TIDMMYX TIDMMYXR
RNS Number : 4047Y
MyCelx Technologies Corporation
17 May 2016
MYCELX TECHNOLOGIES CORPORATION (AIM: MYX)
2015 Financial Results
MYCELX Technologies Corporation (AIM: MYX), the clean water
technology company providing patented solutions for commercial
industrial markets worldwide, is pleased to announce its audited
results for the year ended 31 December 2015 for which highlights
are set out below.
Financial
-- Gross profit margin remained strong at 53.3% (2014:
52.3%)
-- Revenue of $13.6 million (2014: $13.6 million)
-- Adjusted EBITDA of negative $1.7 million (2014: negative $4.1
million)
-- Paid off line of credit balances
-- Cash provided by operating activities of $0.12 million in H2
2015
-- Net cash of $3.7 million (2014: $6.2 million)
Operational
-- Qatar: Successful turnaround project showcased the Company's
ability to quickly deploy and treat extremely difficult water
streams present during these operations
-- Saudi Arabia: Continuous successful operation of four current
installations in petrochemical plants
-- US: Startup of offshore system on new build platform in Gulf
of Mexico
-- US: Third system sold to a terminal operator to treat water
from operations for discharge into Houston Ship Channel
-- Canada and India: Successful trials for Enhanced Oil Recovery
produced water operations
-- Mexico: Successful trial treating upstream produced water
New Contracts
-- US: Secured lease for recycle and reuse system to treat water
for hydraulic fracturing in west Texas
Contract Extensions
-- Saudi Arabia: Two lease and service contract extensions with
SABIC for process water treatment systems
Post period end events
-- Saudi Arabia: Awarded two year contract with SABIC for total
value of $5 million
-- Nigeria: Successful trial offshore platform with local oil
producer
-- Oman: Successful trial resulting in a lease to purchase for
downstream process water in Oman
-- US: Equipment lease secured for treatment of process water at
a refinery in Oklahoma
-- US: Added experienced Business Development personnel with
oilfield services and water treatment background to drive sales and
strategic alliance formation
Outlook
-- Increased focus on establishing strategic alliances to
leverage sales and marketing channels globally
-- Expense control measures will enable the Company to be cash
neutral from operations in 2016
-- Take advantage of oil market dislocation to demonstrate cost
savings achieved through advanced technology
-- Leverage current customer relationships and installations in
the Middle East to continue to grow downstream business in MENA and
North America
-- Oil price volatility and market dislocation will continue to
affect timing of project awards
For further information please contact:
MYCELX Technologies Corporation Tel: 1 888 306 6843
Connie Mixon, CEO
Kimberly Slayton, CFO
RFC Ambrian Limited Tel: 44 20 3440 6800
Corporate Finance
Jonathan Stephens
Oliver Morse
Corporate Broking
Jonathan Williams
Kim Eckhof
Tel: 44 20 7260 1000
Numis Securities Limited
Corporate Broking
James Black
Ben Stoop
Tel: 44 20 3772 2500
Bell Pottinger
Nick Lambert
Henry Lerwill
Chairman's & Chief Executive Officer's Statement
Introduction
Continued distress in the oil and gas market resulted in flat
Y-O-Y growth but provided new opportunities.
In 2015, the Company's expected revenues were adversely affected
by the continuing oil price decline, which led to widespread
project delays. The magnitude of the industry downturn continued to
stun the global market. Operators delayed maintenance and
turnaround activity and producers slowed or shut down their
operations based on operating cost metrics. These factors led to a
very difficult business environment that resulted in no increase in
year-over-year revenue in 2015 versus 2014.
Amid the turmoil and market dislocation the Company seized the
opportunity to present cost effective, differentiated solutions
resulting in successful trials in 2015 with new customers. In the
"new normal" for global oil prices, the operating cost structure of
the producers must improve. MYCELX offers the industry a proven
technology solution that delivers sought-after cost savings but
more importantly enhanced production potential. This is MYCELX's
strength.
We continue to grow our presence in Saudi Arabia and in the
Middle East and build the MYCELX brand based on successful
performance of our installations at four petrochemical plants in
Jubail City.
Overall, while the combination of industry-wide pricing pressure
and uncertainty over project awards made revenue recognition
extremely difficult, the Company made progress in its opportunistic
approach to attract new customers by proving the cost savings with
successful trials. It remains the case that wherever oil and gas
production and petrochemical processing occurs, water is present
and must be cost effectively treated for sustainable operations.
This is what MYCELX does best and where we will continue to move
forward with the entire team's focus.
Operational Review
MIDDLE EAST
In the Middle East, the Company completed a successful
Turnaround at a major petrochemical plant in Qatar utilizing
MYCELX's unique water characterization techniques and proprietary
media to meet the customer's stringent water discharge
requirements. This successful project serves as a reference for the
Company's technology as well as its fast deployment equipment and
services in the Cooperation Council for the Arab States of the Gulf
(GCC).
The Company continued its successful operation of four
installations in petrochemical plants in Jubail City, Saudi Arabia
providing water treatment for process water reuse and wastewater
treatment for discharge to wastewater treatment plants. Two of the
operating leases were extended during the year and one lease was
extended for two years in the amount of $5 million post period. The
plants continue to meet important key performance indicators based
on extended run time even during upset conditions which would
otherwise result in a costly slowdown in production. The Company
continues to make product and process improvements to assist the
plants in meeting their water treatment and operational goals.
Post period, the Company conducted a successful trial offshore
Nigeria and a downstream trial in Oman which led to a lease to
purchase.
INDIA
The Company completed successful trials in Enhanced Oil Recovery
("EOR") produced water with a major producer in India, including
trials using a potential new product line specifically designed for
EOR application. The Company continues to believe the commercial
opportunity associated with treating water associated with EOR
operations cannot be overstated. The EOR process is highly
dependent on the ability to treat the water during operations and
MYCELX has been proven to be a cost effective solution. For
producers around the world, EOR is one of the predominant processes
for maximizing production in older fields. We continue to build on
these successful trials with further opportunities and sales as we
address the untapped market in this lucrative application.
AMERICAS
Leveraging the Company's successes in water reuse applications
globally, the Company leased a water treatment system to an
independent producer to treat water during hydraulic fracturing
operations in west Texas. The system was provided with remote
monitoring capability and greatly reduced the cost of manpower
necessary to operate. The Company is pursuing these projects as a
faster path to recurring media sales. In the terminal sector, the
Company sold its third system to a terminal operator to treat water
from operations for discharge into the Houston Ship Channel, with
installation expected in Q2 2016. In the Gulf of Mexico the Company
performed the startup of the MYCELX(R) system on a new build
platform which has been anticipated and will be additive to the
Company's recurring media sales as production ramps up.
The Company conducted a successful first trial in Mexico
treating water during production and a successful EOR produced
water trial in Alberta.
Financial
Total revenue was flat in 2015 versus 2014 at $13.6 million.
Revenue from equipment sales and leases decreased by 26.0% to $3.7
million for 2015 (2014: $5.0 million) due to continued oil price
volatility and market dislocation. Revenue from consumable
filtration media and service increased by 15.1% to $9.9 million
(2014: $8.6 million) due to two turnaround petrochemical plant
projects in 2015 that did not occur in 2014. Gross profit margin
remained strong in 2015 at 53.3% (2014: 52.3%).
Total operating expenses for 2015 decreased by 16.9% to $10.3
million (2014: $12.4 million). The largest component of operating
expenses was selling, general and administrative (SG&A)
expenses. As a result of the Company's efforts to reduce total
operating expense, SG&A expenses decreased $992,000 due to
reductions in staff costs. Other savings included $440,000 from
travel expense, $271,000 from R&D, $253,000 for freight fees,
$239,000 from consulting and accounting fees, and $125,000 from
marketing expense.
Adjusted EBITDA for 2015 was negative $1.7 million, compared to
negative $4.1 million in 2014. Adjusted EBITDA is net income before
interest expense, provision for income taxes, depreciation and
amortization of fixed and intangible assets including depreciation
of leased equipment which is included in cost of goods sold. The
Company uses Adjusted EBITDA as the profitability measure for
making decisions regarding allocating resources and assessing
performance.
The Company recorded a loss before tax of $3.2 million in 2015,
compared to a loss before tax of $5.5 million in 2014. Basic loss
per share was 20 cents in 2015, compared to basic loss per share of
44 cents for the previous year.
The Company ended the period with $5.8 million of cash and cash
equivalents including restricted cash, compared to $11.8 million in
total at 31 December 2014. The Company's net cash position was $3.7
million at 31 December 2015, compared to $6.2 million at 31
December 2014. Net cash is defined as cash and cash equivalents
plus restricted cash less balances on the lines of credit and the
current and long term note payable. The Company's primary use of
cash in 2015 was related to payments to pay off and close a line of
credit and payments to complete the expansion of the lease
equipment fleet.
Outlook
The Company's primary market remains in distress, therefore we
have taken a conservative approach to forecasting revenue in 2016.
Increasingly operators are keen to seek out new technology that
offers better performance and most importantly cost savings. While
the tough environment has created opportunity for MYCELX, the Board
of Directors and the Company are well aware of the challenges the
Company faces in 2016 and beyond. We continue to believe long-term
success and building a global brand will be achieved by engaging in
large scale projects as well as smaller scale, fast-to-market
opportunities. The Company will remain in the turnaround market,
but primarily with current customers where we have installed
equipment and operators onsite. We have identified lower cost,
lower risk projects with faster execution that will bridge the gap
of lengthy project timelines and will be additive to annual
recurring revenue. We are focusing on strategic partnerships to
leverage sales and marketing platforms that value differentiated
technology. It is clear that the oil and gas industry wants and
needs technology to support cost effective operations.
The current year has started out with the award of a two year
contract in the amount of $5 million with an existing petrochemical
customer in Saudi Arabia. The contract is a result of bringing
operational efficiency which led to attractive cost savings for the
plant. The Company is pleased to report that a successful upstream
trial was completed offshore Nigeria, which the Company believes
will lead to future sales in a market that is actively seeking
effective technology to manage water for compliant overboard
discharge. In the downstream sector the Company completed a
successful trial in Oman which led to a lease-to purchase of
equipment and media sales. In the US a lease has been awarded to
treat water during refinery operations. The Company has
strengthened the Houston Business Development and Engineering team.
The major focus will be the downstream and terminal markets in
Texas and Louisiana. The project pipeline remains strong but
predicting the timing of sales and revenue recognition remains
difficult. Utilising the equipment from previous leases, the
Company is well positioned for projects globally which has enabled
us to respond quickly and cost effectively to paid trial requests
such as the Oman downstream trial.
The Company has taken the necessary actions to reduce operating
expenses which will result in the Company ending the 2016 year
operationally cash neutral. The Company constantly monitors to
ensure specific measures are taken in the event of a revenue
shortfall or contract delay during the year. Our cost reduction
program has been targeted to ensure it does not adversely affect
the Company's ability to grow, engineering and business development
will remain protected from further reductions. The Company will
continue to be prudent stewards of its cash and any additional
equipment purchased will be supported by a sales contract.
At its core, the Company is a technology company. As such, the
Company will continue to innovate and commercialise next generation
technology to achieve treatment results not currently found in the
market today. The oil and gas and petrochemical industries continue
to integrate MYCELX(R) technology into their critical, real-time
processes. This confirms its role in achieving sustainable water
treatment for years to come. The Board of Directors and Company
management are committed to ensuring MYCELX(R) technology reaches
its full potential as the global industry standard.
Tim Eggar
Chairman
Connie Mixon
Chief Executive Officer
16 May 2016
Global need for water treatment
Our market
The need for proven technology that provides reliable and
effective water treatment to the oil and gas industry is as robust
as ever. The desire of industry to invest in production and process
improvement and cost savings is contributing to the global
opportunities for the Company's advanced water treatment technology
and systems. Sustainably managing the enormous volume of water
associated with operations is crucial to the bottom line and indeed
to the survival of some producers within the oil and gas
industry.
Our solutions
The Company provides novel water treatment solutions that are
proven to be highly efficient and cost effective and have been
installed successfully at the facilities of leading industry
operators around the globe. The acceptance of the MYCELX(R)
solutions illustrates the Company's continued success in an
industry that is extremely thorough in evaluating and implementing
changes to established practice. The Company provides robust
technology and systems that give the industry sustainable solutions
to meet pressing water management challenges. The core of the
MYCELX(R) solution is the patented MYCELX(R) compound which
consists of a chemical polymer that is permanently infused in the
consumable media. It is deployed in custom-designed equipment
systems and produces treatment results which have been acknowledged
by leading-edge oil and gas, petrochemical and refining industry
customers around the world.
Our opportunity
There are several key drivers in the oil and gas industry that
continue to present opportunities for the Company. In water
stressed regions of the world, water available for operations is
very limited therefore reuse is highly valued. Deep water
production technology has enabled the volume of oil and gas
produced per well on a daily basis to significantly increase but
with water streams that are more difficult to treat with
conventional technologies. Lastly, increasingly stringent
environmental regulations and the desire of the industry to reduce
its environmental impact compels operators to seek advanced methods
of water treatment. MYCELX addresses these key challenges by
offering technology that enables the industry to treat difficult
streams to low level oil-in-water content as well as operate with
reduced environmental impact in a way that is cost effective and
sustainable. The Company has proven success enabling global
operators to meet their water treatment challenges and expects the
current market conditions to generate greater industry interest in
and adoption of our technology and products.
Our markets and strategy
Our Business Model
The Company's business model is based on recurring revenue.
MYCELX sells or leases equipment with the subsequent recurring
revenue from sales of MYCELX(R) patented consumable filtration
media. The Company continues to sell consumable filtration media on
a long-term, recurring basis. The media must be replaced at regular
intervals based on a projected change-out schedule or earlier if
operational upset conditions occur (such as an increase in
hydrocarbon levels) so that the MYCELX(R) media is consumed faster.
The Company also offers technical services on a recurring basis to
end users that require it.
Our Strategy
Our strategy aligns with global trends in the oil and gas
industry and with specific water treatment needs that the
proprietary MYCELX(R) technology addresses better than other
existing water treatment equipment.
The Company is expanding by leveraging its downstream market
success in the petrochemical sector in Saudi Arabia to other
countries in the GCC, with further plans to grow the application
globally. Water reuse is critical in the Middle East, India, South
America and parts of the drought-stricken United States where water
scarcity or limited availability presents economic and production
challenges. Water used in processes is expensive and consequently
adds to operational costs. There are ongoing global initiatives to
reuse water to conserve it for other uses such as agriculture. The
efficacy of the MYCELX(R) technology is apparent in applications in
water scarce regions where the advanced technology enables water
reuse or discharge that is reliable and sustainable. Readily
available lease equipment is imperative to the success of the
strategy given the elevated operational challenges when production
increases. Other downstream sectors where the Company has key
installations, references or has identified niche opportunities are
refineries, terminals and pipelines. The Company continually
develops intellectual property to offer additional product lines to
existing and new customers.
In the upstream sector the Company is growing through
customer-facing demonstrations in our Houston facility as well as
on site leases and trials. The Company's Houston demonstration
center hosts global producers and has supported growing awareness
and adoption of the technology. The focus on onshore and offshore
produced water treatment using fast-to-market lease equipment
enables convenient trials and sizing of full equipment
installations. With the advent of lower oil prices, producers are
actively seeking to control costs. Water treatment is one of the
targeted areas. MYCELX(R) provides an effective, lower
cost-to-treat option and as a result, the Company expects to see
more opportunity in onshore and offshore applications.
Downstream Strategy
The Company has remained committed to its successful strategy of
focusing on specific water-stressed geographic regions and
applications where there is need for removal of oil from water to
critically low levels.
Implementation of the technology in water-stressed regions such
as the Middle East has been an important proving ground for
MYCELX(R) technology in process water since reduced environmental
impact and process improvement are major priorities of the region
and the petrochemical industry. The Company installed its first
system in Saudi Arabia in 2008 and has since installed four more
systems in three other plants. The importance of the continued
progress with successful installations is the acceptance and
momentum the Company is experiencing with the end users. The
Company considers the water treatment applications in the Middle
East to be high-value; the benefit to the end user is high-value in
terms of process improvement and operational efficiency which
drives cost savings. The Company believes integrating MYCELX(R)
water treatment systems into the plant process and operation has
the potential for much broader implementation because very similar
water treatment issues exist in the petrochemical sector
worldwide.
Leveraging references with current customers in the Middle East,
the Company has focused on opportunities in turnarounds or water
treatment during plant maintenance operations. The regulatory
requirements for water treatment during these projects are getting
more stringent which drives operators to implement better
technologies such as MYCELX(R). The Company completed two
successful turnaround projects in 2015 and expects to engage in the
market in the future by targeting existing customers where the
Company has equipment and operators onsite.
Diversifying into niche segments, the Company has installed
three systems to treat water in the terminal and pipeline sector to
achieve reliable discharge to surface water. The Company believes
the terminal and pipeline sector fits well into its targeted
downstream strategy because so many terminals are located near or
on regulated bodies of water and rely on effective water treatment
to operate efficiently.
Upstream Strategy
There are numerous opportunities for MYCELX(R) technology in the
upstream water treatment market. The largest opportunity the
Company sees for the future is treating produced water at Enhanced
Oil Recovery operations. The EOR process is highly dependent on the
ability to treat the water during production and MYCELX(R) has been
proven to be a cost effective solution. For producers around the
world, EOR is one of the predominant processes for high level
extraction in older fields which have substantial amounts of oil
remaining in the ground. We continue to build on successful trials
and installations with further opportunities and sales as we
address the untapped market in this lucrative application.
The Company has installations in the Gulf of Mexico, one of
which is Chevron's state-of-the-art Jack/St. Malo platform which
became operational in 2015. With successful installations in
offshore oil and gas production, the Company expects to expand its
fast-to-market lease program which enables the operator to
effectively manage and control production water discharge
particularly during upset conditions. The Company has installed on
a platform offshore of Australia, successfully trialed offshore
Nigeria and onshore in the U.S., Albania, Alberta, Qatar, and
Australia. We anticipate more trials in 2016 and 2017 as a result
of our Houston sales, engineering and demonstration center, which
is in close proximity to global oil and gas production companies
and global engineering, procurement and construction companies. The
Company completed a two year study of the efficiency, effectiveness
and cost of operations on a customer platform that has successfully
served as a reference for potential customers around the world.
Principal Risks and Uncertainties
The Company continues to face and address a number of risks and
uncertainties, some of which are as follows:
-- Should the Company require additional funds in order to carry
out its strategy, there can be no assurance that the Company will
be able to raise such additional capital on favorable terms or at
all. The Company is managing its operations with the funds obtained
in the recent equity capital raise with the goal of eliminating the
need for additional funding in the near future.
-- The contribution of the existing Executive Directors, senior
management team members and certain key employees to the immediate
and near-term operations of the Company is likely to be of central
importance to the Company's future success and growth. The Company
continuously monitors and reviews compensation and benefits offered
to its employees. The Company desires to have competitive
remuneration and benefit plans in place to reward and retain key
individuals.
-- The future success of the Company will depend on its ability
to enhance its existing products and services, address the
increasingly sophisticated and diverse needs of its customers and
respond to technological advances and emerging industry and
regulatory standards and practices on a cost effective and timely
basis. The Company seeks and acts upon feedback from its customers
and potential customers through various means including
professional societies, industry conferences, trade shows and
direct queries. The Company is continuously developing intellectual
property to commercialise new products.
-- The Company relies on certain key manufacturers for the
fabrication of the Company's equipment in accordance with the
specifications of the Company's customers. To attempt to manage
this risk, the Company has expanded the number of manufacturers it
uses that are capable of conducting manufacture on similar terms.
However, any disruption in the Company's relationship with a
manufacturer could affect pending orders placed with that
manufacturer and result in transition costs and delays.
-- The Company operates in a competitive market and it can be
expected that the competition will continue and/or increase in the
future both from established competitors and from new entrants to
the market. The Company's competitors include companies with
greater financial, technical and other resources than the Company.
The Company is pursuing a growth strategy to continuously increase
its financial and technical resources.
-- The Company receives a majority of its revenue from one
customer through multiple system installations at several of the
customer's plants. While the individual plants operate
autonomously, any disruption in the Company's relationship with
this customer could result in reduced revenue. The Company is
pursuing a growth strategy that will diversify its customer
base.
-- Historically, the oil and gas industry has been subject to
"boom-and-bust" cycles. Recession-induced downturns can affect the
development of various oil and gas projects, particularly high-cost
projects such as those relating to oil sands, deepwater offshore
and liquefied natural gas. High-cost oil projects like deepwater
offshore and oil sands typically depend on high oil prices. The
market price of oil is affected by numerous factors which are
beyond the Company's control. Should oil prices fall and remain low
for a prolonged period for any reason including, for example, a
lasting economic disruption in China, high cost oil projects may be
scaled down, deferred or cancelled. Although the Company is focused
on the oil and gas industry, it does sell into other industry
sectors and is continuously developing intellectual property to
commercialise new products.
-- Historically, oil supply is subject to periodic disruption
due to political unrest or insurrection, sabotage or terrorism,
nationalist policies, accident or embargo. These events generally
prove to be transient; however they can cause material reductions
in production and are often difficult or impossible to predict. A
disruption in oil supply can cause significant fluctuations in oil
prices which, in turn, could have a material adverse effect on the
Company's business. Although the Company is focused on the oil and
gas industry, it does sell into other industry sectors and is
continuously developing intellectual property to commercialise new
products.
Board of Directors
Tim Eggar
Non-Executive Chairman
Mr. Eggar joined MYCELX as Non-Executive Chairman in June 2011.
Mr. Eggar was a Member of Parliament in the United Kingdom from
1979 to 1997 and served in a number of ministerial positions
including Minister for Energy from 1992 to 1996. He has over 30
years of extensive international experience in the oil and gas
industry including being Global Head of ABN AMRO's Global Energy
Corporate Finance Group, Chief Executive Officer of Monument Oil
and Gas plc, Chairman of Harrison Lovegrove, and Chairman of Indago
Petroleum. He is currently Chairman of Cape plc and Haulfryn Group
Limited. Mr. Eggar holds an MA from Cambridge University and is
qualified as a barrister.
John Mansfield Sr.
Founder and Chairman Emeritus
Mr. Mansfield co-founded the Company with Haluk Alper in 1994,
and was instrumental in the Company's early development, providing
funding and serving as Chairman of the Board of Directors until
June 2011. He has extensive experience in the oil and gas industry,
having founded Mansfield Oil Company in 1957, which is today one of
the largest petroleum distributors in the United States. Mr.
Mansfield is Connie Mixon's father.
Mr. Mansfield stepped down from the Board on 13 May 2013.
Connie Mixon
Chief Executive Officer and Director
Ms. Mixon joined MYCELX in 2004 and was responsible for rapidly
developing the commercial and financial infrastructure to provide
MYCELX products to a global customer base. Prior to joining MYCELX
in 2004, she was Director for Global Markets for Deutsche Bank. Her
career with investment banks included pioneering Deutsche Bank's
institutional presence in the southern region of the U.S. Before
her tenure at Deutsche Bank, Ms. Mixon was Vice President at
Donaldson, Lufkin & Jenrette. Ms. Mixon holds an MBA from Emory
University and a BA in politics from Wake Forest University. Ms.
Mixon is married to Mark Mixon, the Company's Chief Business
Development Officer and Senior Vice President.
Haluk (Hal) Alper
President, Chief Science Officer and Director
Mr. Alper co-founded the Company with John Mansfield Sr. in
1994. An inventor of chemistries and chemical processes, he has
authored and been granted numerous patents in the areas of
electrochemistry, polymer chemistry, and environmental
technologies, including seventy for MYCELX oil removal chemistry
and related applications. He has led the research and development
of the Company since inception.
A published author with over fifty scientific and technical
papers to his credit, Mr. Alper is a member of numerous
professional societies, including NYAS (New York Academy of
Sciences), AAAS (American Association for the Advancement of
Science), ASNE (American Society of Naval Engineers), SNAME
(Society of Naval Architects and Marine Engineers), NDIA (National
Defense Industrial Association), AFS (American Filtration and
Separation Society), ACS (American Chemical Society), AICHE
(American Institute of Chemical Engineers), WEF (Water
Environmental Federation), the Planetary Society and the National
Space Society.
In addition to being a Director of the Company, Mr. Alper is
co-chair of the Society of Naval Architects' and Marine Engineers'
Technical and Research Committee panel (EC-3) on Oily Wastewater
and Bilgewater, the principal author on the IMO Guide to Diagnosing
Contaminants in Oily Bilgewater, and also serves on the ASTM
committee promulgating ASTM standard for shipboard oil prevention
abatement systems (OPAS). Mr. Alper is a recipient of the 2005
Ronald Reagan Gold Medal from the National Republican Congressional
Committee (NRCC) for Technological Innovation, is on the editorial
board of Filtration News Magazine and also serves on the Technical
Advisory Board of Environmental Protection Magazine.
Swinton Griffith
Non-Executive Director
Mr. Griffith joined the Board of MYCELX in January 2012. He has
had a 28 year career as a Certified Public Accountant at Ernst
& Young, most recently holding the position of Tax Partner.
During his time at Ernst & Young he advised across a range of
sectors and was also responsible for tax policy implementation and
quality control for the South Eastern United States. Mr. Griffith
holds a Bachelor of Business Administration from Valdosta State
College and a Masters of Accountancy from the University of
Georgia.
Brian Rochester
Non-Executive Director
Mr. Rochester joined the Board of MYCELX in 1998. He is
currently the Executive Vice-President of Rochester Associates, a
land surveying and civil engineering firm based in Gainesville,
Georgia, and has extensive experience in marketing and business
development for the firm throughout the United States and
internationally. Mr. Rochester is a graduate of The Citadel,
Charleston, South Carolina, where he graduated with a degree in
Civil Engineering in 1987.
Corporate Governance Statement
The Directors recognise the value and importance of high
standards of corporate governance. The Company is incorporated in
the State of Georgia, United States. There are a number of
differences between the corporate structure of the Company and that
of a public limited company incorporated in England under the
Companies Act 2006. Whilst the Directors consider that it is
appropriate to retain the majority of the usual features of a U.S.
corporation, they intend to take certain actions to meet UK
standard practice adopted by companies incorporated under English
law and admitted to AIM.
As the Company's shares are traded on AIM, the Company has not
complied with the UK Corporate Governance Code ("the Code") nor is
it required to. However, the Company is committed to high standards
of corporate governance and draws upon best practice available,
including those aspects of the Code considered appropriate. The
Company complies with the applicable corporate governance regime in
Georgia. The Company is governed by and complies with the Georgia
Business Corporation Code (the "GBCC").
Board of Directors
The Board consists of three Non-Executive Directors with
relevant experience to complement the two Executive Directors and
to provide an independent view to the Executive Directors. The
Non-Executive Directors are Tim Eggar (Chairman), Brian Rochester
and Swinton Griffith. The two Executive Directors are Connie Mixon
(Chief Executive Officer) and Haluk Alper (President and Chief
Science Officer).
Kimberly Slayton was appointed Chief Financial Officer on 16
March 2016, but is not a member of the Board of Directors.
The Board is responsible for formulating, reviewing and
approving the Company's strategy, budgets and corporate
actions.
The Company has established an Audit Committee, a Compensation
Committee, an Executive Committee and a Nomination and Governance
Committee, with formal terms of reference. The Committees carry out
the following roles within the Company:
Audit Committee
The present members of the Audit Committee are Swinton Griffith
(Chairman) and Brian Rochester.
The role of the Committee is to consider matters relating to the
appointment of the Company's auditors and their independence, and
to review the integrity of the Company's financial statements,
including its annual and interim reports, preliminary results
announcements and any other formal announcements relating to its
financial performance. The Committee also reviews and makes
recommendations regarding the adequacy and effectiveness of the
Company's system of internal control and compliance procedures.
The Audit Committee formally met six times in 2015.
Compensation Committee
The present members of the Compensation Committee are Brian
Rochester (Chairman), Tim Eggar and Swinton Griffith.
The primary duty of the Committee is to determine and agree with
the Board the framework or broad policy for the remuneration of the
Company's Executive Directors, the officers and such other members
of the executive management as it is designated to consider. The
remuneration of the Non-Executive Directors is a matter for the
Chairman and the Company's Executive Directors. No Director or
officer may be involved in any decisions as to their own
remuneration.
The Compensation Committee formally met six times in 2015.
Nomination and Governance Committee
The present members of the Nomination and Governance Committee
are Tim Eggar (Chairman) and Swinton Griffith. The Nomination and
Governance Committee is responsible for identifying and nominating
members of the Board, recommending Directors to be appointed to
each committee of the Board and the chair of such committees and
overseeing the evaluation of the Board. An evaluation of the Board
and its performance was carried out internally in 2015. The
evaluation took the form of interviews conducted by the Chairman
with each Director, and questionnaires which also provided each
Director with an opportunity to comment on Board and Committee
procedures. The results were presented to the Board in January
2016.
A performance evaluation of the Chairman was carried out by the
Non-Executive Directors in conjunction with the CEO.
The Nomination and Governance Committee met three times in
2015.
Executive Committee
The present members of the Executive Committee are Connie Mixon
(Chairman) and Tim Eggar. The Executive Committee has the power to
perform all functions of the Board between meetings of the full
Board, except as otherwise provided by the GBCC.
Relations with Shareholders
Copies of the Annual Report and Financial Statements are issued
to all shareholders and copies are available on the Company's
website (www.mycelx.com). The Company also uses its website to
provide information to shareholders and other interested parties,
subject to applicable restrictions of United States securities
laws. The Chief Financial Officer and Secretary also deals with
shareholder correspondence as and when it arises. At the Company's
Annual Meeting, the Chairman along with the Chief Executive Officer
and other Directors are available before and after the meeting for
further discussions with shareholders.
Internal Control
The Board is ultimately responsible for the Company's system of
internal control and reviewing its effectiveness on an ongoing
basis. The system is designed to manage rather than eliminate the
risk of failure to achieve the Company's strategic objectives, and
cannot provide absolute assurance against material misstatement or
loss. The key risk management processes and internal control
procedures include the following:
-- The involvement of the Executive Directors in day-to-day
operations.
-- Clearly defined responsibilities and limits of authority.
-- A system of financial reporting, forecasting and budgeting.
Budgets are prepared annually for the business based
upon a multi-year strategic plan narrowed to a current
year tactical plan to take advantage of current opportunities
and address near term risks. Reviews occur through
the management structure culminating in a Company budget
which is considered and approved by the Board. Company
management accounts are prepared monthly and submitted
to the Board for review. Variances from budget and
prior year are monitored and the reasons for significant
variances are reviewed.
-- An ongoing process for identifying, evaluating and
seeking to manage significant risks across the Company.
Kimberly Slayton
Chief Financial Officer and Secretary
16 May 2016
Directors' Report
for the year ended 31 December 2015
Principal Activities
MYCELX Technologies Corporation ("MYCELX" or the "Company") is a
clean water technology company, incorporated in the State of
Georgia, United States, which provides novel water treatment
solutions to the oil and gas, power, marine and heavy manufacturing
sectors. MYCELX operates globally to deliver environmentally
sustainable, low cost solutions to manage both produced water and
downstream process water effectively.
Business Review
The information that fulfils the requirements of the business
review, including details of the 2015 results, principal risks and
uncertainties and the outlook for future years, are set out in the
Chairman's and Chief Executive Officer's Statement and the Business
and Financial Review on pages 1 to 7.
Admission to AIM
MYCELX was admitted to trading on the AIM market of the London
Stock Exchange on 4 August 2011, at which time 5,787,455 new Common
Shares were placed to raise gross proceeds of approximately $20
million.
On 9 December 2014, the Company received commitments under a
U.S. private placement (the "U.S. Placing") in accordance with
Regulation D of the U.S. Securities Act of 1933, as amended, to
subscribe for 468,773 Common Shares raising $1,101,617 at a price
of US$2.35 (150 pence) per new share.
On 10 December 2014, the Company completed a U.K. Placing of
4,826,296 new Common Shares of US$0.025 per value each with U.K.
institutional investors at a price of 150 pence per new share
raising GBP7.2m (approximately GBP6.9m net of expenses).
On 5 January 2015, the Company completed the final closing of
the U.S. Placing and issued 78,977 Common Shares at a price of
US$2.35 (150 pence) per new share raising US$185,596.
Dividends
The Company has never declared or paid cash dividends on its
capital stock and does not intend to in the foreseeable future.
Directors
The following Directors held office throughout the year ended 31
December 2015 and up to the date of signing the financial
statements.
Tim Eggar - Chairman
Haluk (Hal) Alper (President and Chief Science Officer)
Connie Mixon (Chief Executive Officer)
Brian Rochester (Non-Executive Director)
Swinton Griffith (Non-Executive Director)
Mark Clark, who was a Director at 1 January 2015 and held the
position of Chief Financial Officer and Secretary, resigned with
effect 31 August 2015. Kimberly Slayton was appointed as Interim
Chief Financial Officer upon Mr. Clark's departure, and was
appointed as Chief Financial Officer on 16 March 2016. Ms. Slayton
reports to, but is not a member of, the Board of Directors.
Biographical details of the Directors are shown on pages 8 to
9.
Election of Directors
Directors are elected annually at the Company's Annual Meeting
of Shareholders. The 2016 Annual Meeting will be held at 12 noon on
13 July 2016 at the offices of Addleshaw Goddard LLP located at
Milton Gate, 60 Chiswell Street, London EC1Y 4AG, United
Kingdom.
Directors' Remuneration and Interests
The Remuneration Report is set out on pages 14 to 17. It
includes details of Directors' remuneration, interests in the
Common Shares of the Company and share options.
Corporate Governance
The Board's Corporate Governance Statement is set out on pages
10 to 11.
Going Concern
Having considered the Company's funding position and financial
projections, the Directors have a reasonable expectation that the
Company has adequate resources to continue in operational existence
for the foreseeable future and has prepared the financial
statements on that basis. In assessing whether the going concern
basis is appropriate, the Directors have considered the information
contained in the financial statements, the latest business plan,
revenue forecasts and the latest working capital forecasts. These
forecasts have been subject to sensitivity tests and the Directors
are satisfied that the Company has adequate resources to continue
in operational existence for the foreseeable future.
Share Capital and Substantial Shareholdings
Details of the share capital of the Company as at 31 December
2015 are set out in Note 10 to the financial statements. At 16 May
2016, a total of 18,770,117 Common Shares were outstanding. At 16
May 2016, the Company had received notification, or was otherwise
aware, that the following are interested in more than 3 percent of
the issued ordinary share capital:
Artemis Investment
Management 16.69%
--------------------------- ------
City Financial Investment
Co Ltd 15.28%
--------------------------- ------
Octopus Investments 9.19%
--------------------------- ------
John Mansfield Sr. 9.07%
--------------------------- ------
Hargreave Hale 8.69%
--------------------------- ------
Hal Alper 6.72%
--------------------------- ------
Allianz 5.86%
--------------------------- ------
Connie Mixon 5.28%
--------------------------- ------
BB&T Asset Management 4.05%
--------------------------- ------
Emerald Investment
Group 3.34%
--------------------------- ------
Directors' Responsibilities Statement
Under the GBCC, all corporate powers are exercised by or under
the authority of, and the business and affairs of the corporation
managed under the direction of, its board of directors, subject to
any limitation set forth in the articles of incorporation. Under
the GBCC, the corporation is required to prepare and disseminate to
its shareholders upon request financial statements for each fiscal
year. Consequently, the Company has prepared financial statements
in accordance with Generally Accepted Accounting Principles in the
United States ("U.S. GAAP").
Under the GBCC:
(1) A director shall discharge the duties of a director,
including duties as member of a committee, in a manner he or she
believes in good faith to be in the best interests of the
corporation, and with the care an ordinarily prudent person in a
like position would exercise under similar circumstances.
(2) In discharging the duties of a director, a director is
entitled to rely on information, opinions, reports, or statements,
including financial statements and other financial data, if
prepared or presented by:
(a) One or more officers or employees of the corporation whom
the director reasonably believes to be reliable and competent in
the matters presented; or
(b) Legal counsel, public accountants, or other persons as to
matters the director reasonably believes are within the person's
professional or expert competence; or
(c) A committee of the board of directors of which the director
is not a member if the director reasonably believes the committee
merits confidence.
(3) A director is not entitled to rely if the director has
knowledge concerning the matter in question that makes reliance
otherwise permitted by subsection (2) above unwarranted.
(4) A director is not liable to the corporation or its
shareholders for any action taken as a director, or any failure to
take any action, if the director performed the duties of the
director's office in compliance with the foregoing.
Independent Auditors
The Audit Committee of the Board of Directors reviews annually
the quality and cost effectiveness of the external audit and the
independence and objectivity of the external auditors. Grant
Thornton LLP was engaged to perform the 2015 audit for fees of
$130,000. Grant Thornton LLP was not engaged to perform any other
services than audit related services in 2015.
Grant Thornton LLP have indicated their willingness to continue
in office. A resolution concerning their reappointment will be
voted on at the Annual Meeting.
Kimberly Slayton
Chief Financial Officer and Secretary
16 May 2016
Directors' Remuneration Report
for the year ended 31 December 2015
As an AIM-listed company, MYCELX is not required to comply with
the disclosure requirements of the Directors' Remuneration Report
Regulations 2013 or to comply with Schedule 8 of The Large and
Medium-sized Companies and Groups (Accounts and Reports)
Regulations 2008. The following disclosures are therefore made on a
voluntary basis. The information is unaudited.
Remuneration Policy
The Company's remuneration policy is based on the following
broad principles:
-- to provide competitive remuneration packages to attract
and retain quality individuals;
-- to align the interests of management with the interests
of shareholders; and
-- to set the pay of the Executive Directors with due
account taken of (i) pay and conditions throughout
the Company and (ii) corporate governance best practice.
Remuneration consists of the following elements:
Base pay
Executive Directors' base pay is designed to reflect the role
and responsibility of the individual within the Company. Salary
levels are reviewed annually.
Annual bonus
All Executive Directors and members of senior management
participate in the Company's annual bonus scheme, which is based on
the achievement of individual and Company performance targets.
Annual bonuses are designed to incentivise performance and reward
achievement in line with the agreed corporate strategy.
Long-term incentives
The Compensation Committee considers that equity based long-term
incentive schemes are the most effective way to align the interests
of participants and shareholders.
Service Contracts
Connie Mixon
Ms. Mixon entered into an employment agreement with the Company
on 29 July 2011 to serve as its Chief Executive Officer and to
serve on the Board of Directors and to serve as Chair of the
Executive Committee. The employment agreement provides for, among
other things: (i) salary of $325,000 and participation in the
Executive Bonus Plan to be directed by the Compensation Committee;
(ii) grant of 163,017 options to purchase Common Shares of the
Company vesting ratably over a three-year period; and (iii) a
two-year term (automatically renewing for successive one-year
periods). The agreement may only be terminated by Ms. Mixon upon
six months' notice or by the Company upon providing for one year
base salary as severance if she is terminated without cause or
resigns for good reason. The agreement provides for customary
non-solicitation, non-compete and nondisclosure restrictions.
As part of a programme to reduce costs, Ms. Mixon agreed to a
reduction of 15% in base salary to $296,889 with effect 1 August
2015.
Hal Alper
Mr. Alper entered into an employment agreement with the Company
on 29 July 2011 to serve as its President and Chief Science Officer
and to serve on the Board of Directors. The employment agreement
provides for, among other things: (i) salary of $225,000 and a
technology incentive bonus between $75,000 and $150,000 per year;
(ii) grant of 163,017 options to purchase Common Shares vesting
ratably over a three-year period; (iii) a three-year term
(automatically renewing for successive one-year periods) and no
termination without cause by either party; and (iv) Company
ownership of intellectual property developed by Mr. Alper: (a)
until 4 August 2013; or (b) that relates to the Company's principal
business or the mercury filtration technology, and a Company option
to purchase any intellectual property developed by Mr. Alper that
is developed after 4 August 2013 and does not relate to the
principal business or the mercury filtration technology. The terms
of purchase are that Mr. Alper will be entitled to receive 3
percent on gross sales of products relating to that intellectual
property, 6 percent on license fees received by the Company for the
license of such intellectual property and a non-refundable royalty
equal to the amount of $100,000 for each new and distinct area of
business covered by such intellectual property. The agreement
provides for customary non-solicitation, non-compete and
non-disclosure restrictions.
An increase in Mr. Alper's base salary to $256,513 was approved
by the Compensation Committee with effect 1 January 2015. As part
of a programme to reduce costs, Mr. Alper agreed to a reduction of
15% in base salary to $219,013 with effect 1 August 2015.
Mark Clark (resigned 31 August 2015)
Mr. Clark entered into an employment agreement with the Company
on 11 September 2012 to serve as its Chief Financial Officer and
Treasurer and to serve on the Board at the request of the Company.
The employment agreement provides for, among other things: (i)
salary of $190,000; (ii) grant of 90,000 options to purchase Common
Shares of the Company vesting ratably over a three-year period; and
(iii) a one-year term (automatically renewing for successive
one-year periods). The agreement may only be terminated by Mr.
Clark upon ninety days' notice or by the Company upon providing for
three months' base salary as severance if he is terminated without
cause or resigns for good reason. The agreement provides for
customary non-solicitation, non-compete and non-disclosure
restrictions.
Mr. Clark resigned as a Director and employee with effect 31
August 2015. Mr. Clark received a severance payment of $51,503 on
termination of his employment agreement.
All Directors are elected each year by the shareholders at the
annual meeting, to serve until the next succeeding annual meeting
and until their successors are elected and qualified, or until
their earlier death, resignation or removal.
The Directors' remuneration for 2015 was as follows:
Salary Performance
and Director's Benefits related 2015 2014
fees in kind bonus Total Total
$US $US $US $US $US
====================== =============== ======== =========== ======== ========
Non-Executive
Chairman
====================== =============== ======== =========== ======== ========
Tim Eggar $52,726 - - $52,726 $57,000
====================== =============== ======== =========== ======== ========
Executive
====================== =============== ======== =========== ======== ========
Connie Mixon $326,958 $9,682 - $336,640 $389,645
====================== =============== ======== =========== ======== ========
Mark Clark (resigned
31 August 2015) $200,818 $7,176 - $207,994 $231,809
====================== =============== ======== =========== ======== ========
Hal Alper $241,003 $14,256 - $255,259 $330,331
====================== =============== ======== =========== ======== ========
Non-Executive
====================== =============== ======== =========== ======== ========
Swinton Griffith $42,550 - - $42,550 $46,000
====================== =============== ======== =========== ======== ========
Brian Rochester $42,550 - - $42,550 $40,000
====================== =============== ======== =========== ======== ========
Benefits in kind include medical and life insurance. As part of
a programme to reduce costs, all Non-Executive Directors agreed to
a reduction of base remuneration with effect 1 July 2015.
The interests of the Directors at 16 May 2016 in the shares of
the Company, not including interests of investment funds in respect
of which the Director may have a managerial interest, and with
respect to which such Director disclaims beneficial ownership,
were:
Number Percentage
of of issued
Common share
Shares capital
========================== ========== ==========
Tim Eggar 130,680 0.70
========================== ========== ==========
Hal Alper 1,262,046 6.72
========================== ========== ==========
Connie Mixon (Note 1) 991,211 5.28
========================== ========== ==========
Brian Rochester (Note 2) 264,492 1.41
========================== ========== ==========
Swinton Griffith 103,000 0.55
========================== ========== ==========
(1) The aggregate number of shares shown for Ms. Mixon includes
(a) 150,000 shares held by limited liability companies controlled
by Ms. Mixon; and (b) 202,646 shares held by or on behalf of Ms.
Mixon's children. Additionally, 10,000 shares are held by her
husband Mark Mixon (0.05 percent of the issued share capital) as a
custodian.
(2) The aggregate number of shares shown for Brian Rochester
includes (a) 191,305 Common Shares which are registered in the name
of Rochester Bros. Investments LLC in which Brian Rochester holds a
50 percent interest; and (b) 32,044 shares which are held by his
wife Alana Rochester (0.17 percent of the issued share
capital).
Share Options
Options over Common Shares awarded to Directors under the
Omnibus Performance Incentive Plan in place on 31 December 2015
were:
Earliest
exercise
date and Exercise
date of price Number
Option holder Type of award vesting* ($US) of shares
================ ============================== ========== ======== ==========
1 January
Connie Mixon** Employee Stock Option 2012 $3.44 54,339
================ ============================== ========== ======== ==========
1 January
2013 $3.44 54,339
========================================================== ======== ==========
1 January
2014 $3.44 54,339
========================================================== ======== ==========
1 January
Hal Alper Employee Stock Option 2014 $3.44 54,339
================ ============================== ========== ======== ==========
Swinton Non-Executive Director Stock 1 January
Griffith Option 2016 $3.87 26,000
================ ============================== ========== ======== ==========
* For Non-Executive Director Stock Options, first date permitted
for exercise is shown as 1 January 2016; some or all of the options
are scheduled to vest before that date
** Additionally, options over an aggregate of 200,204 Common
Shares were held by her husband Mark Mixon at 31 December 2015
On 3 June 2015, Tim Eggar exercised Non-Executive Director Stock
Options over 50,459 Common Shares at a price of US$0.86 per Common
Share, and Brian Rochester exercised Non-Executive Director Stock
Options over 41,143 Common Shares at a price of US$0.86 per Common
Share.
Employee Stock Options over 81,667 Common Shares formerly held
by Mark Clark lapsed on 31 December 2015.
No other Director exercised any options over Common Shares
during the year ended 31 December 2015.
Brian Rochester
Chairman, Compensation Committee
16 May 2016
REPORT OF INDEPENT CERTIFIED PUBLIC ACCOUNTANTS
wwwGrantThornton.com
To the Board of Directors and Stockholders of
MyCelx Technologies Corporation:
We have audited the accompanying financial statements of MyCelx
Technologies Corporation (a Georgia corporation), which comprise
the balance sheets as of December 31, 2015 and 2014, and the
related statements of operations, changes in stockholders' equity,
and cash flows for the years then ended, and the related notes to
the financial statements.
Management's responsibility for the financial statements
Management is responsible for the preparation and fair
presentation of these financial statements in accordance with
accounting principles generally accepted in the United States of
America; this includes the design, implementation, and maintenance
of internal control relevant to the preparation and fair
presentation of financial statements that are free from material
misstatement, whether due to fraud or error.
Auditor's responsibility
Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in
accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditor's judgment, including the
assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the
entity's preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity's internal control.
Accordingly, we express no such opinion. An audit also includes
evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the
financial statements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
MyCelx Technologies Corporation as of December 31, 2015 and 2014,
and the results of its operations and its cash flows for the years
then ended in accordance with accounting principles generally
accepted in the United States of America.
Atlanta, Georgia
May 16, 2016
U.S. member firm of Grant Thornton International Ltd
Statements of Operations
(USD, in thousands, except share data)
For the Year Ended 31 December: 2015 2014
===================================== ========== ==========
Revenue 13,592 13,581
===================================== ========== ==========
Cost of goods sold 6,343 6,482
===================================== ========== ==========
Gross profit 7,249 7,099
===================================== ========== ==========
Operating expenses:
===================================== ========== ==========
Research and development 172 443
===================================== ========== ==========
Selling, general and administrative 9,594 11,473
===================================== ========== ==========
Depreciation and amortisation 507 519
===================================== ========== ==========
Total operating expenses 10,273 12,435
===================================== ========== ==========
Operating loss (3,024) (5,336)
===================================== ========== ==========
Other expense
===================================== ========== ==========
Loss on disposal of equipment (76) (2)
===================================== ========== ==========
Interest expense (144) (209)
===================================== ========== ==========
Loss before income taxes (3,244) (5,547)
===================================== ========== ==========
Provision for income taxes (405) (373)
===================================== ========== ==========
Net loss (3,649) (5,920)
===================================== ========== ==========
Loss per share - basic (0.20) (0.44)
===================================== ========== ==========
Loss per share - diluted (0.20) (0.44)
===================================== ========== ==========
Shares used to compute basic loss
per share 18,705,244 13,574,809
===================================== ========== ==========
Shares used to compute diluted loss
per share 18,705,244 13,574,809
===================================== ========== ==========
The accompanying notes are an integral part of the financial
statements.
Balance Sheets
(USD, in thousands, except share data)
31 December: 2015 2014
============================================= ========= =========
Assets
============================================= ========= =========
Current Assets
============================================= ========= =========
Cash and cash equivalents 5,296 11,289
============================================= ========= =========
Restricted cash 500 500
============================================= ========= =========
Accounts receivable - net 2,855 2,610
============================================= ========= =========
Unbilled accounts receivable 20 91
============================================= ========= =========
Inventory 3,790 4,980
============================================= ========= =========
Prepaid expenses 204 528
============================================= ========= =========
Other assets 109 140
============================================= ========= =========
Total Current Assets 12,774 20,138
============================================= ========= =========
Property and equipment - net 11,714 12,386
============================================= ========= =========
Intangible assets - net 809 756
============================================= ========= =========
Total Assets 25,297 33,280
============================================= ========= =========
Liabilities and Stockholders' Equity
============================================= ========= =========
Current Liabilities
============================================= ========= =========
Accounts payable 485 1,201
============================================= ========= =========
Payroll and accrued expenses 577 883
============================================= ========= =========
Deferred revenue 42 282
============================================= ========= =========
Lines of credit - 3,427
============================================= ========= =========
Note payable - current 75 78
============================================= ========= =========
Warrant liability - 63
============================================= ========= =========
Other current liabilities 115 234
============================================= ========= =========
Total Current Liabilities 1,294 6,168
============================================= ========= =========
Note payable - long-term 2,006 2,088
============================================= ========= =========
Total Liabilities 3,300 8,256
============================================= ========= =========
Stockholders' Equity
============================================= ========= =========
Common stock, $0.025 par value, 100,000,000
shares authorised, 18,770,117 and
18,552,803 shares issued and outstanding
at 31 December 2015 and 2014, respectively 469 464
============================================= ========= =========
Additional paid-in capital 40,202 39,820
============================================= ========= =========
Accumulated deficit (18,674) (15,025)
============================================= ========= =========
Stock subscription receivable - (235)
============================================= ========= =========
Total Stockholders' Equity 21,997 25,024
============================================= ========= =========
Total Liabilities and Stockholders'
Equity 25,297 33,280
============================================= ========= =========
The accompanying notes are an integral part of the financial
statements.
Statements of Stockholders' Equity
(USD, in thousands)
Additional Stock
Paid-in Accumulated Subscription
Common Stock Capital Deficit Receivable Total
=========================== ================= ========== =========== ============= =======
Shares $ $ $ $ $
=========================== ========== ===== ========== =========== ============= =======
Balances at 31 December
2013 13,258 332 27,821 (9,105) - 19,048
=========================== ========== ===== ========== =========== ============= =======
Issuance of common stock,
net of offering costs 5,295 132 11,654 - (235) 11,551
=========================== ========== ===== ========== =========== ============= =======
Stock-based compensation
expense - - 345 - - 345
=========================== ========== ===== ========== =========== ============= =======
Net loss for the period - - - (5,920) - (5,920)
=========================== ========== ===== ========== =========== ============= =======
Balances at 31 December
2014 18,553 464 39,820 (15,025) (235) 25,024
=========================== ========== ===== ========== =========== ============= =======
Issuance of common stock,
net of offering costs 217 5 259 - 235 499
=========================== ========== ===== ========== =========== ============= =======
Stock-based compensation
expense - - 123 - - 123
=========================== ========== ===== ========== =========== ============= =======
Net loss for the period - - - (3,649) - (3,649)
=========================== ========== ===== ========== =========== ============= =======
Balances at 31 December
2015 18,770 469 40,202 (18,674) - 21,997
=========================== ========== ===== ========== =========== ============= =======
The accompanying notes are an integral part of the financial
statements.
Statements of Cash Flows
(USD, in thousands)
For the Year Ended 31 December: 2015 2014
============================================= ======= ===========
Cash flow from operating activities
============================================= ======= ===========
Net loss (3,649) (5,920)
============================================= ======= ===========
Adjustments to reconcile net loss
to net cash used in operating activities:
============================================= ======= ===========
Depreciation and amortisation 1,441 1,222
============================================= ======= ===========
Loss from disposition of equipment 76 2
============================================= ======= ===========
Stock compensation 123 345
============================================= ======= ===========
Non-cash change in warrant liability (63) (320)
============================================= ======= ===========
Change in operating assets and liabilities:
============================================= ======= ===========
Accounts receivable (245) 4,821
============================================= ======= ===========
Unbilled accounts receivable 71 1,339
============================================= ======= ===========
Inventory 1,190 (1,838)
============================================= ======= ===========
Prepaid expenses 324 (310)
============================================= ======= ===========
Other assets 31 (46)
============================================= ======= ===========
Accounts payable (716) (479)
============================================= ======= ===========
Payroll and accrued expenses (309) (488)
============================================= ======= ===========
Deferred revenue (240) 267
============================================= ======= ===========
Other current liabilities (119) 188
============================================= ======= ===========
Net cash used in operating activities (2,085) (1,217)
============================================= ======= ===========
Cash flow from investing activities
============================================= ======= ===========
Payments for purchases of property
and equipment (806) (3,024)
============================================= ======= ===========
Proceeds from sale of property and
equipment 3 -
============================================= ======= ===========
Payments for purchases of intangible
assets (92) (219)
============================================= ======= ===========
Net cash used in investing activities (895) (3,243)
============================================= ======= ===========
Cash flows from financing activities
============================================= ======= ===========
Net proceeds from stock issuance 499 11,551
============================================= ======= ===========
Payments on notes payable (85) (73)
============================================= ======= ===========
Payments on lines of credit (3,427) (1,593)
============================================= ======= ===========
Advances on lines of credit - 2,200
============================================= ======= ===========
Net cash (used in) provided by financing
activities (3,013) 12,085
============================================= ======= ===========
Net (decrease) increase in cash and
cash equivalents (5,993) 7,625
============================================= ======= ===========
Cash and cash equivalents, beginning
of year 11,289 3,664
============================================= ======= ===========
Cash and cash equivalents, end of
year 5,296 11,289
============================================= ======= ===========
Supplemental disclosures of cash flow
information:
============================================= ======= ===========
Cash payments for interest 153 191
============================================= ======= ===========
Cash and non cash payments for income
taxes 403 445
============================================= ======= ===========
Property and equipment remaining in
accounts payable and other current
liabilities - 28
============================================= ======= ===========
Management considered the effect of
exchange rate changes on cash and
cash equivalents held or due in foreign
currency and deemed it immaterial
to the statement of cash flows.
============================================= ======= ===========
The accompanying notes are an integral part of the financial
statements.
Notes to the financial statements
1. Nature of business and basis of presentation
Basis of presentation - These financial statements have been
prepared using recognition and measurement principles of Generally
Accepted Accounting Principles in the United States of America
("U.S. GAAP").
Nature of business - MYCELX Technologies Corporation ("MYCELX"
or the "Company") was incorporated in the State of Georgia on 24
March 1994. The Company is headquartered in Duluth, GA with
operations in Houston, Texas, Saudi Arabia, India and the UK. The
Company provides clean water technology equipment and related
services to the oil and gas, power, marine and heavy manufacturing
sectors and the majority of its revenue is derived from the Middle
East and United States.
2. Summary of significant accounting policies
Use of estimates - The preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
The primary estimates and assumptions made relate to depreciation
and amortization, share-based compensation, deferred taxes and
stock warrant valuation. Actual results could differ from these
estimates and the differences may be material to the financial
statements.
Cash and cash equivalents - Cash and cash equivalents consist of
short-term, highly liquid investments which are readily convertible
into cash within ninety (90) days of purchase. At 31 December 2015,
all of the Company's cash and cash equivalent balances were held in
non interest-bearing transaction accounts. The Company maintains
its cash in bank deposit accounts which, at times, may exceed
federally insured limits. At 31 December 2015 and 2014, cash in
non-U.S. institutions was $139,802 and $140,087, respectively. The
Company has not experienced any losses in such accounts.
Restricted cash - The Company classifies as restricted cash all
cash whose use is limited by contractual provisions. As of 31
December 2015 and 2014, restricted cash included $500,000 cash on
deposit in a money market account as required by a lender (see Note
8).
Trade accounts receivable - Trade accounts receivable are stated
at the amount management expects to collect from outstanding
balances. The Company provides credit in the normal course of
business to its customers and performs ongoing credit evaluations
of those customers and maintains allowances for doubtful accounts,
as necessary. Accounts are considered past due based on the
contractual terms of the transaction. Credit losses, when realised,
have been within the range of the Company's expectations and,
historically, have not been significant. There was no allowance for
doubtful accounts for the years ended 31 December 2015 and
2014.
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 market value.
Equipment that is in the process of being constructed for sale or
lease to customers is also included in inventory
(work-in-progress). The Company applies the FIFO method (first in;
first out) to account for inventory. Manufacturing work-in-progress
and finished products inventory includes all direct costs, such as
labor and material, and those indirect costs which are related to
production, such as indirect labor, rents, supplies, repairs and
depreciation costs. A valuation reserve is recorded for slow moving
or obsolete inventory items to reduce the cost of inventory to its
net realisable value.
Prepaid expenses and other current assets - Prepaid expenses and
other current assets include non-trade receivables that are
collectible in less than twelve months, security deposits on leased
space and various prepaid amounts that will be charged to expenses
within twelve months. Non-trade receivables that are collectible in
twelve months or more are included in long-term assets.
Property and equipment - All property and equipment are valued
at cost. Depreciation is computed using the straight-line method
for reporting over the following useful lives:
Buildings 39 years
========================= =========
Leasehold improvements 1-5 years
========================= =========
3-10
Office equipment years
========================= =========
5-15
Manufacturing equipment years
========================= =========
Research and development 5-10
equipment years
========================= =========
Purchased software 1-5 years
========================= =========
Equipment leased to 3-10
customers 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.
Revenue recognition - The Company's revenue consists of media
product and equipment sales. Revenues from media sales are
recognised, net of sales allowances and sales tax, when products
are shipped and risk of loss has transferred to customers,
collection is probable, persuasive evidence of an arrangement
exists, and the sales price is fixed or determinable. The Company
offers customers the option to lease or purchase their equipment.
Lease agreements range from one to twenty-four months in length and
are renewed at the end of each agreement, if necessary. The lease
agreements meet the criteria for classification as operating
leases; accordingly, revenue on lease agreements is recognised as
income over the lease term. Revenues on long-term contracts related
to construction of equipment are recognised, net of sales tax, on
the percentage-of-completion basis using costs incurred compared to
total estimated costs. Costs are recognised and considered for
percentage-of-completion as they are incurred in the manufacture of
the equipment. Therefore, revenues may not be related to the
progress billings to customers. Revenues are based on estimates,
and the uncertainty inherent in estimates initially is reduced
progressively as work on the contract nears completion. Revenues on
sales in which equipment is pre-fabricated and stocked in inventory
are recognised, net of sales tax, upon shipment of the equipment to
the customer.
Contract costs include all direct labor and benefits, materials
unique to or installed to the project, subcontractor costs, as well
as costs relative to contract performance such as travel to a
customer site and shipping charges. Provision for estimated losses
on uncompleted contracts is recorded in the period in which such
losses are probable and estimable. No such provisions have been
recognised as of 31 December 2015 and 2014. Changes in job
performance, job conditions, and estimated profitability may result
in revisions to costs and income, which are recognised in the
period in which the revisions are determined. Actual results could
vary from estimates used in the financial statements.
Unbilled accounts receivable represents revenues recognised in
excess of amounts billed. Deferred revenue represents billings in
excess of revenues recognised. Contract retentions are recorded as
a component of accounts receivable.
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 2015 and 2014.
Shipping and handling costs - Consistent with Financial
Accounting Standards Board ("FASB") Accounting Standards
Codification ("ASC") 605-45-50 Shipping and Handling Fees and
Costs, the Company classifies shipping and handling amounts billed
to customers as revenue, and shipping and handling costs as a
component of costs of goods sold.
Research and development costs - Research and development costs
are expensed as incurred. Research and development expense for the
years ended 31 December 2015 and 2014 was approximately $172,000
and $443,000, respectively.
Advertising costs - The Company expenses advertising costs as
incurred. Advertising expense for the years ended 31 December 2015
and 2014 was approximately $7,000 and $19,000, respectively, and is
recorded in selling, general and administrative expenses.
Rent expense - The Company records rent expense on a
straight-line basis for operating lease agreements that contain
escalating rent clauses. The deferred rent liability included in
other current liabilities in the accompanying balance sheet
represents the cumulative difference between rent expense
recognised on the straight-line basis and the actual rent paid.
Income Taxes - The provision for income taxes for annual periods
is determined using the asset and liability method, under which
deferred tax assets and liabilities are calculated based on the
temporary differences between the financial statement carrying
amounts and income tax bases of assets and liabilities using
currently enacted tax rates. The deferred tax assets are recorded
net of a valuation allowance when, based on the weight of available
evidence, it is more likely than not that some portion or all of
the recorded deferred tax assets will not be realised in future
periods. Decreases to the valuation allowance are recorded as
reductions to the provision for income taxes and increases to the
valuation allowance result in additional provision for income
taxes. The realisation of the deferred tax assets, net of a
valuation allowance, is primarily dependent on the ability to
generate taxable income. A change in the Company's estimate of
future taxable income may require an addition or reduction to the
valuation allowance.
The benefit from an uncertain income tax position is not
recognised if it has less than a 50 percent likelihood of being
sustained upon audit by the relevant authority. For positions that
are more than 50 percent likely to be sustained, the benefit is
recognised at the largest amount that is more-likely-than-not to be
sustained. An uncertain income tax position is not recognised if it
has less than a 50 percent likelihood of being sustained. Where a
net operating loss carried forward, a similar tax loss or a tax
credit carry forward exists, an unrecognised tax benefit is
presented as a reduction to a deferred tax asset. Otherwise, the
Company classifies its obligations for uncertain tax positions as
other non-current liabilities unless expected to be paid within one
year. Liabilities expected to be paid within one year are included
in the accrued expenses account.
The Company recognises interest accrued related to tax in
interest expense and penalties in selling, general and
administrative expenses. During the years ended 31 December 2015
and 2014 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 and warrants. Potentially dilutive
shares are excluded from the computation if their effect is
antidilutive. Total common stock equivalents that were excluded
from computing diluted net loss per share were approximately
1,150,201 and 873,053 for the years ended 31 December 2015 and
2014, respectively.
Fair value of financial instruments - The Company uses the
framework in ASC 820, Fair Value Measurements and Disclosures, to
determine the fair value of its financial assets. ASC 820
establishes a fair value hierarchy that prioritises the inputs to
valuation techniques used to measure fair value and expands
financial statement disclosures about fair value measurements.
The hierarchy established by ASC 820 gives the highest priority
to unadjusted quoted prices in active markets for identical assets
or liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy under ASC 820 are
described below:
Level 1: Unadjusted quoted prices in active markets
for identical assets or liabilities that the Company
has the ability to access at the measurement date.
Level 2: Inputs other than quoted prices included
within Level 1 that are observable for the asset
or liability, either directly or indirectly.
Level 3: Unobservable inputs for the asset or liability.
There were no significant transfers into and out of each level
of the fair value hierarchy for assets measured at fair value for
the year ended 31 December 2015 or 2014.
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 2015 and
2014 include cash and cash equivalents, accounts receivable,
accounts payable, the lines of credit, the note payable, and the
warrant liability. The carrying values of cash and cash
equivalents, accounts receivable, accounts payable, and the lines
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.
The Company uses Level 3 inputs for its valuation methodology
for the warrant liability. The estimated fair value was determined
using a Monte Carlo pricing model based on various assumptions (see
Note 10). The Company's warrant liability is adjusted to reflect
estimated fair value at each period end, with any decrease or
increase in the estimated fair value being recorded in selling,
general and administrative expenses in the statements of
operations.
The following table presents the activity for liabilities
measured at estimated fair value using unobservable inputs for 2014
and 2015:
Warrant Liability
US$000
=============================== =================
Balance at 31 December 2013 383
================================ =================
Adjustments to estimated
fair value (320)
================================ =================
Balance at 31 December 2014 63
================================ =================
Adjustments to estimated
fair value (63)
================================ =================
Balance at 31 December 2015 -
================================ =================
Foreign currency transactions - From time to time the Company
transacts business in foreign currencies (currencies other than the
United States Dollar). These transactions are recorded at the rates
of exchange prevailing on the dates of the transactions. Foreign
currency transaction gains or losses are included in selling,
general and administrative expenses.
Share-based compensation - The Company issues equity-settled
share-based awards to certain employees, which are measured at fair
value at the date of grant. The fair value determined at the grant
date is expensed, based on the company's estimate of shares that
will eventually vest, on a straight-line basis over the vesting
period. Fair value for the share awards representing equity
interests identical to those associated with shares traded in the
open market is determined using the market price at the date of
grant. Fair value is measured by use of the Black Scholes valuation
model (see Note 10).
Recently issued accounting standards - In May 2014, the FASB
issued Accounting Standards Update ("ASU") 2014-09, "Revenue from
Contracts with Customers (Topic 606)", as subsequently amended,
which is the new comprehensive revenue recognition standard that
will supersede all existing revenue recognition guidance under U.S.
GAAP. The standards' core principle is that a company will
recognise revenue when it transfers promised goods or services to a
customer in an amount that reflects the consideration to which the
company expects to be entitled in exchange for those goods or
services. In August 2015, the FASB issued ASU 2015-14, which defers
the effective date of ASU 2014-09 for all entities by one year.
Accordingly, public companies should apply the guidance in ASU
2014-09, as amended, to annual and interim periods beginning on or
after 15 December 2017. Early adoption is permitted but not before
annual periods beginning after 15 December 2016. Entities will have
the option of using either a full retrospective approach or a
modified approach to adopt the guidance. The Company is currently
evaluating the impact of adopting this guidance.
In July 2015, the FASB issued ASU 2015-11, "Simplifying the
Measurement of Inventory", which simplifies the subsequent
measurement of inventory by requiring inventory to be measured at
the lower of cost and net realizable value. The standard applies
only to inventories for which cost is determined by methods other
than last-in first-out and the retail inventory method and is
effective for annual reporting periods beginning after 15 December
2016, and interim periods within those fiscal years, with early
application permitted. The Company is currently evaluating the
impact of adopting this guidance.
In November 2015, the FASB issued ASU 2015-17, "Balance Sheet
Classification of Deferred Taxes", which will require entities to
present deferred tax assets (DTAs) and deferred tax liabilities
(DTLs) as noncurrent in a classified balance sheet. The new
standard simplifies the current guidance, which requires entities
to separately present DTAs and DTLs as current and noncurrent in a
classified balance sheet. The standard is effective for interim and
annual periods beginning after 15 December 2016, with early
application permitted. The Company elected to early adopt this
standard as of 31 December 2015 to simplify the presentation of its
deferred income taxes and applied the guidance retrospectively to
all periods presented. The retrospective application of this
guidance decreased current assets by $50,000 and decreased total
liabilities by $50,000 to include the current portion of the
deferred tax assets and deferred tax liabilities within the
non-current portion of the deferred tax assets and deferred tax
liabilities in the Balance Sheet as of 31 December 2014.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic
842)", which requires lessees to recognize on the balance sheet the
assets and liabilities for the rights and obligations created by
the leases with lease terms of more than twelve months. The
recognition, measurement, and presentation of expenses and cash
flows arising from a lease by a lessee will continue to primarily
depend on its classification as a finance or operating lease.
However, unlike current U.S. GAAP, which requires only capital
leases to be recognized on the balance sheet, the new standard will
require both types of leases to be recognized on the balance sheet.
The new standard also required 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 new standard is effective for fiscal
years beginning after 15 December 2019, and for interim and annual
periods
thereafter, with early application permitted. The Company is
currently evaluating the impact of adopting this guidance.
Reclassifications - Certain reclassifications have been made to
prior years' financial statements to conform to current year
presentation. These reclassifications had no effect on previously
reported results of operations or accumulated deficit.
3. Inventories
Inventories consist of the following at 31 December 2015 and
2014:
31 December 31 December
2015 2014
US$000 US$000
================== =========== ===========
Raw materials 929 1,445
================== =========== ===========
Work-in-progress - 2,056
================== =========== ===========
Finished goods 2,861 1,479
================== =========== ===========
Total inventory 3,790 4,980
================== =========== ===========
4. Property and equipment
Property and equipment consists of the following at 31 December
2015 and 2014:
31 December 31 December
2015 2014
US$000 US$000
==================================== =========== ===========
Land 709 709
==================================== =========== ===========
Building 2,724 2,710
==================================== =========== ===========
Leasehold improvements 325 315
==================================== =========== ===========
Office equipment 745 725
==================================== =========== ===========
Manufacturing equipment 917 841
==================================== =========== ===========
Research and development equipment 644 595
==================================== =========== ===========
Purchased software 222 222
==================================== =========== ===========
Equipment leased to customers 8,610 6,620
==================================== =========== ===========
Construction in progress 826 2,294
==================================== =========== ===========
15,722 15,031
==================================== =========== ===========
Less: accumulated depreciation (4,008) (2,646)
==================================== =========== ===========
Property and equipment - net 11,714 12,386
==================================== =========== ===========
During the years ended 31 December 2015 and 2014, the Company
removed property, plant and equipment and the associated
accumulated depreciation of approximately $41,000 and $14,000,
respectively, to reflect the disposal of property, plant and
equipment.
Depreciation expense for the years ended 31 December 2015 and
2014 was approximately $1,403,000 and $1,186,000, 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 2015 and 2014
was $934,000 and $704,000, respectively.
5. Intangible assets
During 2009, the Company entered into a patent rights purchase
agreement with a shareholder. The agreement provided for the
immediate payment of $28,000 in 2009 with the possibility of an
additional $72,000 based on profits on the sales of a particular
product. During 2010, the Company paid $22,000 based on profits on
the sales of the product and paid the remaining $50,000 in 2011.
The patent is amortised utilising the straight-line method over a
useful life of 17 years which represents the legal life of the
patent from inception. Accumulated amortisation on the patent was
approximately $32,000 and $26,000 as of 31 December 2015 and 2014,
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 2015 and 2014 consist of the
following:
Weighted
Average 31 December 31 December
Useful 2015 2014
lives US$000 US$000
=============================== ========= =========== ===========
Internally developed patents 15 years 1,155 1,064
=============================== ========= =========== ===========
Purchased patents 17 years 100 100
=============================== ========= =========== ===========
1,255 1,164
========================================= =========== ===========
Less accumulated amortisation (446) (408)
========================================== =========== ===========
Intangible assets - net 809 756
========================================== =========== ===========
Approximate aggregate future amortisation expense is as
follows:
Year ending 31 December (USD, in thousands)
============================================= ===
2016 43
============================================= ===
2017 36
============================================= ===
2018 36
============================================= ===
2019 31
============================================= ===
2020 27
============================================= ===
Thereafter 135
============================================= ===
Amortisation expense for the years ended 31 December 2015 and
2014 was approximately $38,000 and $37,000, respectively.
6. Income taxes
The components of income taxes shown in the consolidated
statements of operations are as follows:
31 December 31 December
2015 2014
US$000 US$000
================================== =========== ===========
Current:
================================== =========== ===========
Federal - (5)
================================== =========== ===========
Foreign 392 371
================================== =========== ===========
State 13 7
================================== =========== ===========
Total current provision 405 373
================================== =========== ===========
Deferred:
================================== =========== ===========
Federal - -
================================== =========== ===========
Foreign - -
================================== =========== ===========
State - -
================================== =========== ===========
Total deferred provision - -
================================== =========== ===========
Total provision for income taxes 405 373
================================== =========== ===========
The provision for income tax varies from the amount computed by
applying the statutory corporate federal tax rate of 34 percent,
primarily due to the effect of certain nondeductible expenses,
foreign withholding tax, and changes in valuation allowances.
A reconciliation of the differences between the effective tax
rate and the federal statutory tax rate is as follows:
31 December 31 December
2015 2014
======================================== =========== ===========
Federal statutory income tax rate 34.0% 34.0%
======================================== =========== ===========
State tax rate, net of federal benefit 0.4% 0.5%
======================================== =========== ===========
Valuation allowance (25.1%) (36.8%)
======================================== =========== ===========
Other (13.8%) 0.0%
======================================== =========== ===========
Foreign withholding tax (8.0%) 4.4%
======================================== =========== ===========
Effective income tax rate (12.5%) (6.7%)
======================================== =========== ===========
The significant components of deferred income taxes included in
the balance sheets are as follows:
31 December 31 December
2015 2014
US$000 US$000
========================================= =========== ===========
Deferred tax assets
========================================= =========== ===========
Net operating loss 6,056 4,628
========================================= =========== ===========
Equity compensation 404 764
========================================= =========== ===========
Research and development credits 159 159
========================================= =========== ===========
Accrued liability 44 122
========================================= =========== ===========
Charitable contributions 9 7
========================================= =========== ===========
Other 25 188
========================================= =========== ===========
Total gross deferred tax asset 6,697 5,868
========================================= =========== ===========
Deferred tax liabilities
========================================= =========== ===========
Property and equipment (968) (952)
========================================= =========== ===========
Warrants - (3)
========================================= =========== ===========
Total gross deferred tax liability (968) (955)
========================================= =========== ===========
Net deferred tax asset before valuation
allowance 5,729 4,913
========================================= =========== ===========
Valuation allowance (5,729) (4,913)
========================================= =========== ===========
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 2015, the Company has recorded a valuation allowance of
$5.7 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 2015, the Company has approximately $17.1
million of gross U.S. federal net operating loss carry forwards and
$5.3 million of gross state net operating loss carry forwards that
will begin to expire in the 2019 tax year.
The FASB issued Interpretation ASC-740-10-25, Income Taxes, an
interpretation of ASC-740 which clarifies the accounting for income
taxes by prescribing the minimum recognition threshold a tax
position is required to meet before being recognised in the
financial statements. Under ASC-740, the impact of an uncertain
income tax position on the income tax return must be recognised at
the largest amount that is more likely than not to be sustained
upon audit by the relevant taxing authority. ASC-740 also provides
guidance on derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure and
transition. ASC-740 applies to all tax positions related to income
taxes.
As a result of the adoption and implementation of ASC-740, a tax
position is recognised as a benefit only if it is "more likely than
not" that the tax position would be sustained in a tax examination,
with a tax examination being presumed to occur. The amount
recognised is the largest amount of tax benefit that has a greater
than 50 percent likelihood of being realised on examination. For
tax positions not meeting the "more likely than not" test, no tax
benefit is recorded. The Company recognises interest and penalties
related to tax positions in income tax expense. At 31 December 2015
and 2014, there was no accrual for uncertain tax positions or
related interest.
The Company's tax years 2012 through 2015 remain subject to
examination by federal, state and foreign income tax
jurisdictions.
7. Lines of credit
In August 2013, the Company entered into a revolving credit
facility with a bank that permitted it to borrow up to 90 percent
of eligible accounts receivable and 75 percent of its eligible
inventory with a maximum borrowing capacity of $5 million. In April
2014, the maximum borrowing capacity was increased to $10 million.
Borrowings bear interest at a rate per annum equal to the base
rate, which is the greater of the Prime Rate in effect on a given
day, a rate determined by the lender to be one and one-half percent
(1.5%) above Daily One Month LIBOR, or the Federal Funds Rate plus
one and one-half percent (1.5%). The facility renewed annually and
was secured by a first security interest in all of the Company's
accounts receivable, general intangibles and inventory. Under terms
of the line of credit, the Company was required to maintain a
specified fixed charge coverage ratio and debt to intangible net
worth ratio, as those terms are defined. During the year ended 31
December 2015 the Company repaid the full amount outstanding and
closed the credit facility. The balance on the line of credit at 31
December 2015 and 2014 was $0 and $2,927,000, respectively. The
interest rate on 31 December 2014 was 3.25 percent. Interest
expense related to this loan for the years ended 31 December 2015
and 2014 was $47,000 and $99,000, respectively.
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. The balance on the line of
credit at 31 December 2015 and 2014 was nil and $500,000,
respectively. The facility matures in October 2017 and is secured
by the assignment of a deposit account held by the lender. The line
of credit carries a variable interest rate of 0.5 percentage points
under an independent index which is the Wall Street Journal Prime
and is calculated by applying the ratio of the interest rate over a
year of 360 days multiplied by the outstanding principal balance
multiplied by the actual number of days the principal balance is
outstanding. The interest rate on 31 December 2015 and 2014 was
3.00 percent and 2.75 percent, respectively. Interest expense
related to this loan for the years ended 31 December 2015 and 2014
was nil and $2,000, respectively.
8. Notes payable
On 27 March 2013, the Company entered into a term loan agreement
with a lender for the purchase of property and a building for its
manufacturing operations and corporate offices. The note is secured
by the property and building. The Company borrowed proceeds of
$2,285,908 at a fixed interest rate of 4.45 percent. The loan has a
ten year term with monthly payments based on a twenty year
amortisation. There is a one-time payment at the end of the term of
the note of approximately $1,400,000. In accordance with the terms
of the agreement, the Company is required to keep $500,000 in a
deposit account with the lending bank. As of 31 December 2015 and
2014, 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 2015:
Year ending 31 December (USD, in thousands)
============================================= =====
2016 75
============================================= =====
2017 85
============================================= =====
2018 89
============================================= =====
2019 93
============================================= =====
2020 97
============================================= =====
Thereafter 1,642
============================================= =====
2,081
============================================= =====
9. Public Offering of Common Stock
Authorised shares and shares issuance
In December 2014, the Company issued an additional 5,295,069
shares of common stock for $2.35 per share ("the Public Offering").
The Company incurred costs in the issuance of these shares of
approximately $657,000. The Company received net proceeds of
approximately $11,786,000. In January 2015, the Company completed
the final closing of the share offering and issued 78,977 shares of
common stock for $2.35 per share raising approximately
$186,000.
10. Stock compensation
Stock options
In July 2011, the Company's shareholders approved the Conversion
Shares and the Directors' Shares, as well as the Plan Shares and
Omnibus Performance Incentive Plan ("Plan"). This included the
termination of all outstanding stock incentive plans, cancellation
of all outstanding stock incentive agreements, and the awarding of
stock incentives to Directors and certain employees and
consultants. The Company established the Plan to attract and retain
Directors, officers, employees and consultants. The Company
reserved an amount equal to 10 percent of the Common Shares issued
and outstanding immediately following the Public Offering.
Upon the Issuance of these additional shares, an award of share
options was made to the Directors and certain employees and
consultants, and a single award of restricted shares was made to a
former Chief Financial Officer. In addition, additional stock
options were awarded in each year subsequent. The awards of stock
options and restricted shares made upon issuance were in respect of
85 percent of the Common Shares available under the Plan,
equivalent to 8.5 percent of the Public Offering. The total number
of shares reserved for stock awards and options under this Plan is
1,877,011 with 825,556 shares allocated as of 31 December 2015. The
shares are allocated as 26,000 shares to Non-Executive Directors
and 799,556 shares to employees, executives and consultants.
The options granted to Non-Executive Directors, unless otherwise
agreed, vest contingent on continuing service with the Company at
the vesting date and compliance with the covenants applicable to
such service and have a ten year life.
Employee options either vest over three years with a third
vesting ratably each year, or partially on issuance and partially
over the following 24 month period. 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 must be exercised during the course of the 2016
calendar year or they will expire and vesting accelerates in the
event of a change of control.
As discussed in Note 2, the Company uses the Black Scholes
valuation model to measure the fair value of options granted. Since
the Company does not have a sufficient trading history from which
to calculate its historical volatility, the Company's expected
volatility is based on a basket of comparable companies' historical
volatility. As the Company's initial options were granted in 2011,
the Company does not have sufficient history of option exercise
behavior from which to calculate the expected term. Accordingly,
the expected terms of options are calculated based on the short-cut
method commonly utilised by newly public companies. The risk free
interest rate is based on a blended average yield of two and five
year United States Treasury Bills at the time of grant. The
assumptions used in the Black Scholes option pricing model for
options granted in 2014 and 2015 were as follows:
Number Risk-Free Fair
of Options Grant Interest Expected Exercise Value
Granted Date Rate Term Volatility Price per option
====== =========== ======= ========= ========= ========== ======== ===========
2014 100,000 7/08/14 1.36% 5.5 years 56.00% $7.45 $3.78
====== =========== ======= ========= ========= ========== ======== ===========
2015 299,000 5/20/15 1.29% 6 years 58.00% $2.15 $1.16
====== =========== ======= ========= ========= ========== ======== ===========
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 2015 and 2014:
Average
Weighted-Average Weighted-Average Grant
Exercise Remaining Contractual Date Fair
Stock Options Shares Price Term (in years) Value
=================== ========= ================ ====================== ==========
Outstanding at 31
December 2013 1,072,569 $3.52 5.5 $2,242,935
=================== ========= ================ ====================== ==========
Granted 100,000 $7.45 5.5 $378,000
=================== ========= ================ ====================== ==========
Exercised - $3.44
=================== ========= ================ ====================== ==========
Forfeited (21,295) $7.11
=================== ========= ================ ====================== ==========
Outstanding at 31
December 2014 1,151,274 $3.79 5.5 $2,544,210
=================== ========= ================ ====================== ==========
Granted 299,000 $2.15 6.0 $346,840
=================== ========= ================ ====================== ==========
Exercised (170,007) $0.86
=================== ========= ================ ====================== ==========
Forfeited (454,711) $4.03
=================== ========= ================ ====================== ==========
Outstanding at 31
December 2015 825,556 $3.48 5.8 $1,476,970
=================== ========= ================ ====================== ==========
Exercisable at 31
December 2015 550,556
=================== ========= ================ ====================== ==========
A summary of the status of unvested options as of 31 December
2015 and changes during the years ended 31 December 2015 and 2014
is presented below:
Weighted-Average Fair
Unvested Options Shares Value at Grant Date
========================= ========= =====================
Unvested at 31 December
2013 386,710 $2.11
========================= ========= =====================
Granted 100,000 $3.78
========================= ========= =====================
Vested (361,707) $1.98
========================= ========= =====================
Forfeited (20,001)
========================= ========= =====================
Unvested at 31 December
2014 105,002 $3.83
========================= ========= =====================
Granted 299,000 $1.16
========================= ========= =====================
Vested (38,334) $3.92
========================= ========= =====================
Forfeited (116,668)
========================= ========= =====================
Unvested at 31 December
2015 249,000 $1.16
========================= ========= =====================
As of 31 December 2015, total unrecognised compensation cost of
$233,000 was related to unvested share-based compensation
arrangements awarded under the Plan.
Stock warrants
On 29 July 2011, the Company and one of its consultants entered
into a warrant agreement for the consultant's assistance in
connection with the Company's initial public offering on 4 August
2011. Pursuant to this agreement, the Company agreed to grant to
the consultant warrants to subscribe for Common Shares representing
1.5 percent of the total shares outstanding immediately following
the initial public offering, or 193,843 warrant shares. The warrant
vested upon the August 2011 issuance of the shares. The exercise
price of the warrants is 210 pence per share. The warrants are
exercisable in whole or in part at any time in the period between 5
August 2011 and 5 August 2016. In May 2013, the consultant
exercised 113,843 warrants for consideration paid to the Company
and proceeds of approximately $371,000 were received.
The warrants are exercisable, at the election of the consultant,
without payment of the exercise price, for such number of Common
Shares as is calculated in accordance with a formula set out in the
warrant agreement. In summary, that formula operates by calculating
the notional net gain that the shareholder would have made if it
had exercised its warrants at the exercise price and then sold its
shares at the current market value. The formula then uses the
notional net gain to calculate such lesser number of Common Shares
that the shareholder would need to acquire (at nil acquisition
cost) in order to achieve the same notional net gain. In the event
that the shareholder exercises the warrants (or any part) in this
manner, the warrants are deemed to have been exercised in respect
of such number of Common Shares as would have been required in
order to achieve the same notional net gain had the warrants been
exercised at the exercise price.
In addition, either the consultant or the Company may elect, in
certain circumstances, including a merger or sale of substantially
all of the assets of the Company, to receive or provide (as the
case may be) a cash payment, in substitution for the warrants,
calculated in accordance with a formula set out in the warrant
agreement. As a result, the fair value of the outstanding warrants
is classified as a liability in accordance with ASC 480 -
Distinguishing Liabilities from Equity. As discussed in Note 2, the
fair value of the warrants is measured utilising a Monte Carlo
valuation model with the following assumptions:
31 December 31 December
2015 2014
======================================= =========== ===========
Closing price per share of common
stock $0.37 $2.73
======================================= =========== ===========
Exercise price per share $2.15 $2.27
======================================= =========== ===========
Expected volatility 49.0% 51.0%
======================================= =========== ===========
Risk-free interest rate 0.74% 0.74%
======================================= =========== ===========
Remaining expected term of underlying
securities (years) 0.6 1.6
======================================= =========== ===========
In addition, as of the valuation dates, management assessed the
probabilities of future financing assumptions in the Monte Carlo
valuation model.
11. Employee benefit plan
The Company maintains an active defined contribution retirement
plan for its employees (the "Benefit Plan"). All employees
satisfying certain service requirements are eligible to participate
in the Benefit Plan. The Company makes cash contributions each
payroll period up to specified percentages of employees'
contributions as approved by the Board of Directors. In September
2015, the Company changed its policy of making contributions under
which it chose not to contribute to the plan. The Company may elect
to change its policy in the future. The Company's contributions to
the Benefit Plan were approximately $72,000 and $97,000 for the
years ended 31 December 2015 and 2014, respectively.
12. Commitments and contingencies
Operating leases - The Company leases certain facilities and
equipment under non-cancelable operating leases which expire at
varying times between January 2018 and May 2019. Certain of these
leases have escalating rent payments which result in the Company
recording a deferred rent liability.
Future minimum lease payments under the operating leases,
together with the present value of minimum lease payments as of 31
December 2015 are as follows:
Future
Lease
Payments
Year Ending 31 December US$000
============================= =========
2016 307
============================== =========
2017 314
============================== =========
2018 116
============================== =========
2019 45
============================== =========
Total future lease payments 782
============================== =========
Rent expense for the years ended 31 December 2015 and 2014 was
approximately $613,000 and $453,000, respectively.
13. Related party transactions
The Company has held a patent rights purchase agreement since
2009 with a shareholder as described in Note 5.
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 2015.
For the year ended 31 December 2015, 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.
Revenues from customers by geography are as follows:
Year ending 31 December 2015 2014
======================== ====== ==========
Middle East 10,604 10,322
======================== ====== ==========
United States 1,897 2,512
======================== ====== ==========
Other 1,091 747
======================== ====== ==========
Total 13,592 13,581
======================== ====== ==========
Equipment leased to customers by geography is as follows:
Year ending 31 December 2015 2014
======================== ===== =========
Middle East 6,301 5,180
======================== ===== =========
United States 1,813 1,171
======================== ===== =========
Other 496 269
======================== ===== =========
Total 8,610 6,620
======================== ===== =========
15. Concentrations
At 31 December 2015, two customers, one with three contracts
with three separate plants, represented 74 percent of accounts
receivable. During the year ended 31 December 2015, the Company
received 78 percent of its gross revenue from two customers, one
with three separate plants.
At 31 December 2014, two customers, one with four contracts with
three separate plants, represented 78 percent of accounts
receivable. During the year ended 31 December 2014, the Company
received 65 percent of its gross revenue from one customer with
three separate plants.
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 recognized in the financial statements if
the conditions existed at the date of the balance sheet, but are
not recognized if the conditions did not exist at the balance sheet
date. Management has evaluated subsequent events through 16 May
2016, the date the financial statements were available to be
issued, and no events have occurred which require further
disclosure.
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 company news service from the London Stock Exchange
END
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