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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Elec Geo(DI) | LSE:EGI | London | Ordinary Share | COM STK USD0.001 (DI) |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 102.50 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMEGI
RNS Number : 7936C
Electrical Geodesics, Inc
20 April 2017
Electrical Geodesics, Inc.
Results for the year ended 31 December 2016
EUGENE, OREGON, USA, 20 April 2017 - Electrical Geodesics, Inc. ("EGI" or the "Company"), a leading neurodiagnostic medical technology company, today announces its audited results for the year ended 31 December 2016.
Financial Highlights
-- Revenues up 4.7% to $14.3m (2015: $13.6m)
o North American sales increased to $8.4m (2015: $7.7m)
o European sales increased to $2.9m (2015: $2.6m)
o Asian sales increased to $2.8m (2015: $2.6m)
-- Grant income increased by 33% to $2.0m (2015: $1.5m) -- Gross margin excluding sales of distributed products remained constant at 56% (2015: 56%)
o Aggregate gross margins decreased to 53% (2015: 55%)
-- Cost controls reduced operating expenses 4.5% to $10.2m (2015: $10.7m) -- Operating loss narrowed to $2.2m (2015: 2.8m)
-- Net loss after write-off of exceptional stock issuance costs and interest expense was $2.8m (2015: $2.8m)
-- Cash at year end $1.2m (2015: $1.2m) -- Borrowings on line of credit at year end $1.8m (2015: $0.2m) -- $1.0m subordinated, secured Promissory Note confirmed to the market on 6 March 2017
Operating Highlights
-- Significant product launches in the period driving both research and clinical sales:
o Research market launch of beta version of Geodesic Transcranial Electrical Neuromodulation system (GTEN)
o Research market launch of GeoSource 3 (GS3) a sophisticated electrical source imaging software with a broad range of advanced head modeling features
o Launch of Net Station 5.3 with added clinical features
-- Positive preliminary results from the first three patients treated in Phase 1 IDE safety and feasibility trial for suppressing focal epilepsy with GTEN being conducted at the University of Washington
-- Receipt of IDE from the FDA for the study of dense array EEG localization and rTMS treatment of focal epilepsy. The study is funded and administered by Stanford University Hospital
-- Issuance of a US patent for developing novel methods for using electrical impedance tomography for the purpose of targeting specific neural regions for neurostimulation
-- Issuance of a European patent that will provide a competitive advantage for multimodal neuroimaging products in clinical neuroscience applications in neurology, psychiatry and neurosurgery
-- Dense array EEG recognized as one of the 5 core technologies needed for a comprehensive epilepsy center in Europe in publication by 14 epilepsy key opinion leaders
-- American Clinical Neurophysiology Society ("ACNS") forms a working group headed by EGI customer Dr. Leo Bonilla (Medical University of South Carolina) to work on practice standards, reimbursement and training related to dense array EEG
Don Tucker, CEO of EGI, commented: "2016 saw many successes for EGI. After several years under development, our groundbreaking Geodesic Transcranial Electrical Neuromodulation (GTEN) system and GeoSource 3 were released to the research market. Additionally, our flagship software Net Station, delivered a feature rich update with the release of version 5.3. As separately announced, our clinical trials in support of developing a treatment for focal epilepsy are progressing well, with very early but promising results. Furthermore, the Company has been awarded two patents that are expected to provide important competitive advantages. I am very pleased to see EGI continue with its leadership position in human neuroscience technology." Dr. Tucker further stated "We are pleased to see the enhanced features of our new product releases is resulting in greater penetration into the clinical market".
For more information contact:
EGI Ann Bunnenberg +1 541 687 7962 Peel Hunt LLP (NOMAD and Broker) James Steel, Oliver +44 (0) 20 7418 Jackson 8900
Special Note Regarding Forward Looking Statements
All statements, other than statements of historical fact, are forward-looking, including, without limitation, statements regarding: future operating results; market conditions and opportunities; timing and amount of expected orders and shipments; growing interest in EGI's core products; impact of new product releases and clinical sites on sales; outcome of clinical trials and their ability to assess safety and feasibility; and the benefits of patent or other intellectual property. Words such as "believe," "anticipate," "expect," "estimate," "project," "will be," "will continue," "will likely result," or words or phrases of similar meanings identify forward-looking statements. Forward-looking statements reflect management's current expectations, plans or projections and are inherently uncertain and actual results could differ materially from such expectations, plans or projections. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release. Risks and uncertainties that could cause actual results to differ significantly from management's expectations include, but are not limited to, the following: EGI's limited financial and other resources; potential period-to-period revenue or expense fluctuations; production factors and timely access to raw materials; industry cost factors and conditions; competition; impacts of the repeal of the Affordable Care Act and new Presidential administration in the US; government regulation; labor disputes; technological changes; continued strengthening of the US Dollar against other world currencies; and other international business risks. Additional risks and uncertainties not presently known to EGI or which EGI currently deems immaterial also may impair its business or operations. EGI does not intend to release publicly any revisions to any forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Notes to Editors
Electrical Geodesics, Inc. in Summary
Founded in 1992, EGI designs, develops and commercialises a range of non-invasive neurodiagnostic and neuromodulation products used to monitor, interpret and modulate brain activity, based on its proprietary dense array electroencephalography ("dEEG") platform technology. The Company's technology uses up to 256 sensors, providing much higher resolution brain activity data compared to conventional 8 or 16 channel EEG and is used in medical, clinical and research settings in a diverse range of applications including important areas such as the diagnosis and monitoring of epilepsy, neurosurgical planning, sleep assessment, and many others.
EGI's dEEG systems, available in the GES 300 and now the GES 400 lines, capitalise on the Company's unique Hydrocel Geodesic Sensor Net which allows faster, easier, and more convenient placement of many EEG sensors in an even distribution over the entire scalp, providing more accurate and precise diagnosis and measurement. EGI's technology is now widely used in neuroscience research laboratories and is becoming more commonly used in clinics, care centers, and hospitals around the world. Data is measured and visualised using EGI's proprietary amplifier technology and software, providing a complete, advanced, high-resolution EEG platform. The Company's products are compatible with multiple diagnostic and imaging technologies, including magnetic resonance (MR) imaging, functional MRI (fMRI), and magneto-encephalography (MEG).
See our website www.egi.com
Glossary:
Hot Features
Premium
EEG Electroencephalography
Dense-array EEG
dEEG Geodesic transcranial electrical
GTEN neuromodulation
Geodesic Transcranial Electrical
GTEN Neuromodulation System
GS3 GeoSource 3
MRI Magnetic resonance imaging
fMRI Functional MRI
PET Positron emission tomography
MEG Magneto encephalography
NIRS Near-infra-red spectroscopy
Trans-cranial direct current
tDCS electrical stimulation
TES Trans-cranial electrical stimulation
TMS Trans-cranial magnetic stimulation
Repetitive Trans-cranial magnetic
rTMS stimulation
Operating Review
Our mission is to transform advances in neuroscience into efficient, cost--effective tools for the research and treatment of disease and the promotion of brain health to meet the increasing awareness of the need for better diagnostics and treatments.
Since joining AIM in April 2013, EGI has committed significant resources to the development of advanced dEEG and neuromodulation technology. We have an installed base of nearly 1,300 systems, installed in close to 900 laboratories throughout 52 countries. Our GES 400 system, supported by our Net Station software, represents breakthrough technology and can be found in many of the most prestigious research and clinical facilities around the world.
Revenues for the year ended 31 December 2016 were $14.3m, an increase of 4.7% over the $13.6m reported for 2015. In addition, we recognised grant income of some $2.0m for 2016 (2015: $1.5m).
Following a strong first half performance with revenues of $6.6m (a 27% increase on the prior year), second half revenues of $7.7m (a 10% decrease on the prior year) were unfavorably impacted by customer uncertainties arising from the US presidential election results which generated concerns that federally sponsored research funding could be adversely impacted. Despite these customer concerns and unfavorable currency headwinds the Company reported increased 2016 revenues in North America, Europe and Asia.
The Company's cash reserves as at 31 December 2016 were $1.2m ($1.1m at 30 June 2016). Outstanding borrowings under the Company's revolving credit facility as at 31 December 2016 were $1.8m ($1.0m at 30 June 2016). The Company recently entered into amendments to its revolving credit facility extending the maturity date by twelve months to June 2018 and increasing the credit line from $2.0m to $2.3m.
During the fourth quarter of 2015 and to a lesser extent the first quarter of 2016, the Company incurred and deferred $0.4m of legal, accounting and other costs that were in support of a planned US equity financing. Due to poor market conditions, this financing was terminated and in the second half of 2016 the Company expensed the deferred costs in their entirety.
The Directors have been carefully managing the Company's cash flows whilst also reviewing potential financing options to increase the working capital available which would also assist the Company in exploiting growth opportunities. In order to improve the Company's ability to manage cash requirements, EGI entered into a subordinated secured Promissory Note with the principal amount of $1,000,000, 12% interest, maturing one year from the date of issuance. Significant other terms of the promissory note are set out in the notes to the accompanying consolidated financial statements.
The following significant advancements were achieved during 2016:
Core Systems:
EGI achieved a critical milestone in June 2016 with the beta release to research customers of its GTEN product. The GTEN targeting software allows a user to compute the optimal patterns of electrical sources and sinks to stimulate a targeted area of the cortex. This information is then fed to the GTEN hardware within the GES 400 to deliver the treatment. A unique advantage of the GTEN targeting software is that the same Sensor Net used to record EEG can also be used to deliver the electrical stimulation allowing up to 256 electrodes to be used in multiple combinations to optimize the delivery of energy to the targeted location. The Directors believe the GTEN system could improve the treatment of a broad range of neurological diseases.
GeoSource 3 (GS3) software was introduced to the research community at the recent meeting of the Organization for Human Brain Mapping in Geneva. GS3 provides for three levels of precision in head modeling: individual head, conformal atlas head and 6 age-specific atlas head models. The advantage of having three head modeling options rather than the single atlas model provided by GS2 is that the user can balance the time and complexity of the model used to the nature of the work being performed. For simple diagnostic screening in epilepsy, especially where no MRI of the patient is available, a rapid easy--to--use atlas or conformal head model is ideal; for epilepsy neurosurgical planning, additional precision offered by the individual head model is preferred by neurologists and neurosurgeons. Later in 2017, the Company intends to seek FDA 510(k) approval of GS3 for clinical applications. GS2, the predecessor to GS3, is presently cleared by the FDA for clinical application and carries a medical CE mark.
GS3 is an imaging platform that allows brainwaves and other functional data to be displayed, analyzed and manipulated using high resolution individual MRI and atlas--based head models. When combined with the GTEN product, our GS3 platform provides the planning environment for our neuromodulation products.
EGI has also released to the market its next generation Net Station (NS) 5.3 software, which brings additional features and functionality to both research and clinical customers. A much awaited new feature of NS 5.3 is our Reciprocity Visualization Environment (RVE). RVE provides for visualization of acquisition data on a three dimensional head model. RVE also supports our new GS3 and GTEN software described above. NS 5.3 now provides enhanced workflow tools which enable the user to more easily manipulate their data. A variety of customer requested features have also been included in NS 5.3.
Clinical trials:
-- The small-scale clinical trial to assess safety and feasibility for dense array EEG localisation and GTEN treatment of focal epilepsy is progressing.
o At the US site, Harborview Hospital University of Washington (Seattle), 15 patients have been evaluated in the diagnostic phase and the first three patients have been treated in the intervention phase of the study.
The patients in this trial suffer from focal epilepsy (i.e. epilepsy associated with a specific region of the brain) that is not controlled by medication. The epileptic discharges reflect the abnormal activity of the brain that is often associated with generating seizures. Each of the three patients has demonstrated a statistically significant suppression of epileptic discharges immediately following treatment, where statistical significance is measured by the change in the epileptic discharge rate (before versus after treatment) across the five treatment days.
GTEN represents an advance in targeting brain regions for electrical neuromodulation with a dense electrode array (256 channels) distributed over the head surface, and with high performance computing applied to model the distribution of electrical current in each patient's head tissues. EGI's proprietary technology allows the use of the patient's dense array electroencephalography ("dEEG") to guide the targeting of the therapeutic pulses of electric current. GTEN is currently sold for research use only and will require clearance from a regulatory body such as the FDA in order to be sold for treatment of each specific disorder, including epilepsy.
o The diagnostic phase is now underway at our second clinical trial site, Huashan Hospital, Fudun University (Shanghai).
-- We received an Investigational Device Exemption (IDE) for the study of dense array EEG localisation and rTMS (repetitive Transcranial Magnetic Stimulation) treatment of focal epilepsy. The study is funded by and will take place at Stanford University Hospital and was scheduled to begin in January 2017.
Patent Portfolio:
-- The Company was issued a European patent on a novel invention for constraining dense array EEG source analysis with anatomical information from neural fiber tractography and, conversely, using the physiological covariance of dense array EEG sources to identify accurate fiber tract reconstruction. The US patent has been applied for and is under review. This invention is key to understanding the way in which the electrical activity in any one patient is linked to that patient's unique brain anatomy. It will provide a key competitive advantage for the Company's multimodal neuroimaging products in clinical neuroscience applications in neurology, psychiatry, and neurosurgery.
-- In May 2016, the Company was issued a US patent for developing novel methods for using electrical impedance tomography for the purpose of targeting specific neural regions for neurostimulation. Neural activity changes the impedance of the cortex, and this small effect may be discerned through convergence of impedance changes with dEEG source localization.
The Directors intend to develop further the value of the underlying monitoring, neurodiagnostic and pre-surgical planning business in clinical neurology and neurosurgery. In addition, the Directors are strongly focused on developing the significant potential of the GTEN platform, including assessing the potential benefits of strategic partnerships as a way to achieve this goal.
We believe that our dEEG technology provides a strong basis for EGI's continuing growth in the neuroscience research market and see significant growth opportunities in the clinical market, particularly in the diagnosis and treatment of epilepsy, and the use of our technology for therapeutic neuromodulation for which we intend to seek FDA approval. In the clinical market, our products offer ease of use, more precise data acquisition and visualization, and faster recording times than conventional EEG offerings. Our growth opportunity within the clinical market is "three dimensional," with the primary facets being: 1) deeper sales penetration of the market for epilepsy diagnosis and surgical planning where we have existing high profile customers, 2) the addition of newly--maturing clinical opportunities in areas such as autism, and 3) providing other companies with a platform technology on which they can build their own application--specific products and software.
In the longer term, we also intend to pursue neuromodulation opportunities that leverage our existing dEEG products for therapeutic uses with our GTEN product. This neuromodulation opportunity will build upon our existing GES, source imaging and Sensor Net technologies in order to target electrical stimulation to the brain and disrupt, reset or modify the brain's functioning. We released GTEN for non--therapeutic uses to our existing research market customers in 2016.
Growth Strategy
Our goal is to become a leading provider of dEEG solutions across both the research and clinical neurology market by capitalizing on our technology platform and continuing to develop, manufacture and commercialize novel diagnostic and interventional products. The key components of our growth strategy include:
-- Expand commercialization opportunities for our dEEG solutions in the clinical and neurosurgical markets. The clinical and neurosurgery markets represent an opportunity that we estimate is over ten times the size of our current core research market. In 2016, our sales to these non--research markets represented approximately 22% of our revenues. We believe our products offer potential diagnostic and clinical utility in multiple areas of neurology, including epilepsy, depression, autism, planning brain surgery, traumatic brain injury, schizophrenia, stroke, tinnitus and concussion. Compared to standard low--channel EEG products, which are already widely in use in clinical settings, we believe our products offer greater ease of use, more precise data acquisition and visualization, and faster recording times. Our strategy for growth in the clinical market includes capitalizing on the following opportunities:
-- Expand our market penetration in our existing vertical markets in epilepsy diagnosis and pre--surgical planning by enhancing our marketing and sales capabilities and continuing to expand our product offerings, particularly with respect to epilepsy monitoring units. We believe this expansion will allow us to grow our network of customers to include mid--market hospitals and neurology practices.
-- Adaptation of our products, through additional software offerings or specialized diagnostic add--ons, for specific new clinical opportunities within clinical neurology, neurosurgery, psychiatry and psychology, for indications such as autism, tinnitus and stroke rehabilitation.
-- Apply our technology to develop new products in therapeutic neuromodulation. We believe that our technology can be successfully adapted to offer clinicians the ability to perform therapeutic neuromodulation interventions to treat a variety of diseases such as epilepsy and depression. Our GTEN software, when integrated with our GES 400 system and a Sensor Net, will allow a user to accurately deliver electrical stimulation to targeted parts of the brain while at the same time recording EEG measurements. Our feasibility studies using GTEN for treatment of epilepsy are underway. Subject to funding, we intend to pursue further clinical trials using GTEN in the therapeutic treatment of epilepsy with the intention of seeking an FDA approval in due course.
We believe that GTEN may also offer potential utility in therapeutic treatment of other diseases, disorders and chronic conditions, such as depression, schizophrenia, tinnitus, chronic pain, Parkinson's disease, stroke, limb transplant, Alzheimer's disease, Attention Deficit Hyperactivity Disorder, insomnia, autism and migraine. We believe the most effective path toward adapting our products to treatment of these conditions is to continue our research and development efforts and to evaluate partnerships with other, larger companies pursuing neuromodulation treatments for these conditions.
-- Grow sales in our already established research market. Since inception we have primarily targeted our products toward the strategically important neuroscience research market. With further sales and marketing efforts, we believe we can continue to achieve solid and steady sales growth in this market. As we continue to grow our sales of GES 400 systems, we can expect to see corresponding growth in recurring sales of our Sensor Nets and other related peripheral products.
Financial Review
Consolidated Statements of Operations:
Revenues increased by 4.7% to $14.3m for the year ended 31 December 2016 compared to $13.6m in 2015. Revenues from sales in North America increased to $8.4m in 2016 from $7.7m in 2015, due in part to an increase in sales pursuant to a distribution agreement with Hitachi to market their NIRS line of products. Revenues in Europe and Asia were $2.9m and $2.8m, respectively, in 2016, compared to $2.6m each for 2015. Sales growth in both Europe and Asia was partly constrained in 2016 by the strengthening of the US dollar against the Euro and Chinese yuan, respectively. Historically, revenues from market regions other than North America, Europe and Asia have been sporadic. In 2016, revenues from other world markets decreased $0.6m primarily on unfavorable currency trends and unsettled economic conditions in countries, notably in South America.
Revenues by product type were as follows:
For the year ending 2016 2015
31 December,
$m $m
Systems & upgrades 6.4 7.8
Sensor Nets 3.3 2.2
Major peripherals 0.5 0.7
Software 1.3 1.4
Distributed products 1.5 0.3
Support and other 1.3 1.2
------ ------
14.3 13.6
------ ------
For the first half of 2016, total revenues were up 27% compared to 2015 and 2016 System & Upgrades revenues were consistent with the first half of 2015. In the second half of 2016 System and Upgrade revenues decreased substantially compared to the comparable period of 2015, resulting in lower than expected revenue growth for the year. System sales for the second half of 2016 appeared to be unfavorably impacted by customer uncertainties arising from the US presidential election results which generated concerns that federally sponsored research funding could be adversely impacted.
Revenue from the sale of Sensor Nets increased approximately 50% to $3.3 million in 2016 compared to $2.2 million in 2015. The 2016 increase in Sensor Net revenue was driven by a backlog of Sensor Net orders at 31 December 2015 and the steady increase in our installed systems base coupled with a wider variety of Sensor Nets including the Micronets. Under average conditions Sensor Nets have a useful life of approximately two to three years.
Sales of distributed third party products increased by $1.2 million to $1.5 million in 2016 from $0.3 million in 2015. EGI distributes a line of products which are complimentary to EGI's products, including the Hitachi NIRS systems. EGI's strategic market objective is to bundle our proprietary products with core third-party products to meet market needs.
Cost of revenues were $6.7m in 2016, compared to $6.1m in 2015, resulting in gross profits of $7.5m in each year. The gross margin was 52.9% in 2016 compared to 55.2% in 2015. The decrease in gross margin between the two periods was largely a factor of product mix, particularly the increase in distribution revenues, where the Company earns a smaller margin compared to margins on internally produced products.
EGI has been awarded research grants in support of various EEG--related projects and grant and contract revenue was recognized to the extent of $2.0m in 2016 and $1.5m in 2015. Direct grant related expenses totaled $1.5m in 2016 and $1.2m in 2015 including subcontractor costs of $0.6m in both 2016 and 2015.
Selling and marketing expense remained consistent at $4.0m for both 2016 and 2015, and as a percent of total revenue improved to 27.9% in 2016, compared to 29.1% in 2015. General and administrative expense decreased approximately $0.2m, or 4.5%, to $3.6m in 2016, from $3.8m in 2015. This decrease is primarily due to cost control measures implemented during the period. General and administrative expense as a percent of total revenue decreased to 25.1% in 2016, compared to 27.5% in 2015. Research and development expenses decreased approximately $0.3m, or 10.7%, to $2.6m in 2016, compared to $2.9m in 2015. The decrease was primarily due to allocation in 2016 of resources to grant related activities due to higher grant activity. Research and development expense as a percent of total revenue decreased to 18.4% in 2016, compared to 21.6% in 2015.
During the fourth quarter of 2015 and to a lesser extent the first quarter of 2016, the Company incurred and deferred $0.4m of legal, accounting and other costs that were in support of a planned financing. Due to poor market conditions, this particular financing was terminated and in the second half of 2016 the Company expensed the deferred offering costs in their entirety. The loss on write-off of stock issuance costs is reported as an "other expense" in the accompanying Consolidated Statements of Operations.
Overall the business generated a net loss of $2.8m, or $0.10 per share, on both a basic and fully diluted basis, for both 2016 and 2015.
Balance Sheet:
Working capital decreased $2.6m to $0.3m, at 31 December 2016, from $2.9m at 31 December 2015.
The decrease in working capital for the period was the result of the Company's 2016 net loss of $2.8m. In order to maintain adequate liquidity, the 2016 net loss was supported by a net increase in short term financing of $1.6m and an increase in accounts payable and accrued expenses of $0.8m.
In June 2016, the Company discontinued utilizing its accounts receivable factoring agreement and entered into a revolving credit facility. Outstanding borrowings under the Company's $2.0m revolving credit facility as of 31 December 2016 were $1.8m. EGI has recently entered into an amendment to the credit facility increasing the maximum borrowing amount to $2.3m and extending the maturity date of the credit facility from June 2017 to June 2018. The credit facility bears interest at the prime rate plus 6.0%, with a minimum rate of 9.5%. The present borrowing rate is 9.75%. Generally, availability under the credit facility is the sum of 85% of eligible accounts receivable plus a portion secured by inventory which is calculated as 15% of eligible accounts receivable, or $0.2m, whichever is less.
In the year ended 31 December 2016 capital expenditure was $0.5m and depreciation for the year was $0.6m resulting in a net decrease in property and equipment between the two periods of $0.1m.
Our fundraising in March 2015 resulted in the receipt of $2.9m with expenses of $0.4m and the issue of 3,076,923 new shares of common stock at GBP0.65, increasing the number of shares in issue to 27,525,709.
On 6 March 2017 the Company confirmed it had entered into a subordinated secured Promissory Note with the principal amount of $1.0 million, 12% interest, maturing one year from the date of issuance. Additional terms of the Promissory Note are as follows:
-- A minimum of one-year's interest will be due if EGI prepays prior to the maturity date; change of control would trigger a premium of $250,000 to be paid.
-- Assuming no earlier pre-payment, upon maturity at the end of February 2018, EGI will issue the note-holder warrants to purchase 867,152 shares of EGI's common stock at an exercise price in US dollars of $1.15 (calculated at the exchange rate prevailing at maturity and representing a premium of 20% over the US dollar-equivalent of the last reported sale price of EGI shares on AIM on 28 February 2017). If not exercised, the warrants will terminate five years from issuance.
-- The promissory note is secured by a subordinated security interest in the assets of the Company.
Placement fees and related expenses amounted to approximately $100,000.
The Company anticipates it may require further debt or equity financing during 2017 to optimize business performance.
Effective 17 March 2017 the majority of the Company's senior executives entered into unsecured Promissory Notes in recognition of past and future salary deferrals of 25% of their base salary. As at 17 March 2017 the amount outstanding under the officer notes is $0.1m. The notes bear interest at 12% pa and mature upon the earlier of a change in control of the Company or 31 March 2018.
Key Performance Indicators Outlook & Strategic Goals
The Board set a number of key performance indicators (KPIs) and targets for the business in 2016.
Sales growth achieved for 2016 of 4.7% was lower than the target established by the Board of low double digits. The first half of 2016 saw growth in revenues of 27%, followed by the second half where revenues declined 10%. System sales for the second half of 2016 appeared to be unfavorably impacted by customer uncertainties arising from the US presidential election results which generated concerns that federally sponsored research funding could be adversely impacted.
A gradual improvement in gross margins was targeted for 2016. Gross margins exclusive of distribution revenues remained constant between 2016 and 2015 at 56%. The Board believes that increased sales of higher-margin software and other products and efficiencies of scale will lead to gross margin percentages being maintained and gradually increased, although the overall goal is to target increases in gross profits through revenue growth and cost management. The release of GTEN and Geosource 3 increases the software component of the Company's revenue base. As such, these new products are expected to favorably impact future margins.
The target of controlling costs was strongly met; with operating expenses for 2016 some 4.5% lower than those for 2015. Cost controls will be maintained for 2017, balanced against increased revenues. However, some increases may be necessary in order to deliver the planned increase in sales and customer base.
Key performance indicators for 2017 include a target of single-digit sales growth with increased sales to the research market supported by additional sales of GTEN, and increased sales to the clinical market supported by both new and enhanced products. The Company expects the pattern of revenues being materially second half weighted to be a feature of the current financial year. Current expectations are for operating expenses to remain tightly controlled with any significant increases being in support of increased sales.
Product development goals for 2017 include:
-- Expansion of the GTEN product line to include lower channel count systems -- Receipt of FDA clinical clearance for GeoSource 3 -- Receipt of China FDA clinical clearance for the GES 400 -- Release Net Station 5.5 including spike detection capabilities
Progress the establishment of GTEN as a leading tool for neuromodulation:
-- Continue clinical trial for GTEN treatment of epilepsy at Harborview Hospital in Seattle -- Continue supporting similar clinical trial at Huashan Hospital in Shanghai -- Evaluate GTENs ability to enhance slow wave sleep
The Directors intend to develop the value of the underlying diagnostic and monitoring business and to deliver and retain value in GTEN, bringing the feasibility study to completion during 2017 whilst assessing options to develop the product fully, including assessing relevant grant funding and strategic partnerships.
EGI's strategic goals for the near to mid-term are as follows:
-- to maintain EGI's position as the leading provider of EEG solutions and tools to the neuroscience research community;
-- to provide clinical customers with a full range of compatible, upgradeable solutions for their EEG imaging and neuromodulation needs and build market share;
-- to establish EGI's technology as the leading solution for targeting and imaging brain activity to map and guide brain surgery in epilepsy and general neurosurgery using dEEG and GTEN;
-- to establish GTEN as a leading neuromodulation tool in research and deliver effective, targeted non-invasive neuromodulation in epilepsy to build clinical utility;
-- to improve market share through OEM services, strengthening of sales channels, strategic alliances, continued product improvement and innovation.
ELECTRICAL GEODESICS, INC.
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31,
--- ---------------------------------------------------------------------------------------
2016 2015
--- ------------------------------------------ ---------------------------------------
ASSETS
Current assets:
Cash and cash
equivalents $ 1,189 $ 1,181
Trade accounts
receivable, net
of allowance for
doubtful accounts
of $14 for both 2016 and
2015 3,279 3,271
Grants and contracts
receivable 157 323
Inventories 2,027 1,993
Prepaid expenses and
other assets 362 361
Deferred stock issuance
costs - 368
Total current assets 7,014 7,497
Property and equipment,
net 1,543 1,642
Goodwill 210 210
Other intangible assets,
net 53 67
Total assets $ 8,820 $ 9,416
=== ========================================== =======================================
LIABILITIES
Current liabilities:
Accounts payable and
accrued
expenses $ 2,346 $ 1,554
Line of credit 1,777 -
Recourse debt on
factoring agreement - 216
Accrued payroll and
related
liabilities 1,121 941
Product warranty reserve 117 136
Customer deposits 162 224
Deferred revenue 1,145 1,512
Total current
liabilities 6,668 4,583
Deferred revenue -
noncurrent 300 423
Total liabilities 6,968 5,006
COMMITMENTS AND
CONTINGENCIES
(SEE NOTE 10)
STOCKHOLDERS' EQUITY
Common Stock - $0.001 par
value,
75,000,000 shares
authorized,
27,525,709 shares issued
and
outstanding at December
31,
2016 and 2015 27 27
Additional paid--in
capital 13,275 13,069
Accumulated deficit (11,450) (8,686)
Total stockholders'
equity 1,852 4,410
Total
liabilities
and
stockholders'
equity $ 8,820 $ 9,416
=== ========================================== =======================================
See accompanying notes to consolidated financial statements.
ELECTRICAL GEODESICS, INC.
Consolidated Statements of Operations
(In thousands, except share and per share amounts)
For the years ended
December 31,
----------------------------------------------------------------------------------
2016 2015
--- ------------------------------------ -----------------------------------
Revenues $ 14,259 $ 13,619
Cost of revenues 6,720 6,105
Gross margin 7,539 7,514
Grant and contract revenues 1,994 1,497
Less direct grant and contract
expenses 1,522 1,162
8,011 7,849
Operating expenses:
Selling and marketing expenses 3,975 3,966
General and administrative
expenses 3,582 3,750
Research and development 2,628 2,944
Total operating expenses 10,185 10,660
Operating loss (2,174) (2,811)
Other income (expense):
Interest expense, including
factoring fees (120) (11)
Loss on write-off of
stock
issuance costs (437) -
Other Income, net 1 69
Other income (expense),
net (556) 58
Loss before income taxes (2,730) (2,753)
Income tax expense (benefit) 34 9
Net loss $ (2,764) $ (2,762)
Basic and diluted weighted--average
number of common shares outstanding 27,525,709 26,918,754
Net loss per share:
Basic and diluted $ (0.10) $ (0.10)
See accompanying notes to consolidated financial statements.
ELECTRICAL GEODESICS, INC.
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 2016 and 2015
(In thousands, except share amounts)
Common Stock
-------------------------------------------
Additional Total
Paid--In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
-------------- --------------------------- --------------------------------------- --------------------------------------- -------------------------------------
Balance at
December
31, 2014 24,448,786 $ 24 $ 10,323 $ (5,924) $ 4,423
Stock issued
for
cash, net of
issuance
costs of
$440 3,076,923 3 2,509 - 2,512
Share--based
compensation - - 237 - 237
Net loss - - - (2,762) (2,762)
Balance at
December
31, 2015 27,525,709 27 13,069 (8,686) 4,410
Share--based
compensation - - 206 - 206
Net loss - - - (2,764) (2,764)
Balance at
December
31, 2016 27,525,709 $ 27 $ 13,275 $ (11,450) $ 1,852
See accompanying notes to consolidated financial statements.
ELECTRICAL GEODESICS, INC.
Consolidated Statements of Cash Flows
(In thousands)
For the Years ended
December 31,
-------------------------------------------------------------------
2016 2015
------------------------------ ----------------------------------
Cash flows from operating activities:
Net loss $ (2,764) $ (2,762)
Adjustments to reconcile net
loss to net cash used in operating
activities:
Depreciation and amortization 582 546
Share--based compensation 206 237
Loss on write-off of stock
issuance costs 437
Changes in operating assets
and liabilities:
Trade accounts receivable (8) (386)
Grants and contracts receivable 166 (216)
Inventories (34) (342)
Prepaid expenses and other assets (1) (8)
Accounts payable and accrued
expenses 913 376
Accrued payroll and related
liabilities 180 (45)
Product warranty reserve (19) (26)
Customer deposits (62) 64
Deferred revenue (490) 299
Net cash used in operating activities (894) (2,263)
Cash flows from investing activities:
Acquisition of property and
equipment (469) (342)
Net cash used in investing activities (469) (342)
Cash flows from financing activities:
Proceeds from stock issued - 2,952
Stock issuance costs (190) (571)
Net proceeds from line of credit 1,777 -
Net Proceeds (repayments) from
factoring agreement (216) 216
Principal payments on debt - (43)
Net cash provided by financing
activities 1,371 2,554
Net increase (decrease) in cash 8 (51)
Cash and cash equivalents at
beginning of year 1,181 1,232
Cash and cash equivalents at
end of year $ 1,189 $ 1,181
Non-Cash Financing Activities
Accrued deferred stock issuance
costs $ - $ 121
Supplemental disclosure of cash
flow information:
Cash paid during the year for
interest and factoring fees $ 120 $ 11
Income taxes paid $ 40 $ 9
See accompanying notes to consolidated financial statements.
ELECTRICAL GEODESICS, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(in thousands except share and per share amounts)
Note 1 -- Nature of Business
Electrical Geodesics, Inc., a Delaware corporation, is a developer and manufacturer of hardware and software for dense sensor array methods of human electroencephalographic and event--related research. Revenues are derived from sales of neuroimaging/neuro--monitoring equipment and evaluative software to research and clinical organizations worldwide and from Small Business Innovation Research (SBIR) grants, and grants or grant sub--contracts from various federal agencies. In January 2005, the Company established Geomedica, Inc., an Oregon corporation, and it is a wholly owned subsidiary of EGI. In January 2006, Cerebral Data Systems, Inc., an Oregon corporation ("CDS"), was formed and it is a 93% owned subsidiary of EGI. Geomedica, Inc. and CDS are currently dormant. On September 30, 2013, EGI acquired 100% of the shares of Avatar EEG Solutions Incorporated, a Canadian corporation ("Avatar"), and it remains a wholly-owned subsidiary of EGI. In November 2016, EGI established a fully owned subsidiary, EGI Medical & Scientific (Shanghai) Ltd., a sales and service center located in Shanghai, China.
Note 2 -- Summary of significant accounting policies
Accounting principles. The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP).
Principles of consolidation. The accompanying consolidated financial statements include the accounts of Electrical Geodesics, Inc., Geomedica, Inc., CDS, EGI Medical and Scientific and Avatar (collectively, "EGI" or the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation.
Use of estimates. The preparation of the consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include allowances for potentially uncollectible accounts receivable, valuation of inventory, intangible assets, goodwill, share-based compensation, deferred income taxes, reserve for warranty obligations and the provision for income taxes among others. Actual results could differ from those estimates.
Cash and cash equivalents. Cash and cash equivalents are comprised of cash in banks, certificates of deposits, and money market funds. EGI considers deposits that can be redeemed on demand and investments that have original maturities of less than three months, when purchased, to be cash equivalents. At times, EGI's cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation.
Fair value of financial instruments. The carrying amounts of financial instruments, including cash and cash equivalents, line of credit and recourse debt on factoring agreement, approximate fair value due to the short maturity of these instruments and if recalculated based on current rates.
Receivables. The majority of EGI's trade accounts receivable arise from sales to universities, research hospitals and other clinical institutions. Credit is extended based on evaluation of a customer's financial condition and, generally, collateral is not required. Trade accounts receivable are due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts, if any. Accounts outstanding longer than the contractual payment terms are considered past due. EGI determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history, the customer's current ability to pay its obligations, and the condition of the general economy and the industry as a whole. EGI's grants and contracts are receivable from the U.S. government and are considered to be fully collectible.
Concentration of credit risk. Financial instruments that potentially subject EGI to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. EGI places its cash and cash equivalents with high quality financial institutions and limits the amount of credit exposure with any one institution. Concentrations of credit risk with respect to accounts receivable are limited because a large number of geographically diverse customers make up EGI's customer base, thus spreading the trade credit risk. At December 31, 2016 two customers each had an accounts receivable balance of 11% of total accounts receivable. At December 31, 2015 one customer had an accounts receivable balance of 12% of total accounts receivable. EGI controls credit risk through credit approvals, credit limits, and monitoring procedures. EGI performs credit evaluations of its commercial customers but generally does not require collateral to support accounts receivable.
Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method for all inventories of the Company. EGI regularly evaluates the technological usefulness and anticipated future demand for various inventory components and the expected use of the inventory. When EGI determines it is not likely the cost of inventory items will be recovered through future sales, EGI writes-down the related inventory to net realizable salvage value.
Property and equipment. Property and equipment is recorded at cost and depreciated over the estimated useful lives (generally three to seven years) of the assets, using the straight--line method. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter. Repairs and maintenance are charged to expense as incurred.
EGI reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on this assessment there was no impairment at December 31, 2016 or 2015.
Goodwill and other intangible assets. Goodwill is not amortized, but is tested annually for impairment. An impairment charge is recognized if the carrying amount of a reporting unit exceeds its fair value and the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill. The cost of other intangible assets is amortized on a straight--line basis over the asset's estimated useful life.
Product warranty reserve. EGI offers warranties of various lengths to its customers depending on the specific product and terms of the customer purchase agreement. The average length of the warranty period is 12 months. EGI's warranties require it to repair or replace defective products during the warranty period at no cost to the customer. At the time product revenue is recognized, EGI records a liability for estimated costs that may be incurred under its warranties. The costs are estimated based on historical experience and any specific warranty issues that have been identified. Although historical warranty costs have been within expectations, there can be no assurance that future warranty costs will not exceed historical amounts. EGI periodically assesses the adequacy of its recorded warranty liability and adjusts the balance as necessary.
Share--based compensation. EGI measures compensation cost for share--based payment awards at fair value and recognizes it as compensation expense over the service period for awards expected to vest. Share--based compensation expense is recognized for all share--based payment awards, net of an estimated forfeiture rate. Compensation cost is only recognized for those share--based payment awards expected to vest on a straight--line basis over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of share--based payment awards requires subjective assumptions, including the expected life of the share--based payment awards and stock price volatility. EGI utilizes the Black--Scholes options pricing model to value the stock options granted under its options plans. In this model, the assumptions utilized relate to stock price volatility, stock option term and forfeiture rates that are based upon both historical factors as well as management's judgment. Stock options awarded to EGI's employees have an exercise price denominated in British Pounds Sterling (GBP), which is the currency of the AIM, a small company exchange operated by the London Stock Exchange, the market in which a substantial portion of EGI's securities trade.
Deferred stock issuance costs. Costs incurred to underwriters, legal counsel, printers and advisors, and other costs directly attributable to an identifiable offering of securities are deferred until charged against the gross proceeds of the offering. If an offering is terminated prior to funding, any related deferred costs are immediately expensed. During the fourth quarter of 2015 and to a lesser extent the first quarter of 2016, the Company incurred and deferred $437 of stock issuance costs that were in support of a planned financing. Due to poor market conditions, this particular financing was terminated and the Company expensed the entirety of the deferred stock issuance costs in 2016, reporting the adjustment as other expense in the Consolidated Statement of Operations.
Income taxes. EGI is treated as a C--corporation for purposes of filing its federal income tax return. Income taxes consist of taxes currently due or refundable plus deferred taxes arising from the timing differences between financial and income tax reporting. EGI recognizes deferred tax liabilities and assets for expected future income tax consequences of events that have been recognized in EGI's financial statements which will either be taxable or deductible when the assets and liabilities are recovered or settled and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. EGI is subject to taxation in various jurisdictions. EGI continues to remain subject to examination by various state and U.S. federal authorities for years 2013 through 2016.
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and operating loss and tax credit carryforwards and are measured using the enacted tax rates and laws that will be in effect when the differences and carryforwards are expected to be recovered or settled. A valuation allowance for deferred tax assets is provided when we estimate that it is more likely than not that all or a portion of the deferred tax assets may not be realized through future operations. This assessment is based upon consideration of available positive and negative evidence, which includes, among other things, our recent results of operations and expected future profitability. EGI considers its actual historical results over several years to have stronger weight than other more subjective indicators, including forecasts, when considering whether to establish or reduce a valuation allowance on deferred tax assets.
EGI continues to provide a full valuation allowance against its deferred tax assets as the realization of such assets is not considered to be more likely than not at this time. If EGI's conclusion about the realization of its deferred tax assets and therefore the appropriateness of the valuation allowance changes in a future period, EGI could record a substantial tax provision or benefit in its Consolidated Statements of Operations when that occurs.
EGI recognizes the income tax benefit from a tax position only if it is more likely than not that the tax position will be sustained on examination by the applicable taxing authorities, based on the technical merits of EGI's position. The tax benefit recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
Estimated interest and penalties are recorded as a component of interest expense and other expense, respectively. EGI has reviewed potential tax uncertainties and determined that the exposure to those uncertainties did not have a material impact on EGI's results of operations or financial condition as of December 31, 2016 or 2015.
Revenue recognition. Revenues from product sales are recognized in the period the product is shipped, title passes to the customer and all obligations have been met or are deemed inconsequential, the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. The product includes both hardware and software to operate the equipment. Shipping and handling charges to customers are included in revenues. Shipping and handling costs incurred by EGI are included in cost of revenues.
EGI enters into multiple--deliverable arrangements that include a medical device, with embedded diagnostic software, and one or two year(s) of post--contract customer support (PCS). The diagnostic software and hardware function together to provide the device's essential functionality. Arrangements generally do not include any performance, cancellation, termination, or refund provisions. Devices are generally delivered to customers together with PCS provided over a one--year or two--year service period. The medical device, including the diagnostic software, is considered a single unit of accounting and PCS is the second unit of accounting. Arrangement consideration allocated to the device is recognized as revenue upon shipment or delivery when title and risk of loss passes to the customer. Consideration allocated to PCS is recognized as revenue ratably over the agreed service period.
Consideration is allocated to the deliverables at inception of an arrangement using the relative selling price method. Selling price is determined based on a selling price hierarchy. EGI has not established vendor specific objective evidence of fair value (VSOE) nor is it able to obtain sufficient third--party evidence of selling price for any of its devices or related PCS. As a result, selling price for the devices and PCS is determined using management's best estimate of selling price.
EGI determines its best estimate of selling price through a weighting of several factors including market competition, manufacturing costs, and gross profit margin objectives, and level of technical complexity of the product. The gross profit margin is initially obtained from an average of historic sales of arrangements with bundled elements, segregated by device model and geographic area. EGI considers several other factors in adjusting the profit margin, including the device's enhanced technological features as compared to its competitor's products, the expected remaining life of the device and customer demand. Selling price for PCS is determined using a similar cost plus margin approach. EGI considers its employee staffing costs required to provide support for its devices, research, and development costs related to upgrades for the diagnostic software while considering other inputs such as PCS renewal rates for similar services.
Revenues from sales of standalone items of hardware and software where there are no further performance obligations on the Company are recognized when shipped or delivered when title and risk of loss passes to the customer.
Grant and contract revenues are recognized as qualified expenses are incurred. Unreimbursed expenses are recognized as grants and contracts receivables at year end. Receipts in excess of qualified expenses, if any, are deferred until earned.
Research and development. All research and development expenditures are expensed as incurred. Research and development costs include costs of all basic research activities as well as other research, engineering, and technical effort required to develop a new product or service or make significant improvement to an existing product or manufacturing process. However, the costs incurred for the development of computer software that will be sold, leased, or otherwise marketed are capitalized when technological feasibility has been established. Once technological feasibility is established, all software costs are capitalized until the product is available for release to customers. Judgment is required in determining when technological feasibility of a product is established. To date, management has determined that technological feasibility of software products is reached shortly before the products are released. Costs incurred after establishment of technological feasibility have not been material, and therefore, management has expensed all research and development costs as incurred.
Advertising. All advertising costs are expensed as incurred. Advertising expense totaled $19 and $12 in 2016 and 2015, respectively.
Taxes collected from customers and remitted to governmental authorities -- net basis. EGI's policy is to present taxes collected from customers and remitted to governmental authorities on a net basis. EGI records the amounts collected as a current liability and relieves such liability upon remittance to the taxing authority without impacting revenues or expenses.
Foreign currency transaction. EGI uses the U.S. dollar as its functional and reporting currency. Wherever possible, EGI transacts in U.S. dollars although a small number of sales are denominated in foreign currency. EGI minimizes foreign currency risk by requiring its overseas customers to adhere to strict payment terms or to operate through letters of credit.
Net loss per share. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding during the period, calculated using the treasury stock method. Common stock equivalents (common stock options only) are not used to calculate diluted loss per share because their effect would be anti-dilutive.
Subsequent Events. Management of EGI has evaluated subsequent events through the date these financial statements were available to be issued, which was April 10, 2017.
Pending Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (FASB) issued changes to accounting standards to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill, which is currently required if a reporting unit with goodwill fails a Step 1 test comparing the fair value of the reporting unit to its' carrying value including goodwill. Under this new guidance, an entity should perform its annual, or interim, goodwill impairment test using just the Step 1 test of comparing the fair value of a reporting unit with its carrying amount. Any goodwill impairment, representing the amount by which the carrying amount exceeds the reporting unit's fair value, is determined using this Step 1 test. Any goodwill impairment loss recognized would not exceed the total carrying amount of goodwill allocated to that reporting unit. This new guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company will early adopt this new guidance in 2017 and does not anticipate that it will have a material impact on its consolidated financial statements.
In March 2016, the FASB issued new guidance to simplify employee share-based payment accounting. The areas for simplification in this guidance involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This new guidance is effective for the Company's 2017 year with early adoption permitted. The Company is currently evaluating the possible impact of this new guidance, but does not anticipate that it will have a material impact on its consolidated financial statements.
In February 2016, the FASB issued new guidance on the accounting for leases. This new guidance will require that a lessee recognize assets and liabilities on the balance sheet for all leases with a lease term of more than twelve months, with the result being the recognition of a right of use asset and a lease liability. The new lease accounting requirements are effective for the Company's 2019 year with a modified retrospective transition approach required, with early adoption permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In July 2015, the FASB issued changes to simplify the measurement of inventory valuation at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The new inventory measurement requirements are effective for the Company's 2017 year, and will replace the current inventory valuation guidance that requires the use of a lower of cost or market framework. The adoption of these changes is not expected to have a material impact on the Company's consolidated financial statements.
In May 2014, the FASB issued changes to revenue recognition with customers. This update provides a five-step analysis of transactions to determine when and how revenue is recognized. An entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB approved a one-year deferral of the effective date of this new guidance resulting in it now being effective for the Company beginning in 2018. The Company plans to adopt this accounting standard update using the modified retrospective method, with the cumulative effect of initially applying this update recognized in the first reporting period of 2018. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
Note 3 -- Inventories
Inventories consist of the following:
December 31
2016 2015
---------------------------------------- -----------------------------------------
Materials $ 1,840 $ 1,899
Work in process 3 7
Finished products and
merchandise 184 87
Total inventories $ 2,027 $ 1,993
Note 4 -- Property and equipment
Property and equipment consist of the following:
December 31
---------------------------------------------------------------------------
2016 2015
------------------------------------
Furniture and fixtures $ 158 $ 147
Leasehold improvements 309 308
Computer software 245 214
Demonstration and loaned
equipment 1,758 1,124
Equipment 2,222 2,430
Total property and equipment 4,692 4,223
Accumulated depreciation (3,149) (2,581)
Property and equipment,
net of accumulated
depreciation $ 1,543 $ 1,642
Note 5 -- Other intangible assets
Other intangible assets subject to amortization consist of the following:
December 31
--------------------------------------------------
2016 2015
------------------------------------- -----------
Patents $ 110 $ 110
Less accumulated amortization (56) (43)
Other intangible assets,
net $ 53 $ 67
Amortization expense for the years ended December 31, 2016 and 2015 was $14 and $15, respectively. Estimated annual amortization expense for intangible assets approximates $14 for each of the next four years.
Note 6 - Line of Credit
In June 2016, EGI entered into a credit facility with a finance company. The facility provides for borrowings of up to $2.3 million or the maximum available under the borrowing base, whichever is less. The borrowing base equals the sum of 85% of the value of eligible accounts receivable plus $0.2 million of eligible inventory limited to 15% of eligible accounts receivable. Interest is payable at the prime rate plus 6%, but not less than 9.5%. The prime rate at December 31, 2016 was 3.75%. The annual fee for the credit facility is $23. The facility contains no financial covenants and is collateralized by cash, cash equivalents, accounts receivable, inventories and property and equipment. In January 2017, the credit facility was amended to increase the amount of the credit line from $2.0 million to $2.3 million and also to extend the maturity date from June 2017 to June 2018. As of December 31, 2016, there was $1.8 million outstanding under the facility and approximately $0.5 million in availability.
Note 7 - Recourse debt on factoring agreement
In September 2015, EGI entered into a factoring agreement for up to $1 million of qualifying receivables, with recourse to the lender. EGI received 98.05% of the face value of such customer invoices and paid interest of 4% per year on invoice balances that exceed 90 days from the invoice date. Under the agreement, EGI provided a security interest in accounts receivable, inventory and, property and equipment of EGI. Factoring fees and, if applicable, any interest expense, are reported as interest expense in the Consolidated Statements of Operations. Upon the commencement of the Company's line of credit in June 2016, all amounts due under the factoring agreement were paid and the lender removed their filed security interests in the assets of the Company. As of December 31, 2015, there was $216 in borrowings outstanding under the agreement. There is no balance outstanding at December 31, 2016.
Note 8 - Subsequent Events - Notes Payable
On February 28, 2017, the Company entered into a subordinated secured Promissory Note with the principal amount of $1,000,000, 12% interest, maturing one year from the date of issuance. Additional terms of the Promissory Note are as follows:
-- A minimum of one-year's interest will be due to the Holder if EGI prepays prior to the maturity date; change of control would trigger a premium to be paid to the Holder of $250,000.
-- Assuming no earlier pre-payment, upon maturity on February 28, 2018, EGI will issue the note-holder warrants to purchase 867,152 shares of EGI's common stock at an exercise price in US dollars of $1.15 (calculated at the exchange rate prevailing at maturity and representing a premium of 20% over the US dollar-equivalent of the last reported sale price of EGI shares on AIM on February 28, 2017). If not exercised, the warrants will terminate five years from issuance.
-- The promissory note is secured by a subordinated security interest in the assets of the Company.
Placement fees and related expenses amounted to approximately $100,000.
Effective March 17, 2017 substantially all of the Company's senior executives have entered into unsecured Promissory Notes in recognition of past and future salary deferrals of 25% of their base salary. The initial principal amount outstanding under the notes is $118. The notes are at 12% interest and mature upon the earlier of a change in control of the Company or March 31, 2018. As of December 31, 2016, deferred officer salaries and director fees of $270 were reported in accrued payroll and related liabilities in the accompany Consolidated Balance Sheets.
Note 9 -- Product warranty reserve
Changes in EGI's product warranty liability are as follows:
December 31
-----------------------
2016 2015
--- ------ ------
Balance at beginning of year $ 136 $ 163
Warranty expense 158 113
Settlements of warranty claims (177) (140)
------ ------
Balance at end of period $ 117 $ 136
====== ======
Note 10 -- Commitments and contingencies
Operating lease commitments. EGI has entered into operating leases for office and warehouse space. Total rent expense under these leases amounted to $529 for both of the years ended December 31, 2016 and 2015. The aggregate minimum future lease payments under all of these operating leases are as follows:
Year ending December 31, Amount
--------------
2017 $ 540
2018 506
--------------
$ 1,046
==============
Litigation or contingencies. From time to time, EGI is subject to various legal proceedings that arise in the ordinary course of business, none of which are currently material to the Company's business.
Grant revenue. Under the terms and conditions of the grants with the U.S. government, the granting agency may elect to audit the grant expenses reported by EGI. An adjustment as a result of an audit, if any, could result in a liability to EGI.
Note 11 -- Income taxes
2016 2015
------------------------- --------------
Current:
Federal $ - $ -
State and local 34 9
Total current provision 34 9
Deferred provision - -
Income tax provision $ 34 $ 9
The income tax provision is comprised of the following for the years ended December 31:
The provision for income taxes for the years ended December 31, 2016 and 2015 differs from the amount obtained by applying the U.S. Federal statutory income tax rate to pretax income due to the following:
2016 2015
-------------------------------------- --------------------------------------
Tax on book income at federal
statutory rate, net of state
tax benefit $ (938) $ (936)
State income tax (104) (117)
Nondeductible expenses 35 36
Current year federal research
credit (210) (161)
Current year state research
credit (69) (50)
Differences in actual graduated
tax rates vs. flat deferred
tax rates 94 (205)
Change in valuation allowance
for deferred tax assets 1,226 1,442
Total provision
benefit for
income taxes $ 34 $ 9
The components of deferred tax assets at December 31 are as follows:
2016 2015
---------------------------------------- ----------------------------------------
Current:
Assets:
Net vacation, commissions,
and
stockholder accrual
adjustments $ 60 $ 60
Warranty reserve 46 53
Bad debt reserve 5 5
263A Inventory
capitalization
adjustments 33 31
Deferred revenue adjustments 117 163
Stock option compensation
adjustments 250 170
Less valuation allowance (511) (482)
Net current $ - $ -
deferred tax
asset
Noncurrent:
Assets/Liabilities:
Research credit
carryforwards $ 1,287 $ 1,009
Net operating loss
carryforwards 4,652 3,815
Charitable contribution
carryforwards 17 16
Excess tax over book
depreciation 73 (8)
Less valuation allowance (6,029) (4,832)
Net noncurrent $ - $ -
deferred tax
asset
EGI's federal and Oregon research credit carry forwards as of December 31, 2016 are approximately $963 and $324 respectively. The federal research credit carry forwards expire in varying amounts through 2036. The Oregon carry forwards expire in varying amounts through 2021. EGI's federal and Oregon net operating loss carry forwards as of December 31, 2016 are approximately $11,600 and $10,000. The federal net operating loss carry forward expires in varying amounts in 2033 through 2036. The Oregon net operating loss carry forwards expire in varying amounts in 2027 through 2031. Realization of the benefit of tax losses is dependent on generating sufficient taxable income prior to expiration of the credit carry forwards.
Note 12 -- 401 (k) savings plan
EGI has adopted a 401 (k) savings plan for all eligible employees. All employees are eligible to participate in the plan after reaching age 18 and completing six months of service. Employees may defer compensation up to the limits prescribed by the Internal Revenue Code. The plan provides a discretionary employer matching contribution and a discretionary employer profit sharing contribution. Effective January 1, 2013, EGI amended the plan to include safe harbor provisions. EGI makes safe harbor matching contributions of 100% of the first 3% of elective employee deferrals and 50% for the 4th and 5th percent of elective deferrals. Safe harbor contributions and earnings are 100% vested. The value of profit sharing contributions and earnings vest 20% per year over five years. EGI's matching contributions to the plan were $168 and $150 in 2016 and 2015, respectively. There were no employer discretionary profit sharing contributions made in 2016 or 2015.
Note 13 - Equity incentive plan
Description of the Plan
In June 2016, the stockholders of the Company approved an amendment to EGI's 2013 Equity Incentive Plan (the Plan), increasing the number of shares of Company common stock reserved for issuance thereunder by 215,385 shares from 1,711,415 to 1,926,800. The Plan permits the grant of stock options, restricted stock and stock appreciation rights (SARS) to its employees. Option awards are generally granted with an exercise price equal to the market price of EGI's stock at the date of grant; those option awards generally vest based on three years of continuous service and have 10--year contractual terms. No grants of restricted stock or SARS have been made under the plan. As of December 31, 2016, 425,300 shares were available for issuance under the Plan.
EGI's common stock is listed and trades on AIM, a small company exchange operated by the London Stock Exchange. All trades on AIM are transacted in British Pounds Sterling (GBP). Accordingly, EGI has granted all of its stock options with an exercise price denominated in GBP.
Stock Option Activity
A summary of the changes in stock options outstanding under EGI's Plan for the two years Ended December 31, 2016 is presented below:
Weighted
Average Weighted
Exercise Average
Number Price Remaining Aggregate
Of (in British Contractual Intrinsic
Options Pounds) Term Value
(years)
---------- -------------- ------------ ----------
Options outstanding,
December 31, 2014 874,988 GBP 1.32
Granted 295,000 0.80
Exercised - -
Forfeited (187,488) 1.33
Expired - -
----------
Options outstanding,
December 31, 2015 982,500 1.16
Granted 600,000 0.80
Exercised - -
Forfeited (81,000) 1.15
Expired - -
----------
Options outstanding,
December 31, 2016 1,501,500 GBP 1.02 8.2 -
==========
Options vested
at December 31,
2016 669,833 GBP 1.23 7.1 -
==========
Valuation Information
The fair value of each option award is estimated on the date of grant using the Black--Scholes option valuation model that uses the assumptions noted as follows.
Dividend Yield
EGI has not made any dividend payments nor does it have plans to pay dividends in the foreseeable future. An increase in the dividend will decrease compensation expense.
Expected Price Volatility
Expected price volatility is a measure of the amount by which the price of a security has fluctuated or is expected to fluctuate. EGI has experienced a limited volume of trading activity and has not been publicly traded for a period that is commensurate with the expected term of the stock grants. To determine the expected volatility, EGI utilized peer company data to supplement its own trading activity. An increase in the expected price volatility will increase compensation expense.
Risk-Free Interest Rate
For the risk-free interest rate, EGI uses the U.S. Treasury rate for the week of the grant having a term approximating the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.
Expected Term
Expected term is the period of time over which the options granted are expected to remain outstanding. EGI utilizes the simplified method in determining the expected term of options. The simplified method is an average of the vesting period and the term of the option. The simplified method is used due to the fact that the Company does not have adequate history of option activity to provide a reasonable basis to estimate option lives. Options granted have a term of ten years. An increase in the expected term life will increase compensation expense.
Forfeitures
EGI expects limited forfeitures over the remaining grant vesting periods. Stock-based compensation expense is adjusted as forfeitures occur during the vesting period. An increase in the forfeiture rate would decrease compensation expense.
The fair value of stock options granted in 2016 and 2015 were determined using the weighted-average assumptions below:
2016 2015
------ ------
Expected annual dividend yield None None
Expected price volatility 35.9% 36.1%
Risk free interest rate 1.4% 1.6%
Expected term (in years) 6 6
The weighted--average grant--date fair value of options granted during 2016 was $0.42 and for options granted in 2015 was $0.44.
The fair value of each option is amortized into compensation expense on a straight-line basis over the vesting period (the requisite service period). As of December 31, 2016, there was total unrecognized compensation cost of $254 related to unvested stock options granted under the Plan to be recognized over a weighted average period of approximately 2.0 years.
Note 14 -- Concentrations
Significant customer: No customers accounted for more than 10% of revenue in 2016. During 2015, one customer accounted for approximately 11.8% of revenue.
Grant and contract revenue: Grant and contract revenue principally consists of Small Business Innovation Research (SBIR) grants sponsored by the U.S. Department of Health and Human Services.
A substantial number of the materials EGI uses in manufacturing its products are available from multiple sources and in sufficient supply; however, certain suppliers and contract manufacturers have been qualified to EGI standards. In the short-term any disruption or termination of these arrangements could adversely affect the Company's operating results pending the qualification of replacement suppliers.
Note 15 -- Segment information: Geographic Revenue Distribution
EGI operates in a single operating segment that includes the sales of neuroimaging/neuro--monitoring equipment and evaluative software to research and clinical organizations. Substantially all long--lived assets are located in the U.S.
The following table reflects revenue and percent of total revenues based on the geographic location of the customer:
For the year ended December
31,
-----------------------------------------------
2016 2015
----------------------- ----------------------
United States and
Canada $ 8,380 58.8 % $ 7,658 56.2 %
Europe 2,929 20.5 2,601 19.1
Asia 2,847 20.0 2,614 19.2
Other 103 0.7 746 5.5
------- -------
Total $ 14,259 100 % $ 13,619 100 %
======= =======
Note 16- Preliminary Results Announcement
The figures for the year ended 31 December 2016 and 2015 have been extracted from the full accounts for that year on which the Independent Registered Public Accounting Firm has issued an unqualified audit opinion. This announcement was approved by the Board of Directors on 19 April 2017 and authorized for issue on 20 April 2017.
Directors
Don Tucker, Chairman & Chief Executive Officer
Ann Bunnenberg, President & Chief Operating Officer
Christine Soden, Non-executive director, Company Secretary
John Brown, Non-executive director
Ray Englander, Non-executive director
Broker & Nominated Adviser
Peel Hunt LLP
Moor House, 120 London Wall
London EC2Y 5ET
Registrars
Capita Registrars (Guernsey) Limited
Mont Crevelt House
Bulwer Avenue, St Sampson
Guernsey GY2 4LH
Legal Advisers
K&L Gates LLP
London, UK Seattle, US
One New Change 925 Fourth Avenue,
Suite 2900
London EC4M 9AF Seattle, Washington
98101
Independent Public Accounting Firm
Peterson Sullivan LLP 601 Union Street Suite 2300 Seattle, Washington 98101 USA
Registered Office
National Registered Agents Inc.
160 Greentree Drive, Suite 101
Principal Address: UK Branch: 500 East 4th Ave 59-60, Thames Street Suite 200 Windsor Eugene OR 97401 SL4 1TX UK USA
Dover, Kent, DE 19904 USA
Special Note Regarding Forward Looking Statements
This Annual Report contains "forward looking statements" that involve substantial risks and uncertainties. The forward looking statements are contained principally in the sections entitled "Operating Highlights," "Financial Highlights," "Operating Review," and "Directors' Report." In some cases, you can identify forward looking statements by the following words: "may," "will," "could," "would," "should," "expect," "intend," "plan," "anticipate," "believe," "estimate," "predict," "project," "potential," "continue," "ongoing" or the negative of these terms or other comparable terminology, although not all forward looking statements contain these words. These statements relate to future events or our future financial performance or condition and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievement to differ materially from those expressed or implied by these forward looking statements. These forward looking statements include, but are not limited to, statements about:
-- our expectations regarding the sales and marketing of our products and product candidates;
-- the timing and likelihood of FDA approvals and regulatory actions on our product candidates and product marketing activities;
-- our expectations for market acceptance of our dEEG solutions in the therapeutic market;
-- our ability to retain the continued service of our key professional and to identify, hire and retain additional qualified professionals;
-- the potential for adverse application of health and safety and other laws and regulations on our operations;
-- our ability to establish and maintain intellectual property on our products and our ability to successfully defend these in cases of infringement;
-- the implementation of our business strategies; -- the potential for exposure to product liability claims;
-- the potential for our marketed products to be withdrawn due to recalls, patient adverse events or deaths;
-- our financial performance expectations;
-- our ability to compete in the development and marketing of our products and product candidates with other competitors in the industry;
-- difficulties or delays in the development, production, manufacturing and marketing of new or existing products, including difficulties or delays associated with obtaining requisite regulatory approvals or clearances associated with those activities;
-- changes in laws and regulations or in the interpretation or application of laws or regulations, as well as possible failures to comply with applicable laws or regulations as a result of possible misinterpretations or misapplications;
-- actions of regulatory bodies and other government authorities, including the FDA and foreign counterparts, that could delay, limit or suspend product development, manufacturing or sales or result in recalls, seizures, consent decrees, injunctions and monetary sanctions;
-- the results, consequences, effects or timing of any commercial disputes, patent infringement claims or other legal proceedings or any government investigations;
-- interruption in our ability to manufacture our products or an inability to obtain key components or raw materials or increased costs in such key components or raw materials;
-- uncertainties in our industry due to government healthcare reform; and -- competitive pressures in the markets in which we operate.
You should read this document completely and with the understanding that our actual results may differ materially from what we expect as expressed or implied by our forward looking statements. In light of the significant risks and uncertainties to which our forward looking statements are subject, you should not place undue reliance on or regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all. These forward looking statements represent our estimates and assumptions only as of the date of this Annual Report. Except as required by law, we undertake no obligation to update or revise publicly any forward looking statements, whether as a result of new information, future events or otherwise after the date of this Annual Report.
This information is provided by RNS
The company news service from the London Stock Exchange
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