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:
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
END
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