TIDMMYX TIDMMYXR
RNS Number : 7400J
MyCelx Technologies Corporation
14 September 2016
14 September 2016
Contains price sensitive information
MYCELX TECHNOLOGIES CORPORATION (AIM: MYX)
Half Year Results Statement
For the six months ended 30 June 2016
Increasing industry recognition that MYCELX systems bring
greater operational efficiency and attractive cost savings
MYCELX Technologies Corporation ("MYCELX" or the "Company"), the
clean water technology company providing patented solutions for
commercial industrial markets worldwide, is pleased to announce its
interim unaudited results for the six months ended 30 June 2016 for
which highlights are set out below.
Financial
-- Gross profit margin remained strong at 53.5% (2015 H1: 51.9%)
-- Revenue of $3.9 million (2015 H1: $8.7 million)
-- Adjusted EBITDA of negative $0.6 million (2015 H1: negative $0.5 million)
-- Cash provided by operating activities of $0.2 million (2015
H1: cash used by operating activities $2.2 million)
-- Net cash of $3.7 million (2015 H1: $3.9 million)
Strategic Agreement
-- Entered exclusive sales and marketing agreement with
Schlumberger for the Upstream market. Schlumberger will promote
MYCELX products as the method of choice for water treatment to
their upstream oil and gas customers.
Operational
-- H1 contract awards highlight increasing industry recognition
that MYCELX systems bring greater operational efficiency and
attractive cost savings:
o Saudi Arabia: Awarded two year contract with SABIC for total
value of $5 million
o US: Third MYCELX system commissioned at terminal operator to
treat water from operations for discharge into the Houston Ship
Channel
o US: Equipment lease secured for treatment of process water at
Oklahoma refinery
o US: Added experienced Business Development personnel with
oilfield services and water treatment background to drive sales and
strategic alliance formation
o Nigeria: Successful trial offshore platform with local oil
producer. First deployment of RE-GEN system offshore
o Oman: Successful trial resulted in lease and media sales for
downstream process water
-- Sales initiative for a new fast-to-market product - the MYCELX Oil Recovery System
Outlook
-- Rigorous cost control measures will enable the Company to be
at least cash neutral from operations in 2016
-- Utilise Schlumberger's global sales and marketing platform to
accelerate adoption by global EOR producers of the MYCELX RE-GEN
media, and broader MYCELX products
-- Leverage current customer relationships and installations in
the Middle East to continue to grow downstream business in MENA and
North America
-- Continued focus on establishing strategic alliances to accelerate sales growth globally
Commenting on these results, Connie Mixon, CEO, said:
"During the first half of the year the Company met key
milestones in its cost reduction program, converted new business
development opportunities into revenue generating installations and
made significant progress on its goal of strategic alliances.
At its core, the Company is a technology company with
exceptional expertise gained through onsite, real-time water
treatment experience. As such, the Company will continue to use its
knowledge to innovate and commercialise next generation technology
to meet our customers' current and future needs more reliably and
cost effectively than outdated conventional methods. The oil and
gas and petrochemical industries continue to integrate MYCELX(R)
technology into their critical, real-time processes. This is
confirmation that our technology has its role in achieving
sustainable water treatment for years to come.
Now with the support of Schlumberger in upstream and leveraging
off our existing footprint with leading downstream operators,
MYCELX is well on its way towards its ultimate goal of becoming the
industry standard for water treatment."
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
Numis Securities Limited Tel: 44 20 7260 1000
Corporate Broking
James Black
Ben Stoop
Celicourt Communications Tel: 44 20 7520 9266
Mark Antelme
Joanna Boon
Chairman's and Chief Executive Officer's Statement
Summary
Last year the Company implemented expense control measures in
response to the challenging oil price environment. The Company has
now met its goal of being cash neutral from operations for twelve
months, cash positive in H1 2016 and is on track to deliver the
next milestone of being cash positive from operations for the full
year. The Company will continue to be a prudent steward of its cash
with monitoring in place to ensure specific measures are taken in
the event of a revenue shortfall or contract delay during the year
and any additional equipment purchased will be supported by a sales
contract. Our cost reduction program has been targeted to ensure
that it does not adversely affect the Company's continuing ability
to win contracts and grow. Our recent wins in new markets and with
new customers serve to show that whilst our selling, general and
administrative costs have reduced by 47% our ability to convert
business development opportunities into cash generation has not
diminished. For example, the Company is pleased to report that a
successful upstream trial was completed offshore Nigeria, which we
believe will lead to future sales in a market that is actively
seeking effective technology to manage water for compliant
overboard discharge.
Our steadfast goal of widespread industry adoption of MYCELX
relies on our ability to retain and leverage our existing customer
relationships as well as explore strategic alliances to leverage
sales and marketing channels globally. So far this year we have
made substantial progress on both fronts.
The current year started out with the award of a two-year
contract in the amount of $5 million with a SABIC company in Saudi
Arabia. The contract is a result of the recognition that MYCELX
systems bring greater operational efficiency which led to higher
production and attractive cost savings for the plant. Growing
recognition of our successful performance throughout the GCC region
has led to paid trial requests from new customers, such as the
recent Oman downstream trial that led to a lease, which we are able
to respond quickly to by utilising equipment from our rental fleet.
During the period the Company also undertook a sales initiative for
a new fast-to-market product - the MYCELX Oil Recovery System which
offers customers a system that treats water onsite charged on a
volume treated basis which reduces truck haul off and produces high
quality sales oil in the process. The Company expects the first
installation of this new product will be installed during H2 2016.
Elsewhere in downstream, we have strengthened our Houston Business
Development and Engineering team to focus on the markets in Texas
and Louisiana. Recent wins in these markets include a third
installation in the Houston Ship Channel and an equipment lease at
a refinery in Oklahoma.
The highlight of the first half of the year was the
establishment of an exclusive upstream sales and marketing
agreement with Schlumberger, the world's largest oil field services
company. The Agreement will help to expedite the industry adoption
of MYCELX's new RE-GEN product line as Schlumberger will market it
as the water treatment method of choice in the upstream market. We
continue to pursue 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.
We continue to focus our growth strategy in the Middle East,
India and Americas regions. Although the Company's primary market
remains in distress, operators are increasingly 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. 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.
H1 Review
Market conditions during the first half of 2016 continued to be
challenging for the oil and gas industry and the associated service
sector, with many of the operators consistently exercising
stringent capital discipline. In the face of the difficult market,
business sales in H1 were as expected and on track to meet the full
year forecast. Our technology continues to deliver value in an
industry that is struggling with significant price dislocation.
This is evidenced by continued contract renewals and sales to our
core customers, new prosecuted projects, ongoing paid trials, and
the recent progress made into the hydraulic fracturing market.
A significant development in MYCELX's progress to become the
industry standard for water treatment occurred in H1 2016.
Schlumberger, the world's largest oil field services company,
entered into an exclusive Sales and Marketing agreement with the
Company to be the sole distributor of MYCELX's entire product range
in the upstream market. The agreement will help to expedite
widespread industry adoption of MYCELX's new RE-GEN product line in
particular which Schlumberger will market as its water treatment
method of choice in the upstream market. The RE-GEN product has
been proven to be highly effective in advanced enhanced oil
recovery (EOR) produced water treatment and for polymer flood
produced water in particular. The Company believes treating the
vast amount of water that is produced during EOR operations, that
can be used for re-injection and other purposes, will be a
significant challenge for the upstream industry in the foreseeable
future. Producers are already opting to increase production from
existing fields using these advanced extraction methods in response
to oil prices and their own portfolio considerations. Historically,
the difficulty of treating the water during EOR operations hindered
the use of several of these advanced extraction methods. RE-GEN
media overcomes this obstacle. Leveraging Schlumberger's global
sales and marketing platform should accelerate adoption by global
EOR producers of the MYCELX RE-GEN media. Moreover, Schlumberger's
ability to broadcast MYCELX's superior and cost effective
performance to its global customer base should increase adoption of
MYCELX entire product suite throughout the upstream sector.
The cost control measures implemented last year have enabled the
Company to meet key targets during the period. The Company was cash
positive from operations in H1 2016 and has been cash neutral from
operations since 30 June 2015. MYCELX is on track to be at least
cash neutral from operations for the full year. These cost control
measures have become engrained in the Company's approach to
stewarding its cash and it is this discipline that will allow the
Company to navigate what it expects to be continuing volatile
market conditions in 2016 and the years to come.
Operational Review
Middle East & India
The Company pursued its key applications in the Middle East and
India; process water treatment in downstream petrochemical sector
and treating produced water during Enhanced Oil Recovery.
During H1 one of the Company's existing SABIC customers renewed
their operating lease for two years in the amount of $5 million.
This contract underpinned the expected lease, media and service
revenues from the downstream petrochemical sector in 2016 and 2017.
The Company's strategy continues to focus on providing process
improvements for production efficiency which is highly valued in
this sector. This niche application and unique capability is
attributable to the small footprint and highly efficient technology
MYCELX provides where space is limited and performance is key to
ongoing operations and consistent production. In addition, the
Company will remain in the turnaround market, but primarily with
current customers where we have installed equipment and operators
onsite.
A new sales initiative was recently undertaken to support a
fast-to-market downstream product, the MYCELX Oil Recovery System.
The system treats water onsite on a volume treated basis which
reduces truck haul off and produces high quality sales oil in the
process. The Company believes that these applications of MYCELX
technology are difficult for other water treatment companies to
mimic in terms of performance or cost.
As reported previously, MYCELX continues to progress a major
project in India with additional paid trials which will be
undertaken in the H2 period to further refine their overall clean
water solution. In addition to this project, MYCELX is pursuing
further opportunities in the Middle East and India for Enhanced Oil
Recovery (EOR) applications leveraging the RE-GEN media
performance.
North America
MYCELX commissioned a water treatment system at a terminal
operator to treat water from operations for discharge into the
Houston Ship Channel. This is the third such installation for the
Company in the Texas location. Water discharge into the Channel is
regulated and enforced by the US Coast Guard and the Environmental
Protection Agency and only operators with MYCELX systems are
allowed to discharge into the Channel. There are cost savings to
the operator by treating and discharging rather than having to pump
water to an industrial waste water treatment plant that charges the
operator by volume and contamination level.
In the refinery space the Company leased equipment for treatment
of process water at an Oklahoma refinery and with the addition of
an experienced business development professional the Company
expects to progress its footprint in the refinery and petrochemical
sector in the Gulf Coast region going forward.
The US onshore market is focused on production from wells with
lower operational costs. Innovative technology such as MYCELX that
enables producers to recycle and reuse water while mitigating the
need for fresh water during operations is increasingly in demand.
Furthermore, MYCELX continues to innovate its systems to lower the
cost of operation for the end user by providing remote monitoring
capability which reduces manpower costs. Continuing our efforts in
2015 we pursued opportunities to enter new segments of the US
onshore market created by the departure of several oil field
services companies whose water treatment options are no longer
economically viable. The Company has entered into strategic
agreements which it believes will accelerate this fast-to-market
opportunity. The full water recycle and reuse system with remote
monitoring installed last year for use in hydraulic fracturing
continues to perform well and we expect to build on this success
for future onshore installations for cost effective water treatment
and advanced cost control in the hydraulic fracturing market
Financial
The decline in revenues over the period due to the continued oil
price volatility and market dislocation was as expected. Equipment
sales and leases decreased by 35.0% to $1.3 million in the first
half of 2016 (2015 H1: $2.0 million). Revenue from consumable
filtration media and service decreased because last year's numbers
benefited from two turnaround petrochemical plant projects which
were not expected this year. Total revenue decreased by 55.2% to
$3.9 million (2015 H1: $8.7 million) with gross profit margins
slightly enhanced at 53. 5% (2015 H1: 51.9%).
Cost cutting measures resulted in total operating expenses for
the first half of 2016 decreasing by 41.4% to $3.4 million (2015
H1: $5.8 million) with the largest component of those savings
coming from reduced selling, general and administrative
("SG&A") expenses. The decrease to SG&A expenses included a
reduction in staff costs of $1.1 million, a decrease in facilities,
maintenance and shipping of $500,000, a decrease in travel expense
of $330,000, and a decrease in research and development expense of
$141,000.
Adjusted EBITDA was negative $600,000 for the first half of
2016, compared to negative $500,000 for the first half of 2015.
Adjusted EBITDA is net income before interest expense, provision
for income taxes, depreciation and amortisation 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 $1.4 million in the
first half of 2016 compared to a loss before tax of $1.3 million in
the first half of 2015. Basic loss per share was 8 cents for the
first half of 2016, which was unchanged from the first half of
2015.
Cash preservation has been an imperative for the Company and
MYCELX ended the period with $5.7 million of cash and cash
equivalents including restricted cash, compared to $5.8 million in
total at 31 December 2015. Cash provided by operations was $200,000
for the first half of 2016, compared to $2.2 million cash used in
operations in the first half of 2015. The Company's net cash
position remained at $3.7 million. 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.
Summary and Outlook
MYCELX believes that the volatile market conditions are likely
to continue throughout the rest of 2016 and beyond, but is well
positioned to meet those challenges. The Company has adapted its
business plans to enhance its prospects for new contract wins,
preserve existing revenue streams and reduce costs to achieve our
goal of being operationally cash positive in FY 2016. 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. We continue to progress large
and complex projects by undertaking paid trials to refine the water
treatment solution to meet customers' specific requirements. Given
market conditions, these projects have moved at a slow pace but
nevertheless continue to generate revenue for MYCELX at a time when
other large scale projects elsewhere in the industry have been
suspended. We have also 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.
The agreement with Schlumberger achieved one of the Company's
stated goals of forming strategic relationships. It is of great
value as we build our brand globally especially in the upstream
market. Alignment with Schlumberger's global customer base, via
their sales and marketing channels, should accelerate uptake and
sales in large scale EOR projects where the RE-GEN solution has
already been proven the field. We will continue to vigorously
pursue this large global application.
The refinement of the evaluation process for our project
pipeline to ensure all resources expended are cost efficient and
geared to market conditions has kept the Company very focused.
Adoption of a risked approach to our revenue outlook together with
our cost cutting initiatives has the Company on track to achieve
our goal of being at least operationally cash flow neutral in H2
and full year 2016.
At its core, the Company is a technology company with
exceptional expertise gained through onsite, real-time water
treatment experience. As such, the Company will continue to use its
knowledge to innovate and commercialise next generation technology
to meet our customers' current and future needs more reliably and
cost effectively than outdated conventional methods. Now with the
support of Schlumberger in upstream and leveraging off our existing
footprint with leading downstream operators, MYCELX is well on its
way towards its ultimate goal of becoming the new industry standard
for water treatment.
Tim Eggar Connie Mixon
Chairman Chief Executive Officer
14 September 2016
MYCELX TECHNOLOGIES CORPORATION
Statements of Operations
(USD, in thousands, except share data)
Six Months Six Months Year
Ended Ended Ended
30 June 30 June 31 December
2016 2015 2015
(unaudited) (unaudited)
-------------- ----------------- ---------------------------
Revenue 3,945 8,690 13,592
Cost of goods sold 1,834 4,178 6,343
Gross profit 2,111 4,512 7,249
-------------- ----------------- ---------------------------
Operating expenses:
Research and development - 141 172
Selling, general and administrative 3,180 5,364 9,594
Depreciation and amortisation 268 266 507
-------------- ----------------- ---------------------------
Total operating expenses 3,448 5,771 10,273
-------------- ----------------- ---------------------------
Operating loss (1,337) (1,259) (3,024)
Other expense
Loss on disposal of equipment - - (76)
Interest expense (47) (78) (144)
-------------- ----------------- ---------------------------
Loss before income taxes (1,384) (1,337) (3,244)
Provision for income taxes (116) (225) (405)
-------------- ----------------- ---------------------------
Net loss (1,500) (1,562) (3,649)
============== ================= ===========================
Loss per share-basic (0.08) (0.08) (0.20)
============== ================= ===========================
Loss per share-diluted (0.08) (0.08) (0.20)
============== ================= ===========================
Shares used to compute basic loss per share 18,770,117 18,638,929 18,705,244
============== ================= ===================
Shares used to compute diluted loss per share 18,770,117 18,638,929 18,705,244
============== ================= ===================
The accompanying notes are an integral part of the financial
statements.
MYCELX TECHNOLOGIES CORPORATION
Balance Sheets
(USD, in thousands, except share data)
As of As of As of
30 June 30 June 31 December
2016 2015 2015
(unaudited) (unaudited)
-------------------- ------------------- ----------------
ASSETS
Current Assets
Cash and cash equivalents 5,246 7,240 5,296
Restricted cash 500 500 500
Accounts receivable - net 2,502 3,970 2,855
Unbilled accounts receivable 57 32 20
Inventory 3,269 4,385 3,790
Prepaid expenses 205 508 204
Other assets 76 150 109
------------------------ ------------------- ----------------
Total Current Assets 11,855 16,785 12,774
Property and equipment - net 11,213 12,300 11,714
Intangible assets - net 811 773 809
Total Assets 23,879 29,858 25,297
======================== =================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable 531 489 485
Payroll and accrued expenses 629 1,381 577
Deferred revenue - - 42
Lines of credit - 1,762 -
Note payable - current 83 79 75
Warrant liability - 63 -
Other current liabilities 119 42 115
------------------------ ------------------- ----------------
Total Current Liabilities 1,362 3,816 1,294
Note payable - long-term 1,964 2,041 2,006
------------------------ ------------------- ----------------
Total Liabilities 3,326 5,857 3,300
------------------------ ------------------- ----------------
Stockholders' Equity
Common stock, $0.025 par value, 100,000,000
shares authorised, 18,770,117 shares issued
and outstanding at 30 June 2016 and 2015,
and 31 December 2015.
469 469 469
Additional paid-in capital 40,258 40,119 40,202
Accumulated deficit (20,174) (16,587) (18,674)
------------------------ ------------------- ----------------
Total Stockholders' Equity 20,553 24,001 21,997
------------------------ ------------------- ----------------
Total Liabilities and Stockholders' Equity 23,879 29,858 25,297
======================== =================== ================
The accompanying notes are an integral part of the financial
statements.
Additional Stock
Common Stock Paid-in Accumulated Subscription
Capital Deficit Receivable Total
Shares $ $ $ $ $
--------- ---- ----------- ------------ ------------- --------
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 - - 40 - - 40
Net loss for the period - - - (1,562) - (1,562)
--------- ---- ----------- ------------ ------------- --------
Balances at 30 June 2015
(unaudited) 18,770 469 40,119 (16,587) - 24,001
Stock-based compensation
expense - - 83 - - 83
Net loss for the period - - - (2,087) - (2,087)
--------- ---- ----------- ------------ ------------- --------
Balances at 31 December
2015 18,770 469 40,202 (18,674) - 21,997
Stock-based compensation
expense - - 56 - - 56
Net loss for the period - - - (1,500) - (1,500)
--------- ---- ----------- ------------ ------------- --------
Balances at 30 June 2016
(unaudited) 18,770 469 40,258 (20,174) - 20,553
========= ==== =========== ============ ============= ========
The accompanying notes are an integral part of the financial
statements.
MYCELX TECHNOLOGIES CORPORATION
Statements of Cash Flows
(USD, in thousands)
Six Months Six Months Year
Ended Ended Ended
30 June 30 June 31 December
2016 2015 2015
(unaudited) (unaudited)
---------------------- ----------------- -------------
Cash flow from operating activities
Net loss (1,500) (1,562) (3,649)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Depreciation and amortisation 728 709 1,441
Loss from disposition of equipment - - 76
Stock compensation 56 40 123
Non-cash change in warrant liability - - (63)
Change in operating assets and
liabilities:
Accounts receivable 353 (1,360) (245)
Unbilled accounts receivable (37) 58 71
Inventory 521 595 1,190
Prepaid expenses (1) 20 324
Other assets 33 (10) 31
Accounts payable 46 (712) (716)
Payroll and accrued expenses 52 493 (309)
Deferred revenue (42) (282) (240)
Other current liabilities 4 (192) (119)
Net cash provided by (used in) operating
activities 213 (2,203) (2,085)
---------------------- ----------------- -------------
Cash flow from investing activities
Payments for purchases of property
and equipment (207) (598) (806)
Proceeds from sale of property and
equipment - - 3
Payments for purchases of intangible
assets (22) (36) (92)
---------------------- ----------------- -------------
Net cash used in investing activities (229) (634) (895)
---------------------- ----------------- -------------
Cash flows from financing activities
Net proceeds from stock issuance - 499 499
Payments on notes payable (34) (46) (85)
Payments on lines of credit - (1,665) (3,427)
---------------------- ----------------- -------------
Net cash used in financing activities (34) (1,212) (3,013)
---------------------- ----------------- -------------
Net decrease in cash and cash
equivalents (50) (4,049) (5,993)
---------------------- ----------------- -------------
Cash and cash equivalents, beginning
of period 5,296 11,289 11,289
Cash and cash equivalents, end of period 5,246 7,240 5,296
====================== ================= =============
Supplemental disclosures of cash flow
information:
Cash payments for interest 39 88 153
Cash and non cash payments for income
taxes 164 233 403
Property and equipment remaining in
accounts
payable and other current liabilities 77 6 -
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 interim financial statements have
been prepared using recognition and measurement principles of
Generally Accepted Accounting Principles in the United States of
America ("U.S. GAAP").
The interim financial statements for the six months ended 30
June 2016 and 2015 have not been audited.
Nature of business - MYCELX Technologies Corporation ("MYCELX"
or the "Company") was incorporated in the State of Georgia on 24
March 1994. The Company is headquartered in Duluth, Georgia with
operations in Houston, Texas, Saudi Arabia, India and the United
Kingdom. The Company provides clean water technology equipment and
related services to the oil and gas, power, marine and heavy
manufacturing sectors and the majority of its revenue is derived
from the Middle East and United States.
2. Summary of significant accounting policies
Use of estimates - The preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
The primary estimates and assumptions made relate to depreciation
and amortisation, 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 30 June 2016, 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 30 June 2016 and 2015, and 31 December 2015,
cash in non-U.S. institutions was $139,802. 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. At 30 June
2016 and 2015, and 31 December 2015, 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 six months ended 30 June 2016 and 2015,
and the year ended 31 December 2015.
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 include 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 financial reporting over the following useful lives:
Buildings 39 years
Leasehold improvements 1-5 years
Office equipment 3-10 years
Manufacturing equipment 5-15 years
Research and development equipment 5-10 years
Purchased software 1-5 years
Equipment leased to customers 3-10 years
Expenditures for major renewals and betterments that extend the
useful lives of property and equipment are capitalised.
Expenditures for maintenance and repairs are charged to expense as
incurred. Depreciation expense includes depreciation on equipment
leased to customers and is included in cost of goods sold.
Intangible assets - Intangible assets consist of the costs
incurred to purchase patent rights and legal and registration costs
incurred to internally develop patents. Intangible assets are
reported net of accumulated amortisation. Patents are amortised
using the straight-line method over a period based on their
contractual lives which approximates their estimated useful
lives.
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 30 June 2016 and 2015, and 31 December 2015.
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 six months ended 30 June 2016 and 2015, and the
year ended 31 December 2015.
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
six months ended 30 June 2016 and 2015, and the year ended 31
December 2015 was approximately $nil, $141,000 and $172,000,
respectively.
Advertising costs - The Company expenses advertising costs as
incurred. Advertising expense for the six months ended 30 June 2016
and 2015, and the year ended 31 December 2015 was approximately
$nil, $7,000 and $7,000, 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 interim and
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 six months ending 30 June 2016
and 2015, and the year ended 31 December 2015 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
1,106,645, 1,193,324, and 1,150,201 for the six months ended 30
June 2016 and 2015, and the year ended 31 December 2015,
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 or out of each level of
the fair value hierarchy for assets measured at the fair value for
the six months ended 30 June 2016 and 2015, and the year ended 31
December 2015.
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 30 June 2016 and 2015,
and 31 December 2015 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 30
June 2016 and 2015, and 31 December 2015:
Warrant Liability
US$000
--------------------
Balance at 30 June 2015 63
Adjustments to estimated fair value (63)
Balance at 31 December 2015 0
Adjustments to estimated fair value -
Balance at 30 June 2016 0
====================
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 realisable 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.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic
842)", which requires lessees to recognise on the balance sheet the
assets and liabilities for the rights and obligations created by
the leases with lease terms of more than 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 be recognised on the balance sheet, the new standard will
require both types of leases to be recognised on the balance sheet.
The new standard also requires disclosures about the amount,
timing, and uncertainty of cash flows arising from leases. These
disclosures include qualitative and quantitative requirements,
providing additional information about the amounts recorded in the
financial statements. The 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 30 June 2016 and 2015,
and 31 December 2015:
30 June 30 June 31 December
2016 2015 2015
US$000 US$000 US$000
Raw materials 797 1,093 929
Work-in-progress 1 8 -
Finished goods 2,471 3,284 2,861
---------- ---------- --------------
Total inventory - net 3,269 4,385 3,790
========== ========== ==============
4. Property and equipment
Property and equipment consists of the following at 30 June 2016
and 2015, and 31 December 2015:
30 June 30 June 31 December
2016 2015 2015
US$000 US$000 US$000
Land 709 709 709
Building 2,724 2,724 2,724
Leasehold improvements 340 315 325
Office equipment 745 741 745
Manufacturing equipment 917 907 917
Research and development
equipment 514 644 644
Purchased software 222 222 222
Equipment leased to customers 8,884 8,548 8,610
Equipment available for lease
to customers 826 826 826
----------------- -------------------------- --------------
15,881 15,636 15,722
Less: accumulated depreciation (4,668) (3,336) (4,008)
----------------- -------------------------- --------------
Property and equipment -
net 11,213 12,300 11,714
================= ========================== ==============
During the six months ended 30 June 2016 and 2015, and the year
ended 31 December 2015, the Company removed property, plant and
equipment and the associated accumulated depreciation of
approximately $48,000, $nil and $41,000, respectively, to reflect
the disposal of property, plant and equipment.
Depreciation expense for the six months ended 30 June 2016 and
2015, and the year ended 31 December 2015 was approximately
$708,000, $690,000 and $1,403,000, respectively, and includes
depreciation on equipment leased to customers. Depreciation expense
on equipment leased to customers included in cost of goods sold for
the six months ended 30 June 2016 and 2015, and the year ended 31
December 2015 was $460,000, $443,000 and $934,000,
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 $36,000, $29,000 and $32,000 as of 30 June 2016 and
2015, and 31 December 2015, 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
jurisdiction outside of the United States.
Intangible assets as of 30 June 2016 and 2015, and 31 December
2015 consist of the following:
Weighted 30 June 30 June 31 December
Average 2016 2015 2015
Useful lives US$000 US$000 US$000
Internally developed
patents 15 years 1,177 1,100 1,155
Purchased patents 17 years 100 100 100
1,277 1,200 1,255
Less accumulated amortisation (466) (427) (446)
-------------------- --------------------- ---------------------
Intangible assets
- net 811 773 809
==================== ===================== =====================
Approximate aggregate future amortisation expense is as
follows:
Year ending 31 December (USD, in
thousands)
2016 19
2017 33
2018 33
2019 29
2020 28
Thereafter 146
Amortisation expense for the six months ended 30 June 2016 and
2015, and the year ended 31 December 2015 was approximately
$20,000, $19,000 and $38,000, respectively.
6. Income taxes
The components of income taxes shown in the consolidated
statements of operations are as follows:
30 June 30 June 31 December
2016 2015 2015
US$000 US$000 US$000
------------------- ------------------ ------------------
Current:
Federal - - -
Foreign 116 225 392
State - - 13
------------------- ------------------ ------------------
Total current provision 116 225 405
------------------- ------------------ ------------------
Deferred:
Federal - - -
Foreign - - -
State - - -
------------------- ------------------ ------------------
Total deferred provision - - -
------------------- ------------------ ------------------
Total provision for income taxes 116 225 405
=================== ================== ==================
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:
30 June 30 June 31 December
2016 2015 2015
---------- ---------- --------------
Federal statutory income tax rate 34.0% 34.0% 34.0%
State tax rate, net of federal benefit 0.7% (1.4%) 0.4%
Valuation allowance (37.5%) (37.9%) (25.1%)
Other (0.1%) (.5%) (13.8%)
Foreign withholding tax (5.5%) (11.1%) (8.0%)
---------- ---------- --------------
Effective income tax rate (8.4%) (16.9%) (12.5%)
========== ========== ==============
The significant components of deferred income taxes included in
the balance sheets are as follows:
30 June 30 June 31 December
2016 2015 2015
US$000 US$000 US$000
----------------------- --------------------- ---------------------
Deferred tax assets
Net operating loss 6,586 5,494 6,056
Equity compensation 424 452 404
Research and development credits 159 159 159
Accrued liability 8 10 44
Charitable contributions 9 9 9
Other 24 170 25
Total gross deferred tax asset 7,210 6,294 6,697
Deferred tax liabilities
Property and equipment (962) (949) (968)
Warrants - (3) -
Total gross deferred tax liability (962) (952) (968)
Net deferred tax asset before valuation
allowance 6,248 5,342 5,729
Valuation allowance (6,248) (5,342) (5,729)
----------------------- --------------------- ---------------------
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
30 June 2016, the Company has recorded a valuation allowance of
$6.2 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 30 June 2016, the Company has approximately $18.6 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 30 June 2016 and
2015, and 31 December 2015, there was no accrual for uncertain tax
positions or related interest.
The Company's tax years 2012 through 2016 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 30
June 2016 and 2015, and 31 December 2015 was $nil, $1,762,000 and
$nil, respectively. Interest expense related to this loan for the
six months ended 30 June 2016 and 2015, and the year ended 31
December 2015 was $nil, $30,000, and $47,000, 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 30 June 2016 and 2015, and 31 December 2015 was $nil. 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 30 June 2016 and 2015, and 31
December 2015 was 3.00 percent, 2.75 percent and 3.00 percent,
respectively. Interest expense related to this loan for the six
months ended 30 June 2016 and 2015, and the year ended 31 December
2015 was $nil.
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 30 June 2016 and 2015,
and 31 December 2015, the Company had restricted cash of $500,000
related to the loan agreement. Future maturities of long-term debt
are as follows as of 30 June 2016:
Year ending 31 December (USD, in
thousands)
2016 41
2017 85
2018 89
2019 93
2020 97
Thereafter 1,642
--------------
2,047
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 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 completion of the issuance of
additional shares in 2011.
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 1,160,556 shares allocated as of 30 June 2016. The
shares are allocated as 26,000 shares to a Non-Executive Director
and 1,134,556 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 2015 and 2016 were as follows:
Number Risk-Free
of Options Interest Expected Exercise Fair Value
Granted Grant Date Rate Term Volatility Price Per Option
-------- -------------- ------------- ------------ ------------- ------------- ----------- --------------
2015 299,000 05/20/2015 1.29% 6 years 58.00% $2.15 $1.16
2016 345,000 03/14/2016 1.70% 5.75 years 54.50% $0.40 $0.20
The Company assumes a dividend yield of 0.0%.
The following table summarises the Company's stock option
activity for the six months ended 30 June 2016:
Weighted-Average Weighted-Average Average Grant
Exercise Remaining Contractual Date Fair
Stock Options Shares Price Term (in years) Value
------------------------------ ------------ ------------------- ------------------------- ----------------
Outstanding at 31 December
2015 825,556 $3.48 5.8 $1,476,970
Granted 345,000 $0.40 5.8 $69,000
Forfeited (10,000) $2.15
------------------------------ ------------
Outstanding at 30 June
2016 1,160,556 $2.69 5.9 $1,466,552
------------------------------ ------------
Exercisable at 30 June
2016 656,223
------------------------------ ------------
A summary of the status of unvested options as of 30 June 2016
and changes during the six months ended 30 June 2016 is presented
below:
Weighted-Average
Fair Value at Grant
Unvested Options Shares Date
-------------------------------- ----------- -----------------------
Unvested at 31 December 2015 249,000 $1.16
Granted 345,000 $0.20
Vested (79,667) $1.16
Forfeited (10,000)
-------------------------------- -----------
Unvested at 30 June 2016 504,333 $0.50
-------------------------------- -----------
As of 30 June 2016, total unrecognised compensation cost of
$235,000 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:
30 June 31 December
2016 30 June 2015 2015
---------- --------------- --------------
Closing price per share of common
stock $0.38 $2.06 $0.37
Exercise price per share $2.81 $3.30 $2.15
Expected volatility 49.0% 51.0% 49.0%
Risk-free interest rate 0.74% 0.74% 0.74%
Remaining expected term of underlying
securities (years) 0.1 1.1 0.6
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 $nil, $52,000, and $72,000 for
the six months ended 30 June 2016 and 2015, and the year ended 31
December 2015, 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 August 2015 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 30
June 2016 are as follows:
Future
Lease Payments
US$000
Year Ending 31 December
2016 95
2017 314
2018 116
2019 49
2020 -
Thereafter -
Total future lease payments 574
===============
Rent expense for the six months ended 30 June 2016 and 2015, and
the year ended 31 December 2015 was approximately $172,000,
$317,000 and $613,000, 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 30 June 2016. For
the six months ended 30 June 2016, 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:
Six months Six months Year ended
ended 30 June ended 30 June 31 December
(USD, in thousands) 2016 2015 2015
Middle East 2,609 7,210 10,604
United States 811 1,060 1,897
Other 525 420 1,091
----------------- ----------------- ---------------
Total 3,945 8,690 13,592
================= ================= ===============
Equipment leased to customers by geography is as follows:
Six months Six months Year ended
ended 30 June ended 30 June 31 December
(USD, in thousands) 2016 2015 2015
Middle East 6,391 6,589 6,301
United States 2,118 1,610 1,813
Other 375 349 496
----------------- ----------------- ---------------
Total 8,884 8,548 8,610
================= ================= ===============
15. Concentrations
At 30 June 2016, two customers, one with three contracts with
three separate plants represented 78 percent of accounts
receivable. During the six months ended 30 June 2016, the Company
received 62 percent of its gross revenue from one customer with
three contracts with three separate plants.
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 30 June 2015, two customers, one with three contracts with
three separate plants represented 81 percent of accounts
receivable. During the six months ended 30 June 2015, the Company
received 82 percent of its gross revenue from two customers, one
with four contracts 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 recognised in the financial statements if
the conditions existed at the date of the balance sheet, but are
not recognised if the conditions did not exist at the balance sheet
date. Management has evaluated subsequent events through 14
September 2016, the date the interim results were available to be
issued, and no events have occurred which require further
disclosure.
Forward Looking Statements
This release 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 announcement, 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 announcement, 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
IR EXLFFQKFLBBD
(END) Dow Jones Newswires
September 14, 2016 02:00 ET (06:00 GMT)
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