred tax assets will not be realised in future
periods. Decreases to the valuation allowance are recorded as
reductions to the provision for income taxes and increases to the
valuation allowance result in additional provision for income
taxes. The realisation of the deferred tax assets, net of a
valuation allowance, is primarily dependent on the ability to
generate taxable income. A change in the Company's estimate of
future taxable income may require an addition or reduction to the
valuation allowance.
The Tax Cuts and Jobs Act ("TCJA") was enacted on 22 December
2017, with a key provision of the TCJA being a reduction of the
corporate income tax rate from 35 percent to 21 percent. Pursuant
to the requirements of ASC 740 the Company's income tax provision
reflects the impact of the TCJA. This includes a $2.6 million tax
expense of the rate reduction on the Company's cumulative
differences between the financial statement and tax basis of its
assets and liabilities. This expense has been fully offset by a
corresponding decrease in valuation allowance.
The benefit from an uncertain income tax position is not
recognised if it has less than a 50 percent likelihood of being
sustained upon audit by the relevant authority. For positions that
are more than 50 percent likely to be sustained, the benefit is
recognised at the largest amount that is more-likely-than-not to be
sustained. An uncertain income tax position is not recognised if it
has less than a 50 percent likelihood of being sustained. Where a
net operating loss carried forward, a similar tax loss or a tax
credit carry forward exists, an unrecognised tax benefit is
presented as a reduction to a deferred tax asset. Otherwise, the
Company classifies its obligations for uncertain tax positions as
other non-current liabilities unless expected to be paid within one
year. Liabilities expected to be paid within one year are included
in the accrued expenses account.
The Company recognises interest accrued related to tax in
interest expense and penalties in selling, general and
administrative expenses. During the years ended 31 December 2018
and 2017 the Company recognised no interest or penalties.
Earnings per share - Basic earnings per share is computed using
the weighted average number of common shares outstanding during the
period. Diluted earnings per share is computed using the weighted
average number of common and potentially dilutive shares
outstanding during the period. Potentially dilutive shares consist
of the incremental common shares issuable upon conversion of the
exercise of common stock options. Potentially dilutive shares are
excluded from the computation if their effect is antidilutive.
Total common stock equivalents that were excluded from computing
diluted net loss per share were approximately 1,119,350 for the
year ended 31 December 2017.
Fair value of financial instruments - The Company uses the
framework in ASC 820, Fair Value Measurements and Disclosures, to
determine the fair value of its financial assets. ASC 820
establishes a fair value hierarchy that prioritises the inputs to
valuation techniques used to measure fair value and expands
financial statement disclosures about fair value measurements.
The hierarchy established by ASC 820 gives the highest priority
to unadjusted quoted prices in active markets for identical assets
or liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy under ASC 820 are
described below:
-- Level 1: Unadjusted quoted prices in active markets for
identical assets or liabilities that the Company has the ability to
access at the measurement date.
-- Level 2: Inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly or indirectly.
-- Level 3: Unobservable inputs for the asset or liability.
There were no transfers into and out of each level of the fair
value hierarchy for assets measured at fair value for the years
ended 31 December 2018 or 2017.
All transfers are recognised by the Company at the end of each
reporting period.
Transfers between Levels 1 and 2 generally relate to whether a
market becomes active or inactive. Transfers between Levels 2 and 3
generally relate to whether significant relevant observable inputs
are available for the fair value measurement in their entirety.
The Company's financial instruments as of 31 December 2018 and
2017 include cash and cash equivalents, accounts receivable,
accounts payable, the line of credit, and the note payable. The
carrying values of cash and cash equivalents, accounts receivable,
accounts payable, and the line of credit approximate fair value due
to the short-term nature of those assets and liabilities. The
Company believes it is impractical to disclose the fair value of
the note payable as it is an illiquid financial instrument.
Foreign currency transactions - From time to time the Company
transacts business in foreign currencies (currencies other than the
United States Dollar). These transactions are recorded at the rates
of exchange prevailing on the dates of the transactions. Foreign
currency transaction gains or losses are included in selling,
general and administrative expenses.
Share-based compensation - The Company issues equity-settled
share-based awards to certain employees, which are measured at fair
value at the date of grant. The fair value determined at the grant
date is expensed, based on the Company's estimate of shares that
will eventually vest, on a straight-line basis over the vesting
period. Fair value for the share awards representing equity
interests identical to those associated with shares traded in the
open market is determined using the market price at the date of
grant. Fair value is measured by use of the Black Scholes valuation
model (see Note 10).
Recently issued accounting standards - In May 2014, the
Financial Accounting Standards Board ("FASB") and International
Accounting Standards Board issued their converged standard on
revenue recognition Accounting Standards Update ("ASU") No.
2014-09, "Revenue from Contracts with Customers (Topic 606)", as
subsequently amended. This ASU replaces nearly all existing U.S.
GAAP guidance on revenue recognition. The standard prescribes a
five-step model for recognising revenue, the application of which
will require significant judgement. ASU No. 2014-09, as amended,
was effective for the Company beginning 1 January 2018. The Company
applied Topic 606 using the cumulative effect method, recognising
the cumulative effect of initially applying Topic 606 as an
adjustment to the opening balance of equity at 1 January 2018 for
all open contracts at 31 December 2017. Based on the analysis
completed by the Company, there was no impact to the beginning
equity account at 1 January 2018.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic
842)", which requires lessees to recognise on the balance sheet the
assets and liabilities for the rights and obligations created by
the leases with lease terms of more than 12 months. The
recognition, measurement, and presentation of expenses and cash
flows arising from a lease by a lessee will continue to primarily
depend on its classification as a finance or operating lease.
However, unlike current U.S. GAAP, which requires only capital
leases to be recognised on the balance sheet, the new standard will
require both types of leases to be recognised on the balance sheet.
The new standard also requires disclosures about the amount,
timing, and uncertainty of cash flows arising from leases. These
disclosures include qualitative and quantitative requirements,
providing additional information about the amounts recorded in the
financial statements. The Company is planning to adopt this ASU
under a modified retrospective approach on 1 January 2019. This
will result in the recognition of an Operating Lease Right of Use
Asset and an Operating Lease Liability of $960K.
Recent accounting pronouncements pending adoption not discussed
above are either not applicable or are not expected to have a
material impact on the Company.
3. Accounts receivable
Accounts receivable and their respective allowance amounts at 31
December 2018 and 2017:
31 December 31 December
2018 2017
US$000 US$000
Accounts receivable 8,525 2,468
=========== ===========
Less: allowance for doubtful accounts (300) (32)
=========== ===========
Total receivable - net 8,225 2,436
=========== ===========
4. Inventories
Inventories consist of the following at 31 December 2018 and
2017:
31 December 31 December
2018 2017
US$000 US$000
Raw materials 1,341 686
=========== ===========
Work-in-progress - 44
=========== ===========
Finished goods 3,367 2,355
=========== ===========
Total inventory 4,708 3,085
=========== ===========
5. Property and equipment
Property and equipment consists of the following at 31 December
2018 and 2017:
31 December 31 December
2018 2017
US$000 US$000
Land 709 709
=========== ===========
Building 2,724 2,724
=========== ===========
Leasehold improvements 361 341
=========== ===========
Office equipment 699 697
=========== ===========
Manufacturing equipment 898 747
=========== ===========
Research and development equipment 496 514
=========== ===========
Purchased software 222 222
=========== ===========
Equipment leased to customers 9,674 8,495
=========== ===========
Construction in progress - 444
=========== ===========
15,783 14,893
=========== ===========
Less: accumulated depreciation (7,247) (6,138)
=========== ===========
Property and equipment - net 8,536 8,755
=========== ===========
During the years ended 31 December 2018 and 2017, the Company
removed property, plant and equipment and the associated
accumulated depreciation of approximately $58,000 and $188,000,
respectively, to reflect the disposal of property, plant and
equipment.
Depreciation expense for the years ended 31 December 2018 and
2017 was approximately $1,167,000 and $1,159,000, respectively, and
includes depreciation on equipment leased to customers.
Depreciation expense on equipment leased to customers included in
cost of goods sold for the years ended 31 December 2018 and 2017
was $801,000 and $783,000, respectively.
6. Intangible assets
During 2009, the Company entered into a patent rights purchase
agreement with a shareholder. The agreement provided for the
immediate payment of $28,000 in 2009 with the possibility of an
additional $72,000 based on profits on the sales of a particular
product. During 2010, the Company paid $22,000 based on profits on
the sales of the product and paid the remaining $50,000 in 2011.
The patent is amortised utilising the straight-line method over a
useful life of 17 years which represents the legal life of the
patent from inception. Accumulated amortisation on the patent was
approximately $51,000 and $45,000 as of 31 December 2018 and 2017,
respectively.
In addition to the purchased patent, the Company has internally
developed patents. Internally developed patents include legal and
registration costs incurred to obtain the respective patents. The
Company currently holds various patents and numerous pending patent
applications in the United States, as well as numerous foreign
jurisdictions outside of the United States.
Intangible assets as of 31 December 2018 and 2017 consist of the
following:
Weighted 31 December 31 December
Average Useful 2018 2017
Lives US$000 US$000
Internally developed patents 15 years 1,294 1,271
================ =========== ===========
Purchased patents 17 years 100 100
================ =========== ===========
1,395 1,371
================================================ =========== ===========
Less accumulated amortisation (606) (534)
=========== ===========
Intangible assets - net 788 837
=========== ===========
Approximate aggregate future amortisation expense is as
follows:
Year Ending 31 December (USD, in thousands)
2019 51
===
2020 51
===
2021 50
===
2022 49
===
2023 41
===
Thereafter 209
===
Amortisation expense for the years ended 31 December 2018 and
2017 was approximately $72,000 and $46,000, respectively.
7. Income taxes
The components of income taxes shown in the statements of
operations are as follows:
31 December 31 December
2018 2017
US$000 US$000
Current:
=========== ===========
Federal - -
=========== ===========
Foreign 1,185 326
=========== ===========
State 15 1
=========== ===========
Total current provision 1,200 327
=========== ===========
Deferred:
=========== ===========
Federal - -
=========== ===========
Foreign - -
=========== ===========
State - -
=========== ===========
Total deferred provision - -
=========== ===========
Total provision for income taxes 1,200 327
=========== ===========
The provision for income tax varies from the amount computed by
applying the statutory corporate federal tax rate of 34 percent for
2017 and 21 percent for 2018, primarily due to the effect of
certain nondeductible expenses, foreign withholding tax, and
changes in valuation allowances.
A reconciliation of the differences between the effective tax
rate and the federal statutory tax rate is as follows:
31 December 31 December
2018 2017
Federal statutory income tax rate 21.0% 34.0%
=========== ===========
State tax rate, net of federal benefit 0.5% (0.5%)
=========== ===========
Valuation allowance (16.7%) 271.6%
=========== ===========
Rate reduction adjustment - (311.6%)
=========== ===========
Other 1.5% (1.8%)
=========== ===========
Foreign withholding tax 21.8% (31.0%)
=========== ===========
Effective income tax rate 28.1% (39.3%)
=========== ===========
The significant components of deferred income taxes included in
the balance sheets are as follows:
31 December 31 December
2018 2017
US$000 US$000
Deferred tax assets
=========== ===========
Net operating loss 3,971 4,679
=========== ===========
Equity compensation 297 284
=========== ===========
Research and development credits 159 159
=========== ===========
Allowance for bad debts 64 7
=========== ===========
Accrued liability 4 1
=========== ===========
Inventory valuation reserve 93 23
=========== ===========
Other 22 3
=========== ===========
Total gross deferred tax asset 4,610 5,156
=========== ===========
Deferred tax liabilities
=========== ===========
Property and equipment (738) (569)
=========== ===========
Total gross deferred tax liability (738) (569)
=========== ===========
Net deferred tax asset before valuation allowance 3,872 4,587
=========== ===========
Valuation allowance (3,872) (4,587)
=========== ===========
Net deferred tax asset (liability) - -
=========== ===========
Deferred tax assets and liabilities are recorded based on the
difference between an asset or liability's financial statement
value and its tax reporting value using enacted rates in effect for
the year in which the differences are expected to reverse, and for
other temporary differences as defined by ASC-740, Income Taxes. At
31 December 2018, the Company has recorded a valuation allowance of
$3.9 million for which it is more likely than not that the Company
will not receive future tax benefits due to the uncertainty
regarding the realisation of such deferred tax assets.
As of 31 December 2018, the Company has approximately $18.0
million of gross U.S. federal net operating loss carry forwards and
$5.2 million of gross state net operating loss carry forwards that
will begin to expire in the 2024 tax year.
On 22 December 2017, the Tax Cuts and Jobs Act was signed into
law and impacts individuals, pass through entities and
corporations. The Company was impacted by the corporation changes.
The new federal corporate tax rate reduces from a maximum 35
percent marginal rate to a set 21 percent rate beginning in 2018.
The Company's current income tax expense is based on a federal tax
rate of 21 percent. Based on the new federal corporate tax rate of
21 percent for 2018 and thereafter, the deferred tax assets and
liabilities were revalued at the new tax rate and the adjustment of
approximately $2.6 million was recorded directly to tax expense in
2017.
The FASB issued Interpretation ASC-740-10-25, Income Taxes, an
interpretation of ASC-740 which clarifies the accounting for income
taxes by prescribing the minimum recognition threshold a tax
position is required to meet before being recognised in the
financial statements. Under ASC-740, the impact of an uncertain
income tax position on the income tax return must be recognised at
the largest amount that is more likely than not to be sustained
upon audit by the relevant taxing authority. ASC-740 also provides
guidance on derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure and
transition. ASC-740 applies to all tax positions related to income
taxes.
As a result of the adoption and implementation of ASC-740, a tax
position is recognised as a benefit only if it is "more likely than
not" that the tax position would be sustained in a tax examination,
with a tax examination being presumed to occur. The amount
recognised is the largest amount of tax benefit that has a greater
than 50 percent likelihood of being realised on examination. For
tax positions not meeting the "more likely than not" test, no tax
benefit is recorded. The Company recognises interest and penalties
related to tax positions in income tax expense. At 31 December 2018
and 2017, there was no accrual for uncertain tax positions or
related interest.
The Company's tax years 2014 through 2018 remain subject to
examination by federal, state and foreign income tax
jurisdictions.
8. Line of credit
In October 2014, the Company entered into a bank line of credit
that allows for borrowings up to $500,000. The line of credit is
revolving and is payable on demand. In November 2018, the maximum
borrowing capacity was increased to $1,875,000. The facility renews
annually and is secured by the assignment of a deposit account held
by the lender and a second deed to the property owned by the
Company in Duluth, Georgia. The line of credit carries a floating
rate of interest equal to the lender's Prime Rate and is subject to
change any time the Prime Rate changes. Under terms of the line of
credit, the Company is required to maintain a minimum cash balance
and a specified cash flow coverage ratio, as those terms are
defined, and the Company was in compliance as of 31 December 2018.
There was no balance on the line of credit at 31 December 2018 and
2017. The interest rate on 31 December 2018 and 2017 was 5.50
percent and 4.00 percent, respectively. There was no interest
expense related to this loan for the years ended 31 December 2018
and 2017.
9. Note payable
On 27 March 2013, the Company entered into a term loan agreement
with a lender for the purchase of property and a building for its
manufacturing operations and corporate offices. The note is secured
by the property and building. The Company borrowed proceeds of
$2,285,908 at a fixed interest rate of 4.45 percent. The loan has a
10 year term with monthly payments based on a 20 year amortisation.
In addition, there is a one-time payment at the end of the term of
the note of approximately $1,400,000. In accordance with the terms
of the agreement, the Company is required to keep $500,000 in a
deposit account with the lending bank. As of 31 December 2018 and
2017, the Company had restricted cash of $500,000 related to the
loan agreement. Future maturities of long-term debt are as follows
as of 31 December 2018:
Year Ending 31 December (USD, in thousands)
2019 86
=====
2020 97
=====
2021 102
=====
2022 107
=====
2023 1,433
=====
1,825
=====
10. Stock compensation
In July 2011, the Company's shareholders approved the Conversion
Shares and the Directors' Shares, as well as the Plan Shares and
Omnibus Performance Incentive Plan ("Plan"). This included the
termination of all outstanding stock incentive plans, cancellation
of all outstanding stock incentive agreements, and the awarding of
stock incentives to Directors and certain employees and
consultants. The Company established the Plan to attract and retain
Directors, officers, employees and consultants. The Company
reserved an amount equal to 10 percent of the Common Shares issued
and outstanding immediately following the Public Offering.
Upon the issuance of these additional shares, an award of share
options was made to the Directors and certain employees and
consultants, and a single award of restricted shares was made to a
former Chief Financial Officer. In addition, additional stock
options were awarded in each year subsequent. The awards of stock
options and restricted shares made upon issuance were in respect of
85 percent of the Common Shares available under the Plan,
equivalent to 8.5 percent of the Public Offering. The total number
of shares reserved for stock awards and options under this Plan is
1,880,762 with 1,347,042 shares allocated as of 31 December 2018.
The shares are all allocated to employees, executives and
consultants.
The options granted to Non-Executive Directors, unless otherwise
agreed, vest contingent on continuing service with the Company at
the vesting date and compliance with the covenants applicable to
such service.
Employee options vest over three years with a third vesting
ratably each year, partially on issuance and partially over the
following 24 month period, or if there is a change of control.
Vesting accelerates in the event of a change of control. Options
granted to Non-Executive Directors and one executive vest partially
on issuance and will vest partially one to two years later. The
remaining Non-Executive Director options expired at the end of
2016.
As discussed in Note 2, the Company uses the Black Scholes
valuation model to measure the fair value of options granted. Since
the Company does not have a sufficient trading history from which
to calculate its historical volatility, the Company's expected
volatility is based on a basket of comparable companies' historical
volatility. As the Company's initial options were granted in 2011,
the Company does not have sufficient history of option exercise
behavior from which to calculate the expected term. Accordingly,
the expected terms of options are calculated based on the short-cut
method commonly utilised by newly public companies. The risk free
interest rate is based on a blended average yield of two and five
year United States Treasury Bills at the time of grant. The
assumptions used in the Black Scholes option pricing model for
options granted in 2017 and 2018 were as follows:
Risk-Free Fair
Number of Interest Expected Exercise Value
Options Granted Grant Date Rate Term Volatility Price per option
2017 205,000 26/05/2017 1.69% 5.75 years 56.70% $0.75 $0.39
================ ========== ========= ========== ========== ======== ===========
25,000 06/11/2017 2.08% 6 years 56.70% $1.26 $0.69
================ ========== ========= ========== ========== ======== ===========
50,000 06/11/2017 2.08% 6 years 56.70% $1.26 $0.00
================ ========== ========= ========== ========== ======== ===========
2018 150,000 30/11/2018 2.90% 5.72 years 53.00% $3.03 $1.57
================ ========== ========= ========== ========== ======== ===========
The Company assumes a dividend yield of 0.0%.
The following table summarises the Company's stock option
activity for the years ended 31 December 2018 and 2017:
Weighted-Average Weighted-Average Average
Exercise Remaining Contractual Grant Date
Stock Options Shares Price Term (in years) Fair Value
Outstanding at 31 December
2016 1,139,556 $2.56 5.9 $1,372,852
========= ================ ====================== ===========
Granted 280,000 $0.89 5.8 $97,200
========= ================ ====================== ===========
Exercised (17,500) $0.36
========= ================ ====================== ===========
Forfeited (180,014) $1.81
========= ================ ====================== ===========
Outstanding at 31 December
2017 1,222,042 $2.31 5.9 $1,307,331
========= ================ ====================== ===========
Granted 150,000 $3.03 5.7 $235,500
========= ================ ====================== ===========
Exercised (20,000) $0.44
========= ================ ====================== ===========
Forfeited (5,000) $0.75
========= ================ ====================== ===========
Outstanding at 31 December
2018 1,347,042 $2.43 5.9 $1,536,406
========= ================ ====================== ===========
Exercisable at 31 December
2018 1,130,375 $2.42 6.0
========= ================ ====================== ===========
A summary of the status of unvested options as of 31 December
2018 and changes during the years ended 31 December 2018 and 2017
is presented below:
Weighted-Average
Fair Value at Grant
Unvested Options Shares Date
Unvested at 31 December 2016 341,833 $0.65
========= ====================
Granted 280,000 $0.35
========= ====================
Vested (340,584) $0.92
========= ====================
Forfeited (97,583)
========= ====================
Unvested at 31 December 2017 183,666 $0.44
========= ====================
Granted 150,000 $1.57
========= ====================
Vested (114,499) $0.34
========= ====================
Forfeited (2,500)
========= ====================
Unvested at 31 December 2018 216,667 $1.14
========= ====================
As of 31 December 2018, total unrecognised compensation cost of
$224,000 was related to unvested share-based compensation
arrangements awarded under the Plan.
11. Commitments and contingencies
Operating leases - The Company leases certain facilities and
equipment under non-cancelable operating leases which expire at
varying times between January 2018 and June 2021. Certain of these
leases have escalating rent payments which result in the Company
recording a deferred rent liability.
Future minimum lease payments under the operating leases,
together with the present value of minimum lease payments as of 31
December 2018 are as follows:
Future
Lease Payments
Year Ending 31 December US$000
2019 233
===============
2020 237
===============
2021 166
===============
2022 120
===============
2023 122
===============
Thereafter 51
===============
Total future lease payments 929
===============
Rent expense for the years ended 31 December 2018 and 2017 was
approximately $320,000 and $325,000, respectively.
Legal - From time to time, the Company is a party to certain
legal proceedings arising in the ordinary course of business. In
the opinion of management, there are no current legal proceedings
or other claims outstanding which could have a material adverse
effect on the results of operations or financial position of the
Company.
12. Related party transactions
The Company has held a patent rights purchase agreement since
2009 with a shareholder as described in Note 6.
13. Segment and geographic information
ASC 280-10, Disclosures About Segments of an Enterprise and
Related Information (ASC 280-10), establishes standards for
reporting information about operating segments. ASC 280-10 requires
that the Company report financial and descriptive information about
its reportable operating segments. Operating segments are
components of an enterprise for which separate financial
information is available that is evaluated regularly by the chief
operating decision maker (CODM) in deciding how to allocate
resources and in assessing performance. The Company's CODM is the
Chief Executive Officer (CEO). While the CEO is apprised of a
variety of financial metrics and information, the business is
principally managed on an aggregate basis as of 31 December 2018.
For the year ended 31 December 2018, the Company's revenues were
generated primarily in the Middle East and the United States
(U.S.). Additionally, the majority of the Company's expenditures
and personnel either directly supported its efforts in the Middle
East and the U.S., or cannot be specifically attributed to a
geography. Therefore, the Company has only one reportable operating
segment.
Revenue from customers by geography is as follows:
Year Ending 31 December (USD, in thousands) 2018 2017
Middle East 23,066 6,256
====== ======
United States 2,465 7,191
====== ======
Other 1,421 304
====== ======
Total 26,952 13,751
====== ======
Equipment leased to customers by geography is as follows:
Year Ending 31 December (USD, in thousands) 2018 2017
Middle East 7,602 6,391
===== =====
United States 1,726 1,729
===== =====
Other 346 375
===== =====
Total 9,674 8,495
===== =====
14. Concentrations
At 31 December 2018, one customer with seven contracts with six
separate plants, represented 89 percent of accounts receivable.
During the year ended 31 December 2018, the Company received 85
percent of its gross revenue from one customer with six separate
plants.
At 31 December 2017, two customers, one with four contracts with
three separate plants, represented 89 percent of accounts
receivable. During the year ended 31 December 2017, the Company
received 80 percent of its gross revenue from two customers, one
with three separate plants.
15. Subsequent Events
The Company discloses material events that occur after the
balance sheet date but before the financials are issued. In
general, these events are recognised in the financial statements if
the conditions existed at the date of the balance sheet, but are
not recognised if the conditions did not exist at the balance sheet
date. Management has evaluated subsequent events through 10 May
2019, the date the financial statements were available to be
issued. On 27 February 2019, the Company completed the closing of a
Placing of 577,246 Common Shares and a Subscription for 26,387
Common Shares, both at a price of 230 pence per new share, raising
US$1.8 million before expenses. Upon conclusion of the public
offering, the total shares issued and outstanding were 19,411,250.
Following the exercise of a share option, the total shares issued
and outstanding at the date of this report is 19,413,750.
Forward Looking Statements
This Annual Report contains certain statements that are or may
be "forward-looking statements". These statements typically contain
words such as "intends", "expects", "anticipates", "estimates" and
words of similar import. All the statements other than statements
of historical facts included in this Annual Report, including,
without limitation, those regarding the Company's financial
position, business strategy, plans and objectives of management for
future operations (including development plans and objectives
relating to the Company's products and services) are
forward-looking statements. By their nature, forward-looking
statements involve risk and uncertainty because they relate to
events and depend on circumstances that will occur in the future
and therefore undue reliance should not be placed on such
forward-looking statements. There are a number of factors that
could cause the actual results, performance or achievements of the
Company to be materially different from future results, performance
or achievements expressed or implied by such forward-looking
statements. Such forward-looking statements are based on numerous
assumptions regarding the Company's present and future business
strategies and the environment in which the Company will operate in
the future and such assumptions may or may not prove to be correct.
Forward-looking statements speak only as at the date they are made.
Neither the Company nor any other person undertakes any obligation
(other than, in the case of the Company, pursuant to the AIM Rules
for Companies) to update publicly any of the information contained
in this Annual Report, including any forward-looking statements, in
the light of new information, change in circumstances or future
events.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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