TIDMMYX TIDMTTM
RNS Number : 8001Z
MyCelx Technologies Corporation
26 May 2021
26 May 2021
MYCELX TECHNOLOGIES CORPORATION (AIM: MYX)
Final Results for the year ending 31 December 2020
MYCELX Technologies Corporation ("MYCELX" or the "Company"), the
clean water and clean air technology experts, announces its audited
results for the year ended 31 December 2020.
Highlights
Financial
-- Revenue of $7.1 million (2019: $11.9 million)
-- Gross profit of $1.6 million (2019: $6.1 million)
-- EBITDA of negative $4.2 million (2019: negative $1.2 million)
-- Net loss of $6.1 million (2019 net loss of $3.0 million)
-- Total operating expenses reduced by 10% year-on-year
Operational
-- No disruption to ongoing operations during COVID-19 lockdowns
-- $0.8 million contract win for a new downstream application
-- Optimisation of the REGEN Retrofit Package
-- Assigned dedicated team to progress PFAS market opportunities
Post-period end
-- Middle East: Two contract extensions signed in Q1 2020, valued at $2.4 million
-- Nigeria: Equipment sale valued at $0.7 million
-- Sale of office in Duluth, Georgia, yielded net proceeds of $2.8 million
-- Validation and capacity upgrade of PFAS system at Australian Department of Defence location
-- In light of customer focus on ESG credentials MYCELX remains
well placed to benefit from bidding activity
Corporate
-- Tom Lamb will assume the role of Chairman, following the
planned departure of Tim Eggar in July 2021
Connie Mixon, CEO, said:
"2020 was a challenging year for the Company, with the combined
impact of COVID-19 and the well-publicised issues facing the oil
and gas industry. Whilst we have been successfully diversifying,
with products that address markets in addition to oil and gas,
MYCELX is not immune to the unprecedented slowdown in the global
economy.
However, with oil prices now stabilised and Brent crude trading
above $60 a barrel, the Company continues to see signs of a
recovery taking place, with more robust bidding activity expected
to follow in the second half of 2021. We remain upbeat both about
our product offering and also the markets and regions where we
operate, so we look forward to keeping all our stakeholders updated
on the Company's progress throughout the rest of the year."
For further information please contact:
MYCELX Technologies Corporation
Connie Mixon, CEO Tel: +1 888 306 6843
Kim Slayton, CFO
Canaccord Genuity, Nominated Adviser
Henry Fitzgerald-O'Connor Tel: + 44 20 7523 8000
Georgina McCooke
Celicourt
Mark Antelme Tel: +44 20 8434 2754
Jimmy Lea
Chairman's Statement
MYCELX's offering has never been more relevant in the fight for
a clean environment
I would like to thank all of those involved with the Company for
their hard work and support during my tenure as Non-Executive
Chairman. Since joining in 2011, the Company has achieved much in
challenging markets, in addition to successfully navigating periods
of low oil prices and a pandemic. I can stand down knowing that the
business is in excellent hands, with Connie Mixon as CEO and Tom
Lamb set to assume the role of Chairman upon my departure in
July.
We have faced a number of major unforeseeable external
challenges since flotation; but throughout that time, we have
continued to improve our patented technology. Our REGEN and PFAS
solutions are unique and ideally placed to assist our clients in
addressing their present and historic environmental and operational
challenges.
2020 was a very difficult year for the global economy. The
energy and industrial markets were adversely affected by the
outbreak of the COVID-10 pandemic, which sent oil and gas prices to
multi-year lows. We witnessed unprecedented events, such as the
price for WTI futures turning negative in April 2020.
We have now entered a period of almost universal Governmental
and private sector concern for the environment so MYCELX's offering
has never been more relevant. The effective treatment of wastewater
is critical to the fight for a clean environment. We are proud to
be able to offer our customers a solution that enables them to
address that issue while helping them to reduce costs and increase
operating margins at the same time.
Investors and the public markets are laser focused on the
Environmental, Social and Governance ('ESG') measures being taken
by corporates. Our offering can offer a real solution to
enterprises in need of safe and sustainable wastewater treatment.
We aim to operate to the highest of ESG standards and continue to
monitor changing trends in our decision making as appropriate.
During this difficult period MYCELX was able to maintain
operations at all of our sites and further cement our position as a
leading global clean water technology company. MYCELX sought to
leverage our footprint within our core regions of focus, which
delivered commercial opportunities, but also expand into new
industry segments, which our patented proprietary technology is
well suited to.
In 2020 we acted quickly to reduce our cost base and safeguard
the Company's financial position. The Company is well funded to
capitalise on new bidding opportunities as they emerge.
Outlook
At the time of writing, although the markets remain fragile, we
are starting to see opportunities appear across the industries we
are targeting. We have already signed a number of new commercial
agreements in 2021 and, with the resurgence in oil prices, we hope
to see renewed bidding activity as we move into the second half of
2021 and into 2022. We are excited about the paid trial we have
secured for REGEN and expect that in the event of a successful
outcome, this will lead to renewed interest from leading Enhanced
Oil Recovery players in the oil and gas space. The Company also
sees considerable opportunity in the treatment of Per- and
polyfluoroalkyl substances ('PFAS'). The treatment of PFAS is not
only an environmental imperative, but it is also likely to be a
growth market for the foreseeable future. It is therefore important
to note that MYCELX's solution is a highly robust form of treatment
that is proven to be superior to conventional methods, which has
been shown to remove a broader range of PFAS contaminants to below
detectable levels.
In closing, I do not know of another business out there that is
more 'of the moment' as MYCELX. The environmental benefits, along
with the cost savings our technologies generate are unparalleled. I
believe that the Company is poised to benefit from greater levels
of demand than ever from corporates committed to behave in an
environmentally responsible manner.
I look forward to watching the Company's progress after I stand
down at the AGM and I would like to thank our shareholders,
employees and wider stakeholders for their continued support during
what has been a challenging period for the business.
Chief Executive's Statement
MYCELX supports sustainable operations with proven
technology
2020 was a challenging year for the Company, with the combined
impact of COVID-19 and the well-publicised issues facing the oil
and gas industry. Whilst we have been successfully diversifying,
with products that address markets in addition to oil and gas,
MYCELX is not immune to the unprecedented slowdown in the global
economy.
MYCELX carefully deployed its resources and expert personnel in
response to the COVID-19 travel and work restrictions. On the
delivery side, this took the form of ensuring staff safety,
adapting to new operating realities, whilst still providing the
superior water and air treatment and a high quality of service to
our customers in our key markets. It further involved the
development of novel applications of MYCELX patented technologies
to address critical water and air treatment challenges in markets
beyond the oil and gas sector.
We began 2020 strongly, with three purchase orders in Q1, which
gave us confidence that we could build on 2019 to deliver a
successful year. Whilst much of the rest of the year was
characterised by the pandemic, we took the opportunity to ensure
that MYCELX is well positioned to take advantage of the
opportunities that lie ahead. This included making strides in
product development and decisions to properly scale operations and
right-size the business to current needs.
The ever-broadening regulatory framework and focus on the
environment has gripped many industries worldwide, and oil and gas
is no exception. MYCELX is well positioned to support the oil and
gas industry, as well as these wider industries, as they seek to
operate in a sustainable manner, with proven technology already in
service around the globe.
There are increasing opportunities for MYCELX outside the energy
sector in groundwater remediation and air filtration. The
technology that we have developed, patented, own and have been
successfully rolling out, is ideally positioned to take advantage
of this ever-increasing need in industry to deploy the most
effective technology that supports and achieves their corporate
environmental goals.
Operational performance
MYCELX made several positive developments during 2020. These
included contract wins, contract extensions and progress with
product developments. Of particular note were contract awards in
the Middle East, which we were delighted to win against very
competitive and testing conditions. These achievements were made
against a backdrop of the team working from home and a slowdown in
bidding activity in core markets.
The successes delivered in 2020 clearly demonstrate the value
our clients place in having the MYCELX solution in place. It is not
only a superior and completely reliable answer to their water and
air management needs, it also supports them in the delivery of
their ESG reporting and business requirements. Above all, it is
cost effective and has been proven to lower both the capital and
operational costs of any individual client site.
A new purchase order was signed with a SABIC affiliate later in
the first half of the year, valued at $0.8 million. The contract
related to an emergency response project, treating process water to
maintain plant performance to desired specifications. Supporting a
further SABIC affiliate expands our footprint in the key Saudi
Arabian market and strengthens our position generally in the Middle
East.
In June, we saw a further contract extension provided by SABIC,
with the lease of a water treatment system. The value of the
contract was $1.8 million. As part of that agreement, MYCELX also
undertook to run a trial with a further SABIC affiliate. The trial
not only again reaffirmed the Company's position in that market, it
also presents a further purchase order opportunity.
The most notable product development during the year was the
successful development and commercialisation of a retrofit package
that enables MYCELX's REGEN media technology to be placed into
existing installed filter systems. In addition to providing the
customer with significant operational efficiencies and improved
performance, this technology reduces the capital outlay,
encouraging customer adoption and interest. The retrofit package
was developed by the Company's in-house R&D team, requiring
significant engineering and design input.
Decisive action was taken early in the pandemic to protect the
safety of employees and reduce the Company's day to day costs. This
entailed stopping all non-essential travel and installing a work
from home policy. It also involved a reduction in salaries across
the business, with the exclusion of those working on an hourly
rate. These measures were effective in supporting our employees as
well as protecting the business from the inevitable challenges of
COVID-19. It is a huge testament to the loyalty and hard work of
our team that, as the business emerges from this turbulent time, we
are poised to move on and take advantage of the opportunities
before us.
Looking to the future
We feel increasingly confident that MYCELX is well placed to
pick up again on the momentum it saw pre-pandemic. A large part of
this is down to being well situated to benefit from the dramatic
growth in environmental regulation worldwide, combined with more
stringent requirements for effective and definitive ESG reporting.
ESG reporting effects every aspect of a customer's business today,
from funding to winning contracts, and has become central to the
way business is conducted, driving strategy and board level
decisions.
Against this backdrop, the Company has made a strong start to
the year with two project extensions, signed with customers in
Saudi Arabia. The Company has also delivered equipment for the
third sale in Nigeria and has commenced contract execution for a
paid trial of the newly developed REGEN solution. A successful
outcome of the trial is expected to lead to further interest among
EOR producers.
MYCELX is benefiting from efforts made to right-size the
business for the future. This culminated in the successful sale of
the office in Duluth, Georgia, post the period end, for a total
consideration of $5.4 million. Net cash proceeds from the sale, of
$2.8 million, support the Company's net cash position of $6
million, providing a good platform for the future.
As per the announcement of 23 March 2021, Tom Lamb will be
assuming the role of Chairman, following the planned departure of
Tim Eggar in July. Tom is currently a Non-Executive Director and I
look forward to working closer with him in his new role. On behalf
of the team at MYCELX, I would again like to take the opportunity
to thank Tim for the tremendous contribution he has made to the
Company, including supporting its expansion into new territories
and taking it public on the London Stock Exchange in 2011.
The Board is fully focused on maximising shareholder returns,
and thereby maximising shareholder value. We are thus very mindful
of the importance of regular and interactive dialogue with our
shareholder base. We will make every effort to not only adhere to
best guidance but to actively look to address and answer any
shareholder concerns that may arise. As a significant shareholder
myself, this is paramount in my thinking.
I am delighted to report that following all the hard work in
2020, MYCELX is well placed and has had a strong start to the year,
trading very much in line with the Board's expectations. This,
combined with encouraging signs across our key markets, means that
the Board remains confident of the Company's prospects for the year
ahead.
Financial Review
Due to the combined impact of COVID-19 and the well-publicised
issues facing the oil and gas industry, total revenue decreased 40%
to $7.1 million for 2020, compared to $11.9 million for 2019.
Revenue from equipment sales and leases decreased by 55% to $4.3
million for 2020 (FY19: $9.5 million) and revenue from consumable
filtration media and service increased by 17% to $2.8 million
(FY19: $2.4 million).
Gross profit decreased by 74% to $1.6 million (FY19: $6.1
million) and gross profit margin decreased by 23% (FY19: 51%). The
decrease in profit margin was the result of a large inventory
reserve for slow moving and obsolete inventory.
Total operating expenses for 2020, including depreciation and
amortisation, decreased by 10% to $7.6 million (FY19: $8.5
million). The largest component of operating expenses was selling,
general and administrative ('SG&A') expenses, which decreased
by 6% to $7.3 million (FY19: $7.8 million) as the Company
implemented a series of company-wide cost saving measures.
Depreciation and amortisation within operating expenses
decreased by 20% to $310,000 (FY19: $386,000), primarily due to
older equipment reaching the end of its useful life.
EBITDA was negative $4.2 million, compared to negative $1.2
million in 2019. EBITDA is defined as net profit before interest
expense, provision for income taxes, and depreciation and
amortisation of fixed and intangible assets, including depreciation
of leased equipment which is included in cost of goods sold. The
Company recorded a loss before tax of $5.8 million in 2020,
compared to a loss before tax of $2.5 million in 2019. Basic loss
per share was 31 cents in 2020, compared to basic loss per share of
15 cents in the previous year.
As of 31 December 2020, total assets were $19.1 million with the
largest assets being property and equipment of $6.8 million,
inventory of $5.6 million, $3.8 million of cash and cash
equivalents including restricted cash and $1.5 million of accounts
receivable.
Total liabilities as of 31 December 2020 were $5.3 million and
stockholders' equity was $13.8 million, resulting in a
debt-to-equity ratio of 38%.
The Company used $1.5 million of cash in operations in 2020
(FY19: $1.9 million used in operations). The Company used $159,000
in investment activities compared to $867,000 for 2019. In 2020,
the Company's financing activities included net proceeds of
$997,000 from advances on the line of credit, $401,000 from a
forgivable loan, and $96,000 paid towards debt.
Post the period end, the Company completed the sale of its
building in Duluth, Georgia, USA for a total consideration of $5.4
million. The Company recognised a financial gain of approximately
$2.5 million on the sale of the property and net cash proceeds were
approximately $2.8 million. The Note Payable and line of credit
were paid in full and $500,000 of cash was reclassified from
restricted cash. The sale enabled the Company to right-size its
office space needs across its main operating locations and provided
cash proceeds which will be used for working capital purposes to
support the business needs.
Statements of Operations
(USD, in thousands, except share data)
For the Year Ended 31 December: 2020 2019
Revenue 7,104 11,908
---------- ----------
Cost of goods sold 5,512 5,822
---------- ----------
Gross profit 1,592 6,086
---------- ----------
Operating expenses:
---------- ----------
Research and development 64 352
---------- ----------
Selling, general and administrative 7,271 7,754
---------- ----------
Depreciation and amortisation 310 386
---------- ----------
Total operating expenses 7,645 8,492
---------- ----------
Operating loss (6,053) (2,406)
---------- ----------
Other income (expense)
---------- ----------
Gain upon extinguishment of debt 404 -
---------- ----------
Loss on disposal of equipment - (13)
---------- ----------
Interest expense (117) (80)
---------- ----------
Loss before income taxes (5,766) (2,499)
---------- ----------
Provision for income taxes (328) (460)
---------- ----------
Net loss (6,094) (2,959)
---------- ----------
Loss per share - basic (0.31) (0.15)
---------- ----------
Loss per share - diluted (0.31) (0.15)
---------- ----------
Shares used to compute basic loss per share 19,443,750 19,312,664
---------- ----------
Shares used to compute diluted loss per share 19,443,750 19,312,664
---------- ----------
The accompanying notes are an integral part of the financial
statements.
Balance Sheets
(USD, in thousands, except share data)
As at 31 December: 2020 2019
Assets
--------- ---------
Current Assets
--------- ---------
Cash and cash equivalents 3,292 3,647
--------- ---------
Restricted cash 500 500
--------- ---------
Accounts receivable - net 1,479 3,987
--------- ---------
Inventory 5,642 6,141
--------- ---------
Prepaid expenses 84 218
--------- ---------
Other assets 107 387
--------- ---------
Total Current Assets 11,104 14,880
--------- ---------
Property and equipment - net 6,756 8,016
--------- ---------
Intangible assets - net 790 798
--------- ---------
Operating lease asset - net 482 808
--------- ---------
Total Assets 19,132 24,502
--------- ---------
Liabilities and Stockholders' Equity
--------- ---------
Current Liabilities
--------- ---------
Accounts payable 473 786
--------- ---------
Payroll and accrued expenses 540 503
--------- ---------
Contract liability 745 -
--------- ---------
Customer deposits 492 864
--------- ---------
Operating lease obligations - current 175 282
--------- ---------
Note payable - current 102 97
--------- ---------
Line of credit 997 -
--------- ---------
Total Current Liabilities 3,524 2,532
--------- ---------
Operating lease obligations - long-term 275 484
--------- ---------
Note payable - long-term 1,541 1,642
--------- ---------
Total Liabilities 5,340 4,658
--------- ---------
Stockholders' Equity
--------- ---------
Common stock, $0.025 par value, 100,000,000 shares
authorised, 19,443,750 shares issued and outstanding
at 31 December 2020 and 2019. 486 486
--------- ---------
Additional paid-in capital 42,400 42,358
--------- ---------
Accumulated deficit (29,094) (23,000)
--------- ---------
Total Stockholders' Equity 13,792 19,844
--------- ---------
Total Liabilities and Stockholders' Equity 19,132 24,502
--------- ---------
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 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
-------- ---- ---------- ----------- -------
Stock-based compensation expense - - 42 - 42
-------- ---- ---------- ----------- -------
Net loss for the period - - - (6,094) (6,094)
-------- ---- ---------- ----------- -------
Balances at 31 December 2020 19,444 486 42,400 (29,094) 13,792
-------- ---- ---------- ----------- -------
The accompanying notes are an integral part of the financial
statements.
Statements of Cash Flows
(USD, in thousands)
For the Year Ended 31 December: 2020 2019
Cash flow from operating activities
------- -------
Net loss (6,094) (2,959)
------- -------
Adjustments to reconcile net loss to net cash
used in operating activities:
------- -------
Depreciation and amortisation 1,427 1,269
------- -------
Loss from disposition of equipment - 13
------- -------
Inventory reserve adjustment 1,061 168
------- -------
Gain upon extinguishment of debt (401) -
------- -------
Stock compensation 42 199
------- -------
Change in operating assets and liabilities:
------- -------
Accounts receivable - net 2,508 4,238
------- -------
Unbilled accounts receivable - 20
------- -------
Inventory (562) (1,506)
------- -------
Prepaid expenses 134 10
------- -------
Prepaid operating leases 10 (42)
------- -------
Other assets 280 (345)
------- -------
Accounts payable (313) (2,126)
------- -------
Payroll and accrued expenses 37 (1,447)
------- -------
Contract liability 745 (125)
------- -------
Customer deposits (372) 734
------- -------
Other current liabilities - (23)
------- -------
Net cash used in operating activities (1,498) (1,922)
------- -------
Cash flow from investing activities
------- -------
Payments for purchases of property and equipment (110) (805)
------- -------
Payments for internally developed patents (49) (62)
------- -------
Net cash used in investing activities (159) (867)
------- -------
Cash flows from financing activities
------- -------
Net proceeds from stock issuance - 1,588
------- -------
Net proceeds from exercise of stock options - 43
------- -------
Payments on notes payable (96) (86)
------- -------
Proceeds from notes payable 401 -
------- -------
Advances on line of credit 2,875 -
------- -------
Payments on line of credit (1,878) -
------- -------
Net cash provided by financing activities 1,302 1,545
------- -------
Net decrease in cash, cash equivalents and restricted
cash (355) (1,244)
------- -------
Cash, cash equivalents and restricted cash, beginning
of year 4,147 5,391
------- -------
Cash, cash equivalents and restricted cash, end
of year 3,792 4,147
------- -------
Supplemental disclosures of cash flow information:
------- -------
Cash payments for interest 117 74
------- -------
Cash payments for income taxes 247 496
------- -------
Non-cash movements of inventory and fixed assets - 96
------- -------
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 10) that matures
in March 2023 and access to a line of credit (Note 8) that renews
annually. However, the Note and the line of credit were paid in
full, and $500,000 of cash was reclassified from restricted cash
post the period end when the Company completed the sale of its
building in Duluth, Georgia, USA for total consideration of $5.4
million. The sale enabled the Company to right-size its office
space needs across its main operating locations and provided cash
proceeds, after repayment of the Note Payable and line of credit,
of $2.8 million which will be used for working capital purposes to
support the business needs. 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.
There has been a significant economic impact in the regions in
which the Company operates due to the global pandemic. 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. 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 current uncertainty, 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, 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 contract liability.
Sales tax charged to customers is presented on a net basis
within the 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 goods 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. Contract liability represents billings in
excess of revenue recognised. Contract liability at 31 December
2020 included $745,000 to be recognised as revenue in 2021. There
were no unbilled accounts receivable at 31 December 2020 and 2019,
and no contract liability 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) 2020 2019 2020 2019
-------------- ------------- ------------ -----------
Middle East 5,181 3,931 88 4,324
-------------- ------------- ------------ -----------
United States - 1 1,394 2,448
-------------- ------------- ------------ -----------
Other 3 - 321 916
-------------- ------------- ------------ -----------
Total revenue recognised
under ASC 606 5,184 3,932 1,803 7,688
-------------- ------------- ------------ -----------
Total revenue recognised
under ASC 842 117 288 - -
-------------- ------------- ------------ -----------
Total revenue 5,301 4,220 1,803 7,688
-------------- ------------- ------------ -----------
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 years ended 31 December 2020 and 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 2020, all of the Company's cash, cash
equivalent and restricted cash 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 2020 and 2019, cash in non-U.S. institutions
was $83,000 and $7,000, 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. At 31 December 2020 and 2019, restricted cash included
$500,000 cash on deposit in a money market account as required by a
lender (see Note 10).
Reconciliation of cash, cash equivalents and restricted cash at
31 December 2020 and 2019:
31 December 31 December
2020 2019
US$000 US$000
Cash and cash equivalents 3,292 3,647
----------- -----------
Restricted Cash 500 500
----------- -----------
Total cash, cash equivalents and restricted cash 3,792 4,147
----------- -----------
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 2020 and 2019 was $33,000 and $nil,
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 Average Cost method to
account for its 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. The Company determines the valuation by
evaluating expected future usage as compared to its past history of
utilisation and future expectations of usage. At 31 December 2020
and 2019, the Company had REGEN related inventory of 34 percent and
27 percent of the total inventory balance, respectively. The
inventory is associated with efforts to expand into the Enhanced
Oil Recovery market that the Company has identified as a large
global market.
Change of Accounting Principle - On 30 September 2019, the
Company changed its inventory accounting method from the FIFO
(first in; first out) 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 5-10 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 2020 and 2019.
Research and development costs - Research and development costs
are expensed as incurred. Research and development expense for the
years ended 31 December 2020 and 2019 was approximately $64,000 and
$352,000, respectively.
Advertising costs - The Company expenses advertising costs as
incurred. Advertising expense for the years ended 31 December 2020
and 2019 was $nil and is recorded in selling, general and
administrative expenses.
Rent expense - 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 2020
and 2019 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 1,348,638 for the year ended 31 December
2020 and there were no adjustments to net income available to
stockholders as recorded on the statement of operations.
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
2020 2019
------------ -----------
Basic weighted average outstanding shares of common
stock 19,443,750 19,312,664
------------ -----------
Effect of potentially dilutive stock options - -
------------ -----------
Diluted weighted average outstanding shares of
common stock 19,443,750 19,312,664
------------ -----------
Anti-dilutive shares of common stock excluded
from diluted weighted
average shares of common stock 1,348,638 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 2020 or 2019.
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 2020 and
2019 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 fair value of the note payable approximates face
value.
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 12).
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 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.
The Company adopted this guidance effective 1 January 2020. The
adoption of this new guidance did not have a material impact on the
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.
3. Accounts Receivable
Accounts receivable and their respective allowance amounts at 31
December 2020 and 2019:
31 December 31 December
2020 2019
US$000 US$000
Accounts receivable 1,512 3,987
----------- -----------
Less: allowance for doubtful accounts (33) -
----------- -----------
Total receivable - net 1,479 3,987
----------- -----------
4. Inventories
Inventories consist of the following at 31 December 2020 and
2019:
31 December 31 December
2020 2019
US$000 US$000
Raw materials 2,158 2,125
----------- -----------
Finished goods 3,484 4,016
----------- -----------
Total inventory 5,642 6,141
----------- -----------
5. Property and Equipment
Property and equipment consist of the following at 31 December
2020 and 2019:
31 December 31 December
2020 2019
US$000 US$000
Land 709 709
----------- -----------
Building 2,724 2,724
----------- -----------
Leasehold improvements 277 277
----------- -----------
Office equipment 710 707
----------- -----------
Manufacturing equipment 930 926
----------- -----------
Research and development equipment 551 551
----------- -----------
Purchased software 222 222
----------- -----------
Equipment leased to customers 10,009 9,378
----------- -----------
Equipment available for lease to customers 89 617
----------- -----------
16,221 16,111
----------- -----------
Less: accumulated depreciation (9,465) (8,095)
----------- -----------
Property and equipment - net 6,756 8,016
----------- -----------
During the years ended 31 December 2020 and 2019, the Company
removed property, plant and equipment and the associated gross and
accumulated depreciation of approximately $nil and $369,000,
respectively, to reflect the disposal of property, plant and
equipment.
Depreciation expense for the years ended 31 December 2020 and
2019 was approximately $1,370,000 and $1,217,000, 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 2020 and 2019
was $1,117,000 and $883,000, 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 $64,000 and $58,000 as of 31 December 2020
and 2019, 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. In 2020, there was
$49,000 of new internally developed patents and fees on patent in
progress.
Intangible assets as of 31 December 2020 and 2019 consist of the
following:
31 December 31 December
Weighted Average 2020 2019
Useful Lives US$000 US$000
Internally developed patents 15 years 1,405 1,356
----------------- ----------- -----------
Purchased patents 17 years 100 100
----------------- ----------- -----------
1,505 1,456
------------------------------------------------ ----------- -----------
Less accumulated amortisation (715) (658)
----------- -----------
Intangible assets - net 790 798
----------- -----------
Internally developed patents include approximately $353,000 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)
2021 57
---------
2022 57
---------
2023 50
---------
2024 47
---------
2025 47
---------
Thereafter 179
---------
Amortisation expense for the years ended 31 December 2020 and
2019 was approximately $57,000 and $52,000, respectively.
7. Income Taxes
The components of income taxes shown in the statements of
operations are as follows:
31 December 31 December
2020 2019
US$000 US$000
Current:
----------- -----------
Federal - -
----------- -----------
Foreign 320 462
----------- -----------
State 8 (2)
----------- -----------
Total current provision 328 460
----------- -----------
Deferred:
----------- -----------
Federal - -
----------- -----------
Foreign - -
----------- -----------
State - -
----------- -----------
Total deferred provision - -
----------- -----------
Total provision for income taxes 328 460
----------- -----------
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
2020 2019
Federal statutory income tax rate 21.0% 21.0%
----------- -----------
State tax rate, net of federal benefit (0.4%) 3.8%
----------- -----------
Valuation allowance (24.0%) (28.9%)
----------- -----------
Other 2.0% 0.3%
----------- -----------
Foreign withholding tax (4.4%) (14.6%)
----------- -----------
Effective income tax rate (5.8%) (18.4%)
----------- -----------
The significant components of deferred income taxes included in
the balance sheets are as follows:
31 December 31 December
2020 2019
US$000 US$000
Deferred tax assets
----------- -----------
Net operating loss 5,589 4,660
----------- -----------
Equity compensation 327 324
----------- -----------
Research and development credits 159 159
----------- -----------
Right of use liability 97 168
----------- -----------
Inventory valuation reserve 358 132
----------- -----------
Other 22 16
----------- -----------
Total gross deferred tax asset 6,552 5,459
----------- -----------
Deferred tax liabilities
----------- -----------
Property and equipment (635) (687)
----------- -----------
Right of use asset (104) (178)
----------- -----------
Total gross deferred tax liability (739) (865)
----------- -----------
Net deferred tax asset before valuation allowance 5,813 4,594
----------- -----------
Valuation allowance (5,813) (4,594)
----------- -----------
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 2020, the Company has recorded a valuation allowance of
$5.8 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 2020, the Company has approximately $25.2
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
2031 when the current year net operating losses will expire. As of
31 December 2019, the Company had 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.
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.
On 27 March 2020, the U.S. Government enacted the Coronavirus
Aid, Relied, and Economic Security Act (the "CARES Act"). The CARES
Act includes, but is not limited to, tax law changes related to (1)
accelerated depreciation deductions for qualified improvement
property placed in service after 27 September 2017, (2) reduced
limitation of interest deductions, and (3) temporary changes to the
use and limitation of NOLs. There was no material impact of the
CARES ACT to the Company's income tax provision for 2020.
The Company's tax years 2017 through 2020 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 2020.
The balance on the line of credit at 31 December 2020 and 2019 was
$997,000 and $nil, respectively. The interest rate on 31 December
2020 and 2019 was 4.50 percent and 4.75 percent, respectively.
Interest expense related to this loan was $38,000 and $nil for the
years ended 31 December 2020 and 2019, respectively. See the
subsequent events Note 17 for a description of the settlement of
this debt balance after the balance sheet date.
9. Paycheck Protection Program Loan
On 16 April 2020, the Company was granted a loan from Pinnacle
Bank, the Company's existing lender, in the amount of approximately
$401,000, pursuant to the Paycheck Protection Program ('PPP Loan'),
Title I of the CARES Act, which was enacted 27 March 2020. The PPP
Loan issued to the Company matures on 16 April 2022 and bears
interest at a fixed rate of 1 percent per annum and may be prepaid
in whole or in part without penalty. No interest payments are due
within the initial six months of the PPP Loan. The interest accrued
during the initial six-month period is due and payable, together
with the principal, on the maturity date. The Company used all
proceeds from the PPP Loan to retain employees, maintain payroll
and make lease and utility payments to support business continuity
during the COVID-19 pandemic. All or a portion of the PPP Loan may
be forgiven by the Small Business Administration ('SBA') upon
application by the Company and upon documentation of expenditures
in accordance with the SBA requirements. Under the CARES Act, loan
forgiveness is available for the sum of documented payroll costs,
covered rent payments, covered mortgage interest and covered
utilities during the twenty-four-week period beginning on the date
of receipt of the PPP Loan with certain stipulated restrictions. On
8 December 2020, the Company's PPP Loan was forgiven in full,
including all principal and interest outstanding as of the date of
the forgiveness. Any amount forgiven when the Company was legally
released as the primary obligor under the loan was recognised in
the Statement of Operations as a gain upon the extinguishment of
the loan.
10. 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 2020 and 2019 was $2.9 million and $2.9 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 2020 and 2019, 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
2020:
Year Ending 31 December (US$000)
2021 102
-----
2022 107
-----
2023 1,434
-----
1,643
-----
See the subsequent events Note 17 for a description of the
settlement of this debt balance after the balance sheet date.
11. 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.
12. 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 1,324,338 shares allocated as of 31 December 2020. 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 2020
and 2019 were as follows:
Number of Risk-free
Options Interest Expected Exercise Fair Value
Granted Grant Date Rate Term Volatility Price Per Option
2019 10,000 28/02/2019 2.58% 6.0 years 72.00% $3.20 $2.08
--------- ---------- --------- --------- ---------- -------- -----------
50,000 04/11/2019 1.65% 6.0 years 76.00% $0.68 $0.45
--------- ---------- --------- --------- ---------- -------- -----------
2020 325,000 06/08/2020 0.17% 5.7 years 77.00% $0.45 $0.29
--------- ---------- --------- --------- ---------- -------- -----------
The Company assumes a dividend yield of 0.0 percent.
The following table summarises the Company's stock option
activity for the years ended 31 December 2020 and 2019:
Weighted-Average Weighted-Average Average Grant
Exercise Remaining Contractual Date Fair
Stock Options Shares Price Term (in years) Value
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
--------- ---------------- ---------------------- -------------
Granted 325,000 $0.45 5.7 $0.29
--------- ---------------- ---------------------- -------------
Forfeited (375,204) $1.97
--------- ---------------- ---------------------- -------------
Outstanding at 31 December
2020 1,324,338 $2.04 5.8 $1.01
--------- ---------------- ---------------------- -------------
Exercisable at 31 December
2020 959,338 $2.61 5.9
--------- ---------------- ---------------------- -------------
The total intrinsic value of the stock options exercised during
the years ended 31 December 2020 and 2019 was approximately $nil
and $29,000, respectively.
A summary of the status of unvested options as of 31 December
2020 and changes during the years ended 31 December 2020 and 2019
is presented below:
Weighted-Average
Fair Value
Unvested Options Shares at Grant Date
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
--------- ----------------
Granted 325,000 $0.29
--------- ----------------
Vested (70,000) $1.33
--------- ----------------
Forfeited (58,334)
--------- ----------------
Unvested at 31 December 2020 365,000 $0.34
--------- ----------------
As of 31 December 2020, total unrecognised compensation cost of
approximately $58,000 was related to unvested share-based
compensation arrangements awarded under the Plan.
Total stock compensation expense for the years ended 31 December
2020 and 2019 was approximately $42,000 and $199,000,
respectively.
13. Commitments and Contingencies
Operating leases - As of 31 December 2020, the Operating Lease
ROU Asset has a balance of $482,000, net of accumulated
amortisation of $555,000, and an Operating Lease Liability of
$449,000, which are included in the accompanying balance sheet. The
weighted average discount rate used for leases accounted for under
ASU 2016-02 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 2.99 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
2021 192
------------
2022 120
------------
2023 122
------------
2024 51
------------
Total future maturities 485
------------
Portion representing interest (36)
------------
449
------------
Total lease expense for the years ended 31 December 2020 and
2019 was approximately $315,000 and $313,000, respectively.
Total cash paid for leases for the years ended 31 December 2020
and 2019 was $313,000 and $322,000, respectively.
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 $130,000 and $156,000 for the years
ended 31 December 2020 and 2019, 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.
14. Related Party Transactions
The Company has held a patent rights purchase agreement since
2009 with a shareholder as described in Note 6.
15. 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 2020.
For the year ended 31 December 2020, 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) 2020 2019
Middle East 5,269 8,255
----- ------
United States 1,511 2,737
----- ------
Other 324 916
----- ------
Total 7,104 11,908
----- ------
Long lived assets, net of depreciation, by geography is as
follows:
Year Ending 31 December (USD, in thousands) 2020 2019
Middle East 3,127 4,321
----- -----
United States 4,109 4,390
----- -----
Other 2 113
----- -----
Total 7,238 8,824
----- -----
16. Concentrations
At 31 December 2020, one customer with three contracts
represented 72 percent of accounts receivable. During the year
ended 31 December 2020, that same customer, along with the
Company's second largest customer, account for 78 percent of its
gross revenue.
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.
17. 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 25 May
2021, the date the financial statements were available to be
issued, and no events have occurred which require further
disclosure other than the following:
In December 2020, Congress enacted the Consolidated
Appropriations Act, 2021. The Act is an approximately $900 billion
COVID-19 relief package and includes $284 billion for a second
round of the Paycheck Protection Program (PPP). In January 2021,
the Company applied for and was approved for a second PPP loan in
the amount of approximately $401,000 with an interest rate of 1
percent and a maturity date of January 2026. The Company
anticipates meeting the requirements for forgiveness of the loan as
laid out in the Act.
In March 2021, the Company completed the sale of its building in
Duluth, Georgia, USA, for total consideration of $5.4 million
enabling the Company to right-size its office space needs across
its main operating locations. The Company recognised a financial
gain of approximately $2.5 million on the sale of the property and
net cash proceeds were approximately $2.8 million. The Note Payable
and line of credit were paid in full and $500,000 of cash was
reclassified from restricted cash.
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END
FR PPUCAAUPGGRA
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