REG - MyCelx Tech. Corp. MyCelx Tech. Corp.. - Final Results <Origin Href="QuoteRef">MYXR.L</Origin> - Part 2
17/05/2016 07:07
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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 469 464
18,552,803 shares issued and outstanding at 31 December 2015 and 2014, respectively
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)
Common Stock Additional Paid-in Accumulated Deficit Stock Subscription Receivable Total
Capital
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
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 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 LiabilityUS$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 2015 US$000 31 December 2014 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 2015 US$000 31 December 2014 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 Useful lives 31 December 2015 US$000 31 December 2014 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 2015 US$000 31 December 2014 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 2015 US$000 31 December 2014 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 of Options Granted Grant Date Risk-Free Interest Rate Expected Volatility Exercise Fair
Term Price Value 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:
Stock Options Shares Weighted-Average Exercise Weighted-Average Remaining Contractual Term (in years) Average
Price Grant Date Fair 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
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