TIDMMYX TIDMTTM
RNS Number : 9622N
MyCelx Technologies Corporation
27 May 2020
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.
27 May 2020
MYCELX TECHNOLOGIES CORPORATION
("MYCELX" or the "Company")
Final Results for the year ending 31 December 2019
MYCELX Technologies Corporation (AIM: MYX), the clean water
technology company providing patented solutions for the Oil and Gas
market and commercial industrial markets worldwide, announces its
audited results for the year ended 31 December 2019.
Highlights
Financial
-- Revenue of $11.9 million (2018: $27.0 million)
-- Gross profit of $6.1 million (2018: $14.1 million)
-- EBITDA of negative $1.2 million (2018: $5.6 million)
-- Net loss of $3.0 million (2018: net profit of $3.1 million)
-- Total operating expenses reduced by 12% year-on-year
Operational
-- Saudi Arabia: Three contract extensions and two new contracts
-- Australia: First sale into PFAS remediation in Australia
-- Post period end: Signed three new purchase orders
o Two in the Middle East and one in Nigeria
Corporate
-- During the period Tom Lamb was appointed to the Board of
Directors as a Non-Executive Director and Chairman of the
Compensation Committee
-- Following the slowdown in bidding activity in H1 2019 the
Company took decisive action to reduce costs across the Group
Connie Mixon, Chief Executive Officer of MYCELX Technologies
Corporation said:
"Whilst we experienced a strong first quarter in 2019, global
macro events led to a number of project delays and a slowdown in
bidding activity, which impacted our financial performance during
the year. However, despite the conditions, we were able to sign a
number of new contracts during the period, in addition to extending
two existing contracts in our core market of Saudi Arabia. We
maintained our strategy of remaining close to existing and target
customers and conducting trials with potential customers, which we
believe will deliver results in due course.
In 2020, we now face of some of the most challenging conditions
we have ever encountered, with the onset of a global pandemic and
lower oil prices and have gone to great lengths to protect our
employees and safeguard our financial position by installing a
number of cost saving initiatives across the Company. In terms of
our operations, we remain busy and are actively speaking to our
customers and vendors regarding new and currently active projects.
I would like to thank all our stakeholders for their ongoing
support and I look forward to updating our investors on progress
throughout the rest of 2020."
For further information please contact:
MYCELX Technologies Corporation
Connie Mixon, CEO Tel: +1 888 306 6843
Kim Slayton, CFO
Numis Securities Limited
John Prior Tel: +44 20 7260 1000
James Black, Emily Morris, Alamgir Ahmed
Celicourt
Mark Antelme Tel: +44 20 8434 2754
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
Strengthening foundations and footprint with focus on resilience
and operational efficiency
"We are fortunate to have an existing footprint in countries and
companies operating at the lowest part of their respective industry
cost curves."
In2019, MYCELX further consolidated its position as one of the
world's leading clean water technology companies by widening its
footprint with sales to the oil and gas industry in Nigeria and
Australia and pursuing opportunities in industrial and commercial
markets. With a focus on adding value to our customers, we continue
to provide them with innovative, patented solutions for their water
treatment needs that are both cost-effective and production
enhancing.
At a time of unprecedented global challenges, MYCELX's offering
of world class clean water technology remains more relevant than
ever. Industry has never needed to manage its water as effectively
and responsibly as it does today, or as much as it will tomorrow.
Against the backdrop of the current turbulence facing us all,
following a far-reaching cost reduction programme, the Company
today is lean, yet remains well placed to continue to capture new
opportunities at the appropriate moment.
2019 saw a number of macro-economic factors creating headwinds
in our core market. Whilst MYCELX benefits from supplying into
multiple geographies, the geo-politics of the Middle East
materially affected us with a number of projects for the Saudi
Arabian market being postponed. In 2019, the oil price decreased
year-on-year to an average of $64 a barrel, meaning the oil
companies who we support were required to do more with less.
The further decline of oil prices adds significant pressure on
the oil and gas industry, but it is too early to assess the full
impact. Forward work programmes are being re-assessed by operators
but the need to maximise the effectiveness of production and
processing operations could not be greater. MYCELX therefore
remains well placed to continue to support the industry. We proved
to be robust through the last oil price cycle and are confident,
should the current situation prove to be part of a prolonged
downturn, that we are well placed to continue to develop our
business.
A dominant theme throughout 2019 was the growing awareness of
the need for companies to help achieve the objectives of the 2016
Paris Agreement, the United Nations Framework Convention on Climate
Change. As a result, the focus on the Environmental, Social and
Governance ("ESG") measures being taken by corporates has never
been sharper. The environmental benefits associated with the
correct management of water are clear and MYCELX is uniquely placed
to help all its customers fulfil their ESG commitments whilst
meeting cost-saving goals and supporting their steps to ensure
resilience in these challenging times.
Outlook
Given the uncertain economic environment that has been created
by the coronavirus pandemic, it is critical that MYCELX focuses on
providing its clients with cost-saving solutions that will help
them achieve optimal operational efficiency. As a company, we will
continue to leverage our strong reputation and widening footprint
to pursue opportunities both in core markets as well as opening new
frontiers in the commercial and industrial sectors. We are
fortunate to have an existing footprint in countries and companies
operating at the lowest part of their respective industry cost
curves. Whilst we expect to see a global economic slowdown over the
coming year, our core markets and key customers will continue to
operate and require our solutions although potentially at lower
production levels. The Company has taken specific employee safety
and cost saving actions in light of COVID-19 and plunging oil
prices to ensure the team members remain safe while following
effective guidelines and the Company is poised to move quickly when
the unprecedented global market disruption eases.
Looking ahead, as world markets stabilise, MYCELX remains in a
strong position to capitalise on the myriad of opportunities
identified, both in oil and gas and the commercial and industrial
sectors. Our geographic focus will remain the growing markets of
Saudi Arabia, North America, Australia and Nigeria. This provides
us with both focus and diversity in regions of the world where
MYCELX is now firmly established, and where the regulatory
environment supports our offering.
Board of Directors Composition
In 2019 we welcomed Tom Lamb as a Non-Executive Director,
Chairman of the Compensation Committee and a member of the Audit
and Nomination Committees. Tom brings to the table a considerable
depth of experience in the industrial and technology sectors. We
also said farewell to Brian Rochester who served as a Non-Executive
Director and as Chairman of the Compensation Committee for many
years. We thank Brian for his steadfast support of MYCELX for 20
years, helping the Board guide the Company not only through its IPO
on the AIM market in the UK but its expansion into the Middle East
and other markets worldwide as well.
Our Strategic Report
Our 2019 strategic report was reviewed and approved by the Board
on 26 May 2020.
The business review, future developments and principal risks and
uncertainties have been included in the strategic report.
Chief Executive's Statement
A year of solid performance against a challenging macro
backdrop
"We were pleased to announce multiple contract wins and
extensions in the Middle East and Nigeria."
2019 saw the Company make solid progress in key regions despite
the geo-political challenges for our core market. We continued to
execute our strategy of remaining close to existing and target
customers and conducting trials with potential customers during the
period, and anticipate that these efforts will yield results over
the course of 2020 and beyond.
Operational Performance
During 2019, we were pleased to announce multiple contract wins,
along with a number of contract extensions, in core geographies for
our business, namely the Middle East and Nigeria. Our continued
focus on these regions, and the reliable performance of our
patented technology, also led to a number of contract wins in the
Middle East and Nigeria, post-period end. We were also pleased to
announce our first equipment sale into Australia's burgeoning
Liquefied Natural Gas ("LNG") industry, which will provide
recurring media sales and has the potential to be a revenue
generative market for us going forward.
Whilst we were pleased to start 2019 with a strong first
quarter, our bidding activity was impacted by regional events
taking place in Saudi Arabia at the time. This meant that a number
of the projects we were due to bid on were postponed to later in
the year or to 2020. Although the postponement of bidding activity
was disappointing, as an organisation we were quick to take action
and reduce costs throughout the business. The reduction of costs,
combined with our $1.8 million fundraise in February 2019, ensured
that we maintained a strong balance sheet throughout the
period.
Looking to the Future
While we maintain focus on opportunities in our core Oil and Gas
market, given current sector uncertainty and the reduction in oil
prices, we will continue to develop opportunities in the Commercial
and Industrial sectors. We intend to focus on areas such as air
filtration, PFAS groundwater remediation and agri-business. Our
unique technology and new product development brings distinct
advantages that will generate cost savings and have direct,
positive environmental impact for companies in these industries.
These efforts will take some time to show material results but we
believe it will be worth it in terms of growth and
diversification.
As a business, we continue to benefit from a strong financial
position with ca.$3.6 million of cash and no unsecured debt (as at
31 December 2019). However, we expect there to be significant
market disruption with the global COVID-19 pandemic, combined with
the recent fall in oil prices, which has the potential to have a
long-term impact on bidding activity. Given the global market
uncertainty, the Company has decided to withdraw its guidance for
2020 given earlier this year but will continue to monitor
developments and provide further updates as necessary.
Safety
The safety of our workforce is of paramount importance to the
Company, so in light of the global COVID-19 pandemic we have gone
to great lengths to ensure the safety of our employees. We have
stopped all non-essential work travel and set in place a work from
home policy where possible.
I would like to thank the MYCELX team and all our stakeholders
for their continued support during what was a challenging year for
our business. As we continue to work through the high level of
market uncertainty currently present, we are well placed to benefit
from a pick-up in activity. We look forward to updating all our
stakeholders on progress throughout the rest of 2020.
Statements of Operations
(USD, in thousands, except share data)
For the Year Ended 31 December: 2019 2018
Revenue 11,908 26,952
---------- ----------
Cost of goods sold 5,822 12,892
---------- ----------
Gross profit 6,086 14,060
---------- ----------
Operating expenses:
---------- ----------
Research and development 352 -
---------- ----------
Selling, general and administrative 7,754 9,264
---------- ----------
Depreciation and amortisation 386 438
---------- ----------
Total operating expenses 8,492 9,702
---------- ----------
Operating (loss) profit (2,406) 4,358
---------- ----------
Other expense
---------- ----------
Loss on disposal of equipment (13) (3)
---------- ----------
Interest expense (80) (85)
---------- ----------
(Loss) profit before income taxes (2,499) 4,270
---------- ----------
Provision for income taxes (460) (1,200)
---------- ----------
Net (loss) profit (2,959) 3,070
---------- ----------
(Loss) profit per share - basic (0.15) 0.16
---------- ----------
(Loss) profit per share - diluted (0.15) 0.15
---------- ----------
Shares used to compute basic (loss) profit per
share 19,312,664 18,802,981
---------- ----------
Shares used to compute diluted (loss) profit per
share 19,312,664 20,003,251
---------- ----------
The accompanying notes are an integral part of the financial
statements.
Balance Sheets
(USD, in thousands, except share data)
As at 31 December: 2019 2018
Assets
--------- ---------
Current Assets
--------- ---------
Cash and cash equivalents 3,647 4,866
--------- ---------
Restricted cash 500 525
--------- ---------
Accounts receivable - net 3,987 8,225
--------- ---------
Unbilled accounts receivable - 20
--------- ---------
Inventory - net 6,141 4,708
--------- ---------
Prepaid expenses 218 228
--------- ---------
Other assets 387 42
--------- ---------
Total Current Assets 14,880 18,614
--------- ---------
Property and equipment - net 8,016 8,536
--------- ---------
Intangible assets - net 798 788
--------- ---------
Operating lease asset - net 808 -
--------- ---------
Total Assets 24,502 27,938
--------- ---------
Liabilities and Stockholders' Equity
--------- ---------
Current Liabilities
--------- ---------
Accounts payable 786 2,912
--------- ---------
Payroll and accrued expenses 503 1,950
--------- ---------
Deferred revenue - 125
--------- ---------
Customer deposits 864 130
--------- ---------
Operating lease obligations - current 282 -
--------- ---------
Note payable - current 97 86
--------- ---------
Other current liabilities - 23
--------- ---------
Total Current Liabilities 2,532 5,226
--------- ---------
Operating lease obligations - long-term 484 -
--------- ---------
Note payable - long-term 1,642 1,739
--------- ---------
Total Liabilities 4,658 6,965
--------- ---------
Stockholders' Equity
--------- ---------
Common stock, $0.025 par value, 100,000,000 shares
authorised, 19,443,750 and 18,807,617 shares issued
and outstanding at 31 December 2019 and 2018,
respectively. 486 470
--------- ---------
Additional paid-in capital 42,358 40,544
--------- ---------
Accumulated deficit (23,000) (20,041)
--------- ---------
Total Stockholders' Equity 19,844 20,973
--------- ---------
Total Liabilities and Stockholders' Equity 24,502 27,938
--------- ---------
The accompanying notes are an integral part of the financial
statements.
Statements of Stockholders' Equity
(USD, in thousands)
Common Stock
Additional Accumulated
Paid-in Deficit Total
Capital Shares $ $ $ $
-------- ----
Balances at 31 December 2017 18,788 470 40,456 (23,111) 17,815
-------- ---- ---------- ----------- -------
Exercise of stock options 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
-------- ---- ---------- ----------- -------
Issuance of common stock, net
of offering costs 604 15 1,573 - 1,588
-------- ---- ---------- ----------- -------
Exercise of stock options 32 1 42 - 43
-------- ---- ---------- ----------- -------
Stock-based compensation expense - - 199 - 199
-------- ---- ---------- ----------- -------
Net loss for the period - - - (2,959) (2,959)
-------- ---- ---------- ----------- -------
Balances at 31 December 2019 19,444 486 42,358 (23,000) 19,844
-------- ---- ---------- ----------- -------
The accompanying notes are an integral part of the financial
statements.
Statements of Cash Flows
(USD, in thousands)
For the Year Ended 31 December: 2019 2018
Cash flow from operating activities
------- -------
Net (loss) profit (2,959) 3,070
------- -------
Adjustments to reconcile net (loss) profit to
net cash provided by operating activities:
------- -------
Depreciation and amortisation 1,269 1,239
------- -------
Loss from disposition of equipment 13 3
------- -------
Stock compensation 199 80
------- -------
Change in operating assets and liabilities:
------- -------
Accounts receivable - net 4,238 (5,789)
------- -------
Unbilled accounts receivable 20 378
------- -------
Inventory - net (1,338) (2,082)
------- -------
Prepaid expenses 10 26
------- -------
Prepaid operating leases (42) -
------- -------
Other assets (345) (9)
------- -------
Accounts payable (2,126) 1,930
------- -------
Payroll and accrued expenses (1,447) 1,380
------- -------
Deferred revenue (125) (60)
------- -------
Customer deposits 734 123
------- -------
Other current liabilities (23) 9
------- -------
Net cash (used in) provided by operating activities (1,922) 298
------- -------
Cash flow from investing activities
------- -------
Payments for purchases of property and equipment (805) (492)
------- -------
Payments for internally developed patents (62) (23)
------- -------
Net cash used in investing activities (867) (515)
------- -------
Cash flows from financing activities
------- -------
Net proceeds from stock issuance 1,588 -
------- -------
Net proceeds from exercise of stock options 43 8
------- -------
Payments on notes payable (86) (96)
------- -------
Net cash provided by (used in) financing activities 1,545 (88)
------- -------
Net decrease in cash, cash equivalents and restricted
cash (1,244) (305)
------- -------
Cash, cash equivalents and restricted cash, beginning
of year 5,391 5,696
------- -------
Cash, cash equivalents and restricted cash, end
of year 4,147 5,391
------- -------
Supplemental disclosures of cash flow information:
------- -------
Cash payments for interest 74 92
------- -------
Cash payments for income taxes 496 1,128
------- -------
Non-cash movements of inventory and fixed assets 96 (459)
------- -------
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.
Liquidity - The Company meets its day-to-day working capital and
other cash flow requirements through operations and loan
facilities. The Company has a Note Payable (Note 9) that matures in
March 2023 and access to a line of credit (Note 8) that renews
annually. The Company actively manages its financial risk by
operating Board-approved financial policies that are designed to
ensure that the Company maintains an adequate level of liquidity
and effectively mitigates financial risks.
Currently due to fears over the spread of COVID-19 there has
been a significant economic impact in the regions in which the
Company operates. Further, for several reasons including COVID-19,
there has been a significant decrease in oil demand and therefore a
fall in prices. Considering the Company's customer base is
concentrated in the Oil and Gas industry, this could have a
significant impact on future demand for the Company's clean water
technology. Whilst it is too early to predict the impact to the
Company's operations, the extent of the effect on the Company's
operational and financial performance will depend on future
developments, including the duration, spread, and intensity of the
pandemic, and governmental, regulatory and private sector
responses.
Given the future uncertainty, including that the Company's 2019
operations showed a significant decrease in revenues from 2018 due
to the delay of certain projects, the Company performed a downside
scenario sensitivity analysis taking into account the potential for
continuation of low oil prices and uncertainty around COVID-19,
whilst considering revenues already under contract and adjusting
only for cost of goods sold.
On the basis of current financial projections, including the
downside scenario sensitivity analysis, and facilities available,
the Company believes that it has adequate resources to continue in
operational existence for the foreseeable future at least 12 months
from the date of the issuance of these financial statements and,
accordingly, consider it appropriate to adopt the going concern
basis in preparing these Financial Statements.
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
inventory valuation, accounts receivable valuation, 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, professional services
to operate the leases, turnkey operations, 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 and spare parts 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 professional services provided to monitor and operate the
equipment is recognised over time when the service is provided and
is typically billed monthly. Revenue from turnkey projects whereby
the Company is asked to manage the water filtration process end to
end is recognised on a straight line basis over time as the
performance obligation, in the context of the contract, is a stand
ready obligation to filter all water provided. Revenue from
contracts related to construction of equipment is recognised upon
shipment of the equipment to the customer because the contractual
terms state that control transfers at the point of shipment and
there is no enforceable right to payments made as customer deposits
prior to that date. Customer deposits for equipment sales represent
payments made prior to transferring control at the point of
shipment that can be refunded at any time when requested by the
customer, thus, they do not represent deferred revenue.
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 fulfilment
cost and are included in cost of good sold.
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
that are satisfied over 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. All other
performance obligations are satisfied at a point in time upon
transfer of control to the customer.
The Company's contracts with customers 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. The Company develops observable SSP by reference to
stand-alone sales for identical or similar items to similarly
situated clients at prices within a sufficiently narrow range.
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 revenue recognised in
excess of amounts billed. Deferred revenue represents billings in
excess of revenue recognised. Deferred revenue at 31 December 2018
included $124,867 recognized as revenue in 2019. There was no
unbilled accounts receivable and no deferred revenue at 31 December
2019.
Timing of revenue recognition for each of the periods and
geographic regions presented is shown below:
Consumable Filtration
Equipment Leases, Turnkey Media, Equipment Sales
Arrangements, and Services and Service Recognised
Recognised Over Time at a Point in Time
Year Ending 31 December (USD,
in thousands) 2019 2018 2019 2018
-------------- ------------- ----------- ------------
Middle East 3,931 7,593 4,324 15,473
-------------- ------------- ----------- ------------
United States 1 260 2,448 2,205
-------------- ------------- ----------- ------------
Other - 98 916 1,323
-------------- ------------- ----------- ------------
Total revenue recognised
under ASC 606 3,932 7,951 7,688 19,001
-------------- ------------- ----------- ------------
Total revenue recognised
under ASC 842 288 - - -
-------------- ------------- ----------- ------------
Total revenue 4,220 7,951 7,688 19,001
-------------- ------------- ----------- ------------
Contract Costs - The Company capitalises certain contract costs
such as costs to obtain contracts (direct sales commissions) and
costs to fulfil contracts (upfront costs where the Company does not
identify the set up fees as a performance obligation). These
contract assets are amortised over the period of benefit, which the
Company has determined is customer life.
During the year ended 31 December 2019, the Company did not have
any costs to obtain a contract and any costs to fulfil a contract
were inconsequential.
Cash, cash equivalents and restricted cash - 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 2019, 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 2019 and 2018, cash in non-U.S. institutions was $7,000
and $13,000, respectively. The Company has not experienced any
losses in such accounts. The Company classifies as restricted cash
all cash whose use is limited by contractual provisions. As of 31
December 2019 and 2018, restricted cash included $500,000 cash on
deposit in a money market account as required by a lender (see Note
9). The restricted cash balance at 31 December 2018 also included
$25,000 in a Certificate of Deposit to secure the Company's
corporate credit card.
Reconciliation of cash, cash equivalents and restricted cash at
31 December 2019 and 2018:
31 December 31 December
2019 2018
US$000 US$000
Cash and cash equivalents 3,647 4,866
----------- -----------
Restricted Cash 500 525
----------- -----------
Total cash, cash equivalents and restricted cash 4,147 5,391
----------- -----------
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 2019 and 2018 was $nil and $300,000,
respectively, as the Company wrote off the balances reserved at 31
December 2018 during 2019 and no other amounts were reserved during
2019.
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 changed their inventory accounting
method from the FIFO method (first in; first out) to the Average
Cost method. 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.
The Company determines the valuation by evaluating expected future
usage as compared to its past history of utilisation and future
expectations of usage.
Change of Accounting Principle - On 30 September 2019, the
Company changed its inventory accounting method from the FIFO
method to the Average Cost method. The change coincided with the
migration of the Company's ERP system to NetSuite. While both
costing methods are acceptable under U.S. GAAP, the Company decided
to use average costing in the new system to best utilise NetSuite
capabilities and more accurately account for inventory and cost. A
change in prior periods has been deemed both immaterial and
impractical due to the significant turnover of inventory over the
preceding two years, and thus, the Company has chosen to apply the
change prospectively starting on the date of the NetSuite
implementation.
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:
Building 39 years
Leasehold improvements Lease period or 1-5 years (shorter
of)
--------------------------------------
Office equipment 3-10 years
--------------------------------------
Manufacturing equipment 5-15 years
--------------------------------------
Research and development 5-10 years
equipment
--------------------------------------
Purchased software Licensing period or 5 years (whichever
is shorter)
--------------------------------------
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 2019 and 2018.
Research and development costs - Research and development costs
are expensed as incurred. Research and development expense for the
years ended 31 December 2019 and 2018 was approximately $352,000
and $nil, respectively.
Advertising costs - The Company expenses advertising costs as
incurred. Advertising expense for the years ended 31 December 2019
and 2018 was $nil and is recorded in selling, general and
administrative expenses.
Rent expense - In 2018, under ASC 840, the Company recorded 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 represented the cumulative difference between rent expense
recognised on the straight-line basis and the actual rent paid.
In 2019, under ASC 842, the deferred rent liability was
recognised within the initial right of use asset as of the
transition date and the rent expense was recorded using
straight-line amortisation of the right of use asset as calculated
under the standard for the remainder of the expected lease term.
The lease liability was calculated at the present value of the
remainder of the contracted lease payments.
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 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. 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 2019
and 2018 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 consisting of unexercised stock
options that were excluded from computing diluted net loss per
share were approximately 1,324,968 for the year ended 31 December
2019 and there were no adjustments to net income available to
stockholders as recorded on the income statement.
The following table sets forth the components used in the
computation of basic and diluted net (loss) profit per share for
the periods indicated:
Years Ended 31 December
2019 2018
------------ -----------
Basic weighted average outstanding shares of common
stock 19,312,664 18,802,981
------------ -----------
Effect of potentially dilutive stock options - 1,200,270
------------ -----------
Diluted weighted average outstanding shares of
common stock 19,312,664 20,003,251
------------ -----------
Anti-dilutive shares of common stock excluded
from diluted weighted
average shares of common stock 1,324,968 -
------------ -----------
Fair value of financial instruments - The Company uses the
framework in ASC 820, Fair Value Measurements, 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 2019 or 2018.
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 2019 and
2018 include cash and cash equivalents, restricted cash, 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.
Stock 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 11).
Recently issued accounting standards - In February 2016, the
Financial Accounting Standards Board ('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 prior U.S. GAAP, which required only capital
leases be recognised on the balance sheet, the new standard
requires both finance and operating 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 adopted this ASU
under a modified retrospective approach on 1 January 2019 adopting
the standard only from the beginning of the adoption year with a
cumulative-effect adjustment recorded as of 1 January 2019, which
resulted in no impact to the statement of stockholders' equity.
This resulted is the recognition of an Operating Lease Right of Use
Asset and an Operating Lease Liability of $1,076,000 and
$1,042,000, respectively. The Company adopted the standard with the
'package of three' practical expedient as stated in ASC 842 upon
adoption in evaluating its adoption impact from a lessee
perspective.
Lessor Contracts
The Company evaluated the potential impact of the adoption from
a lessor perspective as the Company's business model provides
customers with the use of equipment to filter water. The Company
determined that in contracts where equipment was leased, there was
an identified asset, the most significant economic benefit was the
ability of the customer to obtain clean water from their use of the
Company's clean water technology, and customers directed the
activities most significant to the ability to obtain those economic
benefits. Contracts generally contain no purchase options or
residual value guarantees. The assets that the Company leases
generally have a long useful life of up to 10 or more years and are
used by several customers over the useful life of the equipment.
The Company believes that the residual value at any point in time
is materially consistent with the recorded rate of depreciation as
a result.
The Company's lease contracts are generally short term in nature
and contain non lease components in the form of services, whereby
employees operate the equipment, and the media to use with the
equipment in order to clean the water. Within these contracts, the
predominant value lies in the purchased media, which cleans the
water, and is the most significant value received by the customer.
As a result, the Company will use the lessor practical expedient to
recognise all components under ASC 606 within these contracts.
From time to time, customers will lease only the equipment on a
trial basis or for a short period of time, as a need arises,
without the purchase of services or media. In these instances,
revenue is recognised under ASC 842. The amount of lease income to
be received under these types of arrangements over the next five
years for which a contract currently exists is not significant
because of the short-term nature of the Company's lease
contracts.
In August 2016, the FASB issued ASU 2016-15, 'Clarification on
Classification of Certain Cash Receipts and Cash Payments on the
Statement of Cash Flows', which amends ASC 230. The FASB issued ASU
2016-15 with the intent of reducing diversity in practice with
respect to eight types of cash flows. The Company has adopted this
guidance effective 1 January 2019. The adoption of this new
guidance did not have a material impact on the consolidated
financial statements.
In November 2016, the FASB issued ASU 2016-18, 'Statement of
Cash Flows (Topic 230): Restricted Cash', that changes the
presentation of restricted cash and cash equivalents on the
statement of cash flows. The Company has adopted this guidance
effective 1 January 2019 using the retrospective transition method
and has applied its content to the statement of cash flows for the
years ended 31 December 2018 and 2019 presented herein.
In August 2018, the FASB issued ASU 2018-13, 'Fair Value
Measurement (Topic 820): Disclosure Framework', which removes,
modifies and adds to the disclosure requirements on fair value
measurements in Topic 820. The amendments on changes in unrealised
gains and losses, the range and weighted average of significant
unobservable inputs used to develop Level 3 fair value
measurements, and the narrative description of measurement
uncertainty should be applied prospectively for only the most
recent interim or annual period presented in the initial fiscal
year of adoption. All other amendments should be applied
retrospectively to all periods presented upon their effective date.
This guidance will become effective for the Company in fiscal years
beginning after 15 December 2019, including interim periods within
that reporting period. The Company does not expect adoption of this
guidance to have a material impact on its financial statements.
In December 2019, the FASB issued ASU 2019-12, 'Income Taxes
(Topic 740): Simplifying the Accounting for Income Taxes', which is
expected to simplify income tax accounting requirements in areas
deemed costly and complex. The amendments under ASU 2019-12 will be
effective as of 1 January 2021, and interim periods within that
year, with early adoption permitted in its entirety as of the
beginning of the year of adoption. At adoption, the guidance allows
for modified retrospective application through a cumulative effect
adjustment to retained earnings. The Company is currently
evaluating the impact of adopting this guidance.
Recent accounting pronouncements pending adoption not discussed
above are either not applicable or are not expected to have a
material impact on the Company.
Reclassifications - Certain reclassifications have been made to
prior years' financial statements to conform to current year
presentation. A reclassification was made on the balance sheet to
separately present 'customer deposits' of $130,000 previously
included in 'other current liabilities'. A reclassification was
made in the cash flow statement to separately present 'customer
deposits' of $130,000 previously included in 'other current
liabilities' among adjustments to reconcile net income to net cash
provided by operating activities. These reclassifications had no
effect on reported results of operations, accumulated deficit, or
net cash provided by operating activities, as of and for the year
ended 31 December 2018.
3. Accounts Receivable
Accounts receivable and their respective allowance amounts at 31
December 2019 and 2018:
31 December 31 December
2019 2018
US$000 US$000
Accounts receivable 3,987 8,525
----------- -----------
Less: allowance for doubtful accounts - (300)
----------- -----------
Total receivable - net 3,987 8,225
----------- -----------
4. Inventories
Inventories consist of the following at 31 December 2019 and
2018:
31 December 31 December
2019 2018
US$000 US$000
Raw materials 2,125 1,341
----------- -----------
Work-in-progress - -
----------- -----------
Finished goods 4,016 3,367
----------- -----------
Total inventory 6,141 4,708
----------- -----------
5. Property and Equipment
Property and equipment consists of the following at 31 December
2019 and 2018:
31 December 31 December
2019 2018
US$000 US$000
Land 709 709
----------- -----------
Building 2,724 2,724
----------- -----------
Leasehold improvements 277 361
----------- -----------
Office equipment 707 699
----------- -----------
Manufacturing equipment 926 898
----------- -----------
Research and development equipment 551 496
----------- -----------
Purchased software 222 222
----------- -----------
Equipment leased to customers 9,378 9,511
----------- -----------
Equipment available for lease to customers 617 163
----------- -----------
16,111 15,783
----------- -----------
Less: accumulated depreciation (8,095) (7,247)
----------- -----------
Property and equipment - net 8,016 8,536
----------- -----------
During the years ended 31 December 2019 and 2018, the Company
removed property, plant and equipment and the associated gross and
accumulated depreciation of approximately $369,000 and $58,000,
respectively, to reflect the disposal of property, plant and
equipment.
Depreciation expense for the years ended 31 December 2019 and
2018 was approximately $1,217,000 and $1,167,000, 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 2019 and 2018
was $883,000 and $801,000, respectively.
6. Intangible Assets
During 2009, the Company entered into a patent rights purchase
agreement. 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 $58,000 and $51,000 as of 31 December 2019
and 2018, 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 2019 and 2018 consist of the
following:
31 December 31 December
Weighted Average 2019 2018
Useful Lives US$000 US$000
Internally developed patents 15 years 1,356 1,294
----------------- ----------- -----------
Purchased patents 17 years 100 100
----------------- ----------- -----------
1,456 1,394
------------------------------------------------ ----------- -----------
Less accumulated amortisation (658) (606)
----------- -----------
Intangible assets - net 798 788
----------- -----------
Internally developed patents includes approximately $357,000 for
costs accumulated for patents that have not yet been issued and are
not depreciating.
Approximate aggregate future amortisation expense is as
follows:
Year Ending 31 December (USD, in thousands)
2020 51
---------
2021 54
---------
2022 53
---------
2023 45
---------
2024 44
---------
Thereafter 194
---------
Amortisation expense for the years ended 31 December 2019 and
2018 was approximately $52,000 and $72,000, respectively.
7. Income Taxes
The components of income taxes shown in the statements of
operations are as follows:
31 December 31 December
2019 2018
US$000 US$000
Current:
----------- -----------
Federal - -
----------- -----------
Foreign 462 1,185
----------- -----------
State (2) 15
----------- -----------
Total current provision 460 1,200
----------- -----------
Deferred:
----------- -----------
Federal - -
----------- -----------
Foreign - -
----------- -----------
State - -
----------- -----------
Total deferred provision - -
----------- -----------
Total provision for income taxes 460 1,200
----------- -----------
The provision for income tax varies from the amount computed by
applying the statutory corporate federal tax rate of 21 percent,
primarily due to the effect of certain non-deductible 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
2019 2018
Federal statutory income tax rate 21.0% 21.0%
----------- -----------
State tax rate, net of federal benefit 3.8% 0.5%
----------- -----------
Valuation allowance (28.9%) (16.7%)
----------- -----------
Other 0.3% 1.5%
----------- -----------
Foreign withholding tax (14.6%) 21.8%
----------- -----------
Effective income tax rate (18.4)% 28.1%
----------- -----------
The significant components of deferred income taxes included in
the balance sheets are as follows:
31 December 31 December
2019 2018
US$000 US$000
Deferred tax assets
----------- -----------
Net operating loss 4,660 3,971
----------- -----------
Equity compensation 324 297
----------- -----------
Research and development credits 159 159
----------- -----------
Right of use liability 168 -
----------- -----------
Allowance for bad debts - 64
----------- -----------
Accrued liability - 4
----------- -----------
Inventory valuation reserve 132 93
----------- -----------
Other 16 22
----------- -----------
Total gross deferred tax asset 5,459 4,610
----------- -----------
Deferred tax liabilities
----------- -----------
Property and equipment (687) (738)
----------- -----------
Right of use asset (178) -
----------- -----------
Total gross deferred tax liability (865) (738)
----------- -----------
Net deferred tax asset before valuation allowance 4,594 3,872
----------- -----------
Valuation allowance (4,594) (3,872)
----------- -----------
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 2019, the Company has recorded a valuation allowance of
$4.6 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 2019, the Company has approximately $20.8
million of gross U.S. federal net operating loss carry forwards and
$4.4 million of gross state net operating loss carry forwards that
will begin to expire in the 2024 tax year and will continue through
2030 when the current year net operating losses will expire.
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.
The Company's tax years 2016 through 2019 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 2019.
There was no balance on the line of credit at 31 December 2019 and
2018. The interest rate on 31 December 2019 and 2018 was 4.75
percent and 5.50 percent, respectively. There was no interest
expense related to this loan for the years ended 31 December 2019
and 2018.
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 from which the Company continues to
operate. The carrying amount of the property and building as of 31
December 2019 and 2018 was $2.9 million and $3.0 million,
respectively. Upon selling the collateral, the Company is required
to repay the term loan in full. The lender is not allowed to sell
the collateral during the term of the loan. 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. This will result in a one-time balloon payment
at the end of the term of the note of approximately $1,400,000
during 2023. 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 2019 and 2018, 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
2019:
Year Ending 31 December (USD, in thousands)
2020 97
-----
2021 102
-----
2022 106
-----
2023 1,434
-----
1,739
-----
10. Public Offering of Common Stock
In March 2019, the Company issued an additional 603,633 shares
of common stock for 230 pence per share. The Company incurred costs
in the issuance of these shares of approximately $229,000. The
Company received net proceeds of approximately $1,588,000.
11. 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 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.
In July 2019, the Company's shareholders approved the extension
of the Plan to 2029 and the increase in the possible number of
shares to be awarded pursuant to the Plan to 15 percent of the
Company's issued capital at the date of any award.
The total number of shares reserved for stock options under this
Plan is 2,916,563 with 1,374,542 shares allocated as of 31 December
2019. The shares are all allocated to employees, executives and
consultants.
Any 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, and
expire on the tenth anniversary date of the grant. 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
on the five year anniversary date of the grant.
As discussed in Note 2, the Company uses the Black Scholes
valuation model to measure the fair value of options granted. The
Company's expected volatility is calculated as the historical
volatility of the Company's stock over a period equal to the
expected term of the awards. The expected terms of options are
calculated using the weighted average vesting period and the
contractual term of the options. 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 2019 and
2018 were as follows:
Number of Risk-free
Options Interest Expected Exercise Fair Value
Granted Grant Date Rate Term Volatility Price Per Option
2018 150,000 30/11/2018 2.90% 5.72 years 53.00% $3.03 $1.57
--------- ---------- --------- ---------- ---------- -------- -----------
2019 10,000 28/02/2019 2.58% 6 years 72.00% $3.20 $2.08
--------- ---------- --------- ---------- ---------- -------- -----------
50,000 04/11/2019 1.65% 6 years 76.00% $0.68 $0.45
--------- ---------- --------- ---------- ---------- -------- -----------
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 2019 and 2018:
Weighted-Average Weighted-Average Average Grant
Exercise Remaining Contractual Date Fair
Stock Options Shares Price Term (in years) Value
Outstanding at 31 December
2017 1,222,042 $2.31 5.9 $1.07
--------- ---------------- ---------------------- -------------
Granted 150,000 $3.03 5.7 $1.57
--------- ---------------- ---------------------- -------------
Exercised (20,000) $0.44
--------- ---------------- ---------------------- -------------
Forfeited (5,000) $0.75
--------- ---------------- ---------------------- -------------
Outstanding at 31 December
2018 1,347,042 $2.43 5.9 $1.14
--------- ---------------- ---------------------- -------------
Granted 60,000 $1.10 6.0 $0.72
--------- ---------------- ---------------------- -------------
Exercised (32,500) $1.29
--------- ---------------- ---------------------- -------------
Outstanding at 31 December
2019 1,374,542 $2.40 5.7 $1.13
--------- ---------------- ---------------------- -------------
Exercisable at 31 December
2019 1,206,208 $2.49 6.0
--------- ---------------- ---------------------- -------------
The total intrinsic value of the stock options exercised during
the years ended 31 December 2019 and 2018 was approximately $29,000
and $19,000, respectively.
A summary of the status of unvested options as of 31 December
2019 and changes during the years ended 31 December 2019 and 2018
is presented below:
Weighted-Average
Fair Value
Unvested Options Shares at Grant Date
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
--------- ----------------
Granted 60,000 $0.72
--------- ----------------
Vested (108,333) $1.50
--------- ----------------
Unvested at 31 December 2019 168,334 $0.76
--------- ----------------
As of 31 December 2019, total unrecognised compensation cost of
approximately $67,000 was related to unvested share-based
compensation arrangements awarded under the Plan.
Total stock compensation expense for the years ended 31 December
2019 and 2018 was approximately $199,000 and $80,000,
respectively.
See remuneration by Director, including stock compensation, on
pages 30 and 31 of this report.
12. Commitments and Contingencies
Operating leases - During 2019, the Company adopted ASU 2016-02
Leases (Topic 842). The Company has operating leases for its
offices, yards and warehouses and is applying the provisions of ASU
2016-02 to these leases. The Company is following a modified
retrospective approach in the adoption of this ASU resulting in the
recognition of an Operating Lease Right of Use ('ROU') Asset of
$1,076,000 and an Operating Lease Liability of $1,042,000 at 1
January 2019. This adjustment is based on the present value of
future minimum rental payments of the leases.
As of 31 December 2019, the Operating Lease ROU Asset has a
balance of $810,000, net of accumulated amortisation of $267,000
and an Operating Lease Liability of $766,000, which are included in
the accompanying balance sheet. The weighted average discount rate
used for leases accounted for under ASU 2016-02 at transition is
5.25 percent, which is based on the Company's secured incremental
borrowing rate.
The Company's leases do not include any options to renew that
are reasonably certain to be exercised. The Company's leases mature
at various dates through May 2024 and have a weighted average
remaining life of 3.49 years.
Future maturities under the Operating Lease Liability are as
follows for the years ended 31 December:
Future Lease
Payments
Year Ending 31 December US$000
2020 313
------------
2021 227
------------
2022 120
------------
2023 122
------------
2024 51
------------
Total future maturities 833
------------
Portion representing interest (67)
------------
766
------------
Total lease expense for the year ended 31 December 2019 was
approximately $313,000.
Total cash paid for leases for the year ended 31 December 2019
was $322,012.
The Company has elected to apply the short-term lease exception
to all leases of one year or less and is not separating lease and
non-lease components when evaluating leases. Total costs associated
with short-term leases was $156,000 for the year ended 31 December
2019.
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.
13. Related Party Transactions
The Company has held a patent rights purchase agreement since
2009 with a shareholder as described in Note 6.
14. 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 2019.
For the year ended 31 December 2019, 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) 2019 2018
Middle East 8,255 23,066
------ ------
United States 2,737 2,465
------ ------
Other 916 1,421
------ ------
Total 11,908 26,952
------ ------
Long lived assets available for lease, net of depreciation, by
geography is as follows:
Year Ending 31 December (USD, in thousands) 2019 2018
Middle East 3,241 3,787
----- -----
United States 663 933
----- -----
Other - 144
----- -----
Total 3,904 4,864
----- -----
15. Concentrations
At 31 December 2019, one customer with four contracts
represented 94 percent of accounts receivable. During the year
ended 31 December 2019, that same customer, along with the
Company's second largest customer, account for 80 percent of its
gross revenue.
At 31 December 2018, one customer with seven contracts
represented 89 percent of accounts receivable. During the year
ended 31 December 2018, that same customer accounted for 85 percent
of the Company's gross revenue.
16. 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 26 May
2020, the date the financial statements were available to be
issued, and no events have occurred which require further
disclosure other than the following:
In March 2020, the World Health Organization declared the
outbreak of the COVID-19 virus a global pandemic. This outbreak is
causing major disruptions to businesses and markets worldwide as
the virus continues to spread. A number of countries as well as
certain states and cities within the United States have enacted
temporary closures of businesses, issued quarantine or
shelter-in-place orders and taken other restrictive measures in
response to COVID-19. The Company is closely monitoring the effects
of the COVID-19 pandemic. The Company is currently operating
normally, and, at this time, does not anticipate any significant
operations effects as a result of the pandemic.
During March 2020, Congress enacted the Coronavirus Aid, Relief,
and Economic Security ('CARES') Act. The CARES Act is an
approximately $2 trillion emergency economic stimulus package in
response to the 2020 coronavirus pandemic, which contains numerous
payroll and income tax provisions among other provisions. The
Company is currently evaluating the implications of the CARES Act,
and its impact on the Company's financial statements and related
disclosures has not yet been determined. The Company applied for
and was approved for a Paycheck Protection Program in the amount of
approximately $401,000 with an interest rate of 1% and a maturity
date of April 2022. The Company anticipates meeting the
requirements for forgiveness of the loan as laid out in the
Act.
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
FR PPURGAUPUGWQ
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