Final Results for the year ending 31 December 2016

RNS Number : 7627E

MyCelx Technologies Corporation

11 May 2017

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR"). Upon the publication of this announcement via a Regulatory Information Service ("RIS"), this inside information is now considered to be in the public domain.

11 May 2017

MYCELX Technologies Corporation

("MYCELX" or the "Company")

Final Results for the year ending 31 December 2016

MYCELX Technologies Corporation (AIM:MYX), the clean water technology company providing patented solutions for commercial industrial markets worldwide, is pleased to announce its audited results for the year ended 31 December 2016.

Financial Highlights

- Management focus on active cash management and margin retention

- Operationally cash flow positive at $0.1m (FY15: negative $2.1m) in spite of tough market conditions

- Revenue reduced in line with management expectations to $7.9m (FY15: $13.6m), with 30% expected revenue growth in 2017

- Cash and cash equivalents, including restricted cash, of $5.6m (FY15: $5.8m)

- Retained robust gross margins at 52% (FY15: 53%)

Operational highlights

- Strategic Agreement - Schlumberger entered into an exclusive sales and marketing agreement with MYCELX for the upstream market and will promote MYCELX products as the method of choice for water treatment to their upstream Oil and Gas customers

- US: Fourth MYCELX system commissioned at terminal operator to treat water from operations for discharge into Houston Ship Channel

- US: Fifth system sold for offshore use to existing supermajor customer

- Saudi Arabia: Launched new fast-to-market product - the MYCELX Oil Recovery System

- Saudi Arabia: Awarded two year contract with SABIC for total value of $5 million

- US: Added experienced Business Development personnel with oilfield services and water treatment background to drive sales and strategic alliance formation

- Nigeria: Successful trial offshore platform with local oil producer. First deployment of RE-GEN system offshore

- Oman: Successful trial resulted in lease and media sales for downstream process water

- US: Equipment lease secured for treatment of process water at Oklahoma refinery

- On-going build-up of recurring revenue with filter media replacement sales

Post period highlights:

- Awarded first contract in the Nigerian Oil and Gas market, will provide an onshore water treatment solution to a leading independent oil and gas producer focused on the Niger Delta

Connie Mixon, Chief Executive Officer of MYCELX Technologies Corp, said: "The actions that we took to safeguard the business have ensured that we met the commitments we made to our investors. We protected our cash position, met our revenue forecast without sacrificing margin, and are cash positive from operations for the year in spite of continuing tough market conditions.

"2016 was not just about righting the ship; weaker or more volatile markets emphasise the need to our clients for them to seek out smarter and more cost effective solutions for water treatment as part of performance optimisation. We seized this opportunity to work closely with existing and new clients on trials to demonstrate the significant value that MYCELX offers them. This market has created a more appreciative audience for our solutions. The concerted effort of undertaking trials over long periods has paid off. We have created business development opportunities that will ensure that the Company is well positioned to thrive going forward, even in uncertain times."

Tim Eggar, Chairman of MYCELX Technologies Corp said: "During this year of continued challenge for the Oil and Gas industry, MYCELX has taken the necessary steps to preserve our financial position and put in place the key building blocks for our future success - strong customer relationships built on the trust that comes from close interaction and consistent results, strategic partnerships and an international business development capability. When combined with our Company's drive for innovation and our technological advantage, we are now well positioned for the future.

"MYCELX has navigated through another extremely challenging year in the Oil and Gas market. Following the fall in crude pricing a survival mindset took hold within the industry and this continues to be prevalent. Pessimism began to lift slightly when a reduction in US production underscored oil price recoveries later in the year. Coupled with this, the cost reduction programmes that had been implemented began to show results. However capital spending delays continued to exert pressure on the oil field services sector. In these adverse times, MYCELX was able to adapt and embrace the challenges facing our industry.

"We were able to do this because of our confidence in our own financial position. The Company met key milestones in its cash preservation program by finishing cash neutral from operations for the last eighteen months. The expense control measures enacted last year in response to the challenging oil price conditions have continued into this year and helped us to meet our goal of achieving a cash positive position from operations for FY2016."

Outlook

We continue to focus our growth strategy in the Middle East, India and Americas regions. Although the Company's primary market remained in distress, operators are increasingly keen to seek out new technology that offers better performance and most importantly cost savings. While the tough environment has created opportunity for MYCELX, the Board of Directors are well aware of the challenges the Company faces. We continue to believe long-term success and building a global brand will be achieved by engaging in large scale projects as well as smaller scale, fast-to-market opportunities. The Company's first Oil Recovery System installed in the petrochemical plant in Saudi Arabia is truly innovative and fits both this faster to market approach and also meets our customers' cost savings goals to turn waste water treatment from a cost into a profit center.

At its core, the Company is a technology company with exceptional expertise gained through onsite, real-time water treatment experience. The Company will continue to use its knowledge to innovate and commercialise next generation technology to meet our customers' current and future needs more reliably and cost effectively than outdated conventional methods. The Oil and Gas and petrochemical industries continue to integrate MYCELX® technology into their critical, real-time processes. This is confirmation that our technology has its role in achieving sustainable water treatment for years to come. The Board of Directors and Company management are committed to ensuring MYCELX® technology reaches its full potential as the global industry standard.

As we enter 2017, a sense of cautious optimism appears to have crept into the industry. Rig count increases, OPEC production cuts and increasing investment into the downstream sector are all signs of a potential recovery. Overall, the MYCELX contracted order book is stronger than this time last year and the Company therefore envisages a year-on-year revenue increase for 2017 in the range of 30%, with the aim of being EBITDA neutral, and with no material change in cash balance. MYCELX's revenue is already being generated from a broader geographic base than previously. The Company fully expects this positive trend, which is a result of our deliberate efforts to broaden our geographic exposure, to continue. By focussing on our customer relationships and strengthening those bonds, we have positioned the business to be prepared for continuing market uncertainty or a quick upturn. We are becoming known as a performance enhancing solution provider - we are important to our customers in all economic scenarios. As such, we embrace whatever challenges the market presents to us.

Strategic Priorities

Our strategic intent is to become the leading provider of water treatment solutions for the Oil and Gas industry. We adopt a staged approach of building traction amongst our target markets to appreciate the performance and cost benefits of truly oil free water delivered by MYCELX. We have three overarching strategic objectives:

1. Demonstrate Technical Superiority

We differentiate ourselves by the reliability of our superior performance. We get better results, using a smaller footprint, and are more cost effective than conventional techniques. The key actions to achieve this goal are:

· Improve Customer Intimacy via trials - we create value for our clients through a deep understanding of their needs, both now and in the future

· Educate the market - Our water expertise allows us to show our customers how they might improve their system by focusing on different water metrics

· Consistent Superior Performance - Our performance underpins our reputation and our future

The benefits of this approach will be:

· A customer base that realises the true value of MYCELX

· Enhancing our reputation via industry game changing trials

· Revenue generation and preservation of margins

2. Gain Industry acceptance

We seek to gain wider industry acceptance of our technology. We need to broadcast our successes to the wider audience. The methods of doing this include:

· Cost Savings Opportunities - The ability to offer quick pay back on investment and cost savings is particularly attractive during this period of low oil price

· Shared Learnings - Issues faced by one operation are often common problems

· Endorsement by leading industry player/awards - References with leading industry players is an immediate comfort for new customers

This approach will lead to revenue generation and further reference creation. In some of our larger customers, if a MYCELX solution is installed in two operations then it will become a recommended solution for the group.

3. Obtain Critical Mass

We aim to convert industry acceptance into revenue generation. We will achieve this aim with the following efforts:

· Rapid response - Often our customers will need us to provide a solution quickly to address an urgent water treatment need. Having a ready rental fleet to deploy is particularly useful when establishing a new customer relationship.

· 24/7 support availability - through our branch offices we offer support to our customers' needs 24/7

· Strategic Partnerships - through their broader customer networks, our successes can be broadcast better

These actions will help to broaden our customer base and support revenue generation.

Forward looking statements:

Certain statements made in this announcement are or may be "forward-looking statements". These statements typically contain words such as "intends", "expects", "anticipates", "estimates" and words of similar import. All the statements other than statements of historical facts included in this announcement, including, without limitation, those regarding the Company's financial position, business strategy, plans and objectives of management for future operations (including development plans and objectives relating to the Company's products and services) are forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future and therefore undue reliance should not be placed on such forward-looking statements. There are a number of factors that could cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding the Company's present and future business strategies and the environment in which the Company will operate in the future and such assumptions may or may not prove to be correct. Forward-looking statements speak only as at the date they are made. Neither the Company nor any other person undertakes any obligation (other than, in the case of the Company, pursuant to the AIM Rules for Companies) to update publicly any of the information contained in this announcement, including any forward-looking statements, in the light of new information, change in circumstances or future events.

For further information please contact:

MYCELX Technologies Corporation

Connie Mixon, CEO

Kim Slayton, CFO

Tel: +1 888 306 6843

Cantor Fitzgerald Europe - NOMAD and Broker

Andrew Craig

Richard Salmond

Tel: +44 20 7894 7000

Celicourt Communications

Mark Antelme

Joanna Boon

Tel: +44 20 7520 9266

Notes to Editors

MYCELX is a revolutionary oil-free water technology company solving the world's toughest oil removal problems in the Oil and Gas industry. The systems are based upon scientific breakthrough for a completely different approach to permanent oil removal. The Company created the patented MYCELX polymer using innovative molecular cohesion for removing oil from water far beyond what conventional systems have ever achieved. MYCELX systems remove oil to critically low levels in a much smaller physical footprint than conventional systems and in a virtually fail-safe process.

www.mycelx.com

CHAIRMAN'S STATEMENT: DECISIVE ACTIONS, EMBRACING THE CHALLENGE, BUILDING OUR FUTURE

During this year of continued challenge for the Oil and Gas industry, MYCELX has taken the necessary steps to preserve our financial position and put in place the key building blocks for our future success - strong customer relationships built on the trust that comes from close interaction and consistent results, strategic partnerships and an international business development capability. When combined with our Company's drive for innovation and our technological advantage, we are now well positioned for the future.

FINANCIAL & OPERATING PERFORMANCE

MYCELX has navigated through another extremely challenging year in the Oil and Gas market. Following the fall in crude pricing a survival mindset took hold within the industry and this continues to be prevalent. Pessimism began to lift slightly when a reduction in US production underscored oil price recoveries later in the year. Coupled with this, the cost reduction programmes that had been implemented began to show results. However capital spending delays continued to exert pressure on the oil field services sector. In these adverse times, MYCELX was able to adapt and embrace the challenges facing our industry.

We were able to do this because of our confidence in our own financial position. The Company met key milestones in its cash preservation program by finishing cash neutral from operations for the last eighteen months. The expense control measures enacted last year in response to the challenging oil price conditions have continued into this year and helped us to meet our goal of achieving a cash positive position from operations for FY2016.

The Company will continue to be a prudent steward of its cash, with monitoring in place to ensure specific measures are taken in the event of a revenue shortfall or contract delay during the upcoming year. Any additional equipment purchased will be supported by a sales contract. Importantly, our cost reduction program is targeted to ensure that it does not adversely affect the Company's continuing ability to win contracts and grow. Our recent wins in new markets and with new customers serve to show that whilst our Selling, General and Administrative costs have been reduced by 50% over the last eighteen months, our ability to convert business development opportunities into cash generation has not diminished.

STRATEGIC PARTNERSHIP

Our steadfast goal of widespread industry adoption of MYCELX relies on our ability to retain and leverage our existing customer relationships as well as explore strategic alliances to leverage sales and marketing channels globally. In 2016 the Company made substantial progress on both fronts.

One of the stated goals of the Company was achieved in the first half of the year. MYCELX signed an exclusive upstream sales and marketing agreement with Schlumberger, the world's largest oil field services company. The agreement will help to expedite the industry adoption of MYCELX's new RE-GEN product line as Schlumberger will market it as the water treatment method of choice in the upstream market. We continue to pursue strategic partnerships to leverage sales and marketing platforms that value differentiated technology. It is clear that the Oil and Gas industry wants and needs technology to support cost effective operations. MYCELX believes that the lack of spending by the oil producers during the downturn has created an even greater need for smart, technology-driven solutions going forward to overcome the likely ramifications of the drop in continuous investment.

PERFORMANCE VS KEY METRICS

The Company performed well against its key metrics despite the generally adverse market conditions. Revenue projections were met at $7.9m in sales, and crucially our commitment to be cash positive from operations was upheld. We have set a goal going forward to be EBITDA neutral.

Executing a strategic arrangement with Schlumberger was not only a demonstration of our ability to execute our strategy but was a powerful endorsement of our technology from the largest player in the oil field services in the world.

Funds have been focused on positioning MYCELX for the future. I'm delighted that we have brought two seasoned business development professionals to pursue opportunities which have arisen as clients respond to the adverse market conditions. We also supported on site trialling work at our clients' sites. Our engineers spent over 250 man days working with customers in the field to demonstrate MYCELX's advanced technology. These trials are increasingly long processes, which reflect an industry determined to take its time to find the right solution as it can ill afford costly mistakes at the current oil price. Our ability to compete in these arduous trials against large established competitors and emerge successful has proven our resilience, demonstrated our superior product offering and meant that our technology is making inroads in new frontiers and markets.

A good example of this is the work this year on Enhanced Oil Recovery opportunities. After months of collaboration with SNF, the world's leading polymer producer for the Oil and Gas industry, our engineers were able to demonstrate conclusively that MYCELX has an effective water treatment solution for Polymer Flood operators who have historically failed to resolve the water treatment challenge using conventional technology. This capability is a game changer for the industry. MYCELX's technology is able to treat polymer laden water effectively, and actually preserve the valuable polymer. This improves the overall economics of the EOR technique. The concerted effort to build the relationship with this industry leader and the resulting white paper co-authored with SNF is a good example of how our efforts in 2016 have helped to build a platform for the future of the Company. By removing the water treatment obstacle for Polymer Flood we have opened up a large potential opportunity that will support not only MYCELX but also the industry at large in its effort to continue producing oil for the next generations.

We have also been careful to ensure our current footprint has been well serviced and maintained whilst we are chasing down new opportunities. We sold a fifth system for offshore use to a current customer and commissioned a fourth system for a midstream client. In downstream, which is currently our principal market, this is the fourth year we have been operating in one of the largest petrochemical plants in the world. The reliability of our service and the close partnership that our Jubail based team has with its customers mean that we have been able to grow our presence within that petrochemical complex with an exciting innovative project - the Oil Recovery System which embodies our corporate message - From Waste to Worth. We are able to convert the costly process of oily wastewater disposal into a revenue generating operation by recovering pure oil that can then be resold.

PROMISING OUTLOOK

With our financial position more assured, we are now well positioned for when the industry does recover. There are signs that the tide is beginning to turn - with an increase in rig activity, and signs of greater investment in the petrochemical industry in our key market of Saudi Arabia.

CHIEF EXECUTIVE'S STATEMENT

Seizing opportunities in a volatile market; establishing strong foundations

The actions that we took to safeguard the business have ensured that we met the commitments we made to our investors. We protected our cash position, met our revenue forecast without sacrificing margin, and are cash positive from operations for the year in spite of continuing tough market conditions.

2016 was not just about righting the ship; weaker or more volatile markets emphasise the need to our clients for them to seek out smarter and more cost effective solutions for water treatment as part of performance optimisation. We seized this opportunity to work closely with existing and new clients on trials to demonstrate the significant value that MYCELX offers them. This market has created a more appreciative audience for our solutions. The concerted effort of undertaking trials over long periods has paid off. We have created business development opportunities that will ensure that the Company is well positioned to thrive going forward, even in uncertain times.

Operational Performance:

The continuing oil price uncertainty and the severe reduction in investment across the industry in 2016 resulted in a generally subdued market for MYCELX but one that nevertheless presented us with opportunities. With an estimated $600 billion worth of projects deferred or cancelled through to 2020, there has been an increasing focus by Oil and Gas companies on optimising existing operations. Our superior performance, smaller footprint and immediate cost saving offering puts MYCELX in good position to impress clients looking for ways to optimise their current operations.

The effect of the downturn has been most profoundly felt in North America, whereas the Middle East was less impacted with no significant drop in Saudi Arabian investment this year. For MYCELX, the Middle East and specifically Saudi Arabia continue to be a primary market. Whilst capital investments were not scaled back in Saudi Arabia, the reduced margins that our petrochemical customers are experiencing, as they become accustomed to the increased price for their feedstock, has meant they too are focused on cost saving and performance enhancement opportunities.

Middle East and North Africa (MENA)

MYCELX had several key successes in the MENA region during the year and has taken action to strengthen our business going forward by committing additional resources. During 2016 we continued to operate at one of the leading ethylene plants in the world with a full service contract that treats water for the crucial quenchwater loop system. The current two year contract is for $5 million and is the result of the recognition that MYCELX systems bring greater operational efficiency which lead to higher production and attractive cost savings for the plant. As a result of the significant performance improvement experienced by the client, we were honored to be the only water treatment company invited to present at the internal SABIC Technical Conference held in Jubail.

In Saudi Arabia, the Company also undertook a sales initiative for a new fast-to-market product - the MYCELX Oil Recovery System which offers customers a system that treats oily wastewater onsite charged on a volume treated basis. Its benefits include cost savings, reduction of truck haul off and production of high quality sales oil in the process. It is the driving force behind our campaign - From Waste to Worth - that seeks to turn water treatment from a costly annoyance into a potentially significant profit center. The first installation of this new product occurred in Q1 2017 and underpins our 2017 forecasts.

Growing recognition of our successful performance has also spread throughout rest of the GCC region and led to paid trial requests from new customers. A downstream trial in Oman led to a lease, which we were able to respond quickly to by utilizing equipment from our rental fleet.

In order to capitalize on this wave of business opportunities, MYCELX appointed a Director of Business Development for the MENA and Asia regions who will be located in Saudi Arabia. This seasoned professional has worked with MYCELX for many years and will lead our efforts to grow the business in this key region. The fundamentals of the petrochemical industry in Saudi Arabia remain strong. Reduction in power and water subsidies, concerns over sustainability, along with the increased price for feedstock is driving operational efficiencies. At the same time, the commitment of the Saudi government to the petrochemical industry, as seen in both the National Transformation Plan and Vision 2030, ensures it will remain a key pillar of the economy and retain its leading global cost competitive position.

The Company had an important breakthrough in Nigeria during the year. We successfully performed our first trial offshore with a local oil producer and it was the first time that we had tested a RE-GEN system on an offshore facility. The Company will leverage this success to perform other trials in Nigeria showcasing the robust performance in a challenging operating environment. The Company expects successful trials to generate sales in the region as the oil price rises.

Americas

While activity in North America and South America was generally subdued in 2016 the Company's strategy of engaging with new customers to run trials generated revenue and we were also able to leverage our existing footprint to make follow on sales. For example, in the US onshore market MYCELX commissioned its fourth water treatment system for a terminal operator in the Houston Ship Channel. As the only approved technology for discharge into Houston Ship Channel, the system is able to freely discharge the water from operations. Similarly, the Company supplied a fifth offshore system to an important supermajor customer to manage water in a challenging production environment. MYCELX also secured its first project in Oklahoma with an equipment lease to a refinery. To further expand and strengthen our reach in North and South America from our Houston office, the Company added an experienced Business Development professional with years of oilfield services and water treatment background to drive sales and strategic alliance formation.

The Global EOR Market

The Company has been engaged in trials in Enhanced Oil Recovery ("EOR") produced water in North America, the Middle East, Europe and with a major producer in India for three years. The opportunity to trial at full scale at a polymer flood field facility is the only way to gather the necessary data and understand the operating conditions under which a water treatment system will have to perform. We continue to believe the commercial opportunity associated with treating water in EOR operations cannot be overstated.

The choice of which EOR processes are adopted is highly dependent on the ability to treat the water. One approach - Polymer Flood - presents a particularly difficult challenge as conventional technologies have been unable to effectively treat the polymer-laden water. This inability to properly process produced water containing polymers has adversely impacted the widespread adoption of what is an effective EOR technique.

MYCELX has now been proven to be the water treatment method to overcome this hurdle. Our cost-effective solution transforms the economics of using Polymer Flooding for the end user. This game changer opportunity for the industry was tested in close collaboration with SNF, the world's largest provider of polymer to the Oil and Gas industry. The objective was to test our RE-GEN media's ability to reliably remove oil and grease in the presence of polymer in produced water applications. The testing was very successful. Not only was RE-GEN media able to remove the oil from the polymer water to the required levels, the polymer was not removed from the water in the treatment process. This offers the potential for huge cost savings for producers using this technique. These results support the use of SNF's polymer to increase production in older fields. In the co-authored white paper, supported by extensive testing data, both MYCELX and SNF conclude that MYCELX provides the solution that operators have been searching for. This is a good example of how a concerted effort of working together with industry leaders to explore how combined technology capabilities can open up future opportunity in a lucrative market with applications globally.

PROGRESS ON STRATEGIC GOALS

We set a goal of searching for opportunities for strategic partnerships that would help to expedite the widespread adoption of MYCELX's technology in the industry. In June 2016 we executed an exclusive distributorship agreement for the upstream market with Schlumberger, the world's largest oil field services company.

As our strategic partner, Schlumberger is marketing our products around the world on a scale and to an audience that only an industry leader could achieve. In partnering with Schlumberger, MYCELX has expedited our business plan and our ambition. Both MYCELX and Schlumberger believe together we can achieve more than either of us could alone in our targeted market sectors and we expect to grow in these sectors quickly as the market recovers.

MYCELX continues to look into further opportunities for similar partnerships that can expedite growth in our other target markets.

SAFETY

Our continuing success is based on our people, and their safety and of those people around us is central to everything we do. We are proud of our safety record and have engineered the design of our systems to ensure that operating them is simple and safe.

LOOKING TO THE FUTURE

We continue to focus our growth strategy in the Middle East, India and Americas regions. Although the Company's primary market remained in distress, operators are increasingly keen to seek out new technology that offers better performance and most importantly cost savings. While the tough environment has created opportunity for MYCELX, the Board of Directors are well aware of the challenges the Company faces. We continue to believe long-term success and building a global brand will be achieved by engaging in large scale projects as well as smaller scale, fast-to-market opportunities. The Company's first Oil Recovery System installed in the petrochemical plant in Saudi Arabia is truly innovative and fits both this faster to market approach and also our meets customers' cost savings goals to turn waste water treatment from a cost into a profit center.

OUR CORE MARKETS

Downstream: Current trends

Our key market in the downstream petrochemical industry is Saudi Arabia.

Saudi Arabia: Positive support for the future

The future of the Saudi petrochemical industry has been confirmed along with its status as a vital pillar in the Saudi Arabian economy. It has been identified as a focus by two key government drives- the National Transformation Program (NTP) and Vision 2030. The Royal Commission for Yanbu and Jubail which oversees the Petrochemical industry in the Kingdom will be the second largest receiver of government funds under these schemes.

The Saudi Arabian petrochemical industry already has a structural advantage over its global competitors due to its low cost feedstock. This has helped it to weather the storm from the drop in global chemical prices since mid 2014, increased competition from the US and China and the recent rise in the price for its feedstock.

Even with the rise in ethane pricing to $1.75 per mmBTu, Saudi Arabia retains a distinct margin advantage over other petrochemical regions. Whereas it costs Saudi producers $108.50/MT ethylene, it would cost US producers $142.10/MT and other countries in the Middle East up to $303.80/MT.

It is therefore no surprise that Saudi petrochemical players hold the advantageous position of being the world's lowest cost ethylene producers. Saudi Arabia has 13 steam crackers currently operating in the country and MYCELX already has a footprint in several of these facilities.

Focus on margins

The 133% price rise of ethane in January 2016, along with the increase in the cost of electricity and water by 40% has led to a focus on margin improvement by Saudi ethylene producers hoping to address this new paradigm squeeze on their margins via performance optimisation and cost savings.

New investment in the industry

The recent move by Saudi Aramco to enter the petrochemical industry directly in Saudi Arabia via Sadara, its JV with Dow Chemical, is an excellent prospect and will lead to the building of many new plants.

Rest of GCC

Most of the petrochemical companies in the GCC are wholly or majority owned by their local governments and thus have been supported during these times of low prices and strained capital budgets.

Nevertheless, given the oil price impact on state budgets and the resulting reductions in subsidies for power and water - petrochemical plants across the region are looking to cut costs and protect their already squeezed margins.

Downstream: Impact and Opportunities

MYCELX's systems offer significant cost savings for Saudi players by improving the water and utilities usage of their current processes.

Furthermore, the higher quality water that our systems generate contribute to production improvement and large reductions in maintenance and repair costs.

The Company appointed a new Director of Business Development for MENA and Asia specifically to chase down new opportunities such as the new market entrants in Jubail Industrial City.

The new Oil Recovery System (ORS) that MYCELX has developed is particularly welcomed given current market conditions. The ability to convert what was historically a costly waste stream into a profit generating centre without any outlay of capital and also benefiting from the improved water preservation is perfectly in tune with our customers' current concerns.

Upstream offshore: Current Trends

Producers have declared 2016 as a year of tough decisions. Following the fall in crude pricing early in the year, a survival mindset took hold within the industry and this continues to be prevalent. Pessimism began to lift when a reduction in US production underscored oil price recoveries. Coupled with this, the cost reduction programmes that had been implemented began to take hold. For oilfield services companies like MYCELX, the continuing delays on capital spending remained to exert pressure, however in June 2016 US rig counts, a leading indicator, began to recover.

The US Energy Information Administration (EIA) projects growth in the Gulf of Mexico between 2016 and 2018 to be 300,000 barrels per day (bpd) which will account for 30% of the total US production increase forecast. The EIA also expects 2018 total production will be 1.9 million bpd. Additionally, according to the energy consultancy firm Douglas-Westwood, production from the global offshore market is expected to grow in the medium term as projects sanctioned before the downturn add to output. They also suggest that long term new supply could stall as we approach 2020 from lack of investment during the last two years.

Upstream offshore: Impact and Opportunities

MYCELX has a footprint of five offshore installations with a supermajor and looks to expand its reach as the oil price recovers.

The forecast for increased production coupled with the prevailing lack of investment points to the necessity for technology that can get the most out of existing assets as prices recover and robust enough to perform reliably to support production as output levels increase. This plays well into MYCELX's core strengths in offshore water treatment, namely excursion management and small footprint.

MYCELX has installed produced water treatment systems offshore managing severe upset conditions that curtail production and cost producers millions of dollars in production loss.

Desirous of new and better technology, Chevron designed the MYCELX system into their full treatment train on the Jack/St. Malo platform, their state-of-the-art facility in the Gulf of Mexico. The Company has continued its deployment with Chevron in the Gulf of Mexico and to other platforms around the world.

The Company anticipates the strategic alliance with Schlumberger will accelerate the uptake of MYCELX's differentiated solution for offshore use.

Upstream onshore: Current Trends

With global demand for hydrocarbons continuing to rise each year, the ability of producers to meet demand is becoming increasingly strained. As fields mature, the oil production decreases while water production increases. The recovery factor of these mature fields currently average around 20% to 40%. This equates to 60% to 80% of the Original Oil in Place (OOIP) locked in the reservoir.

It is generally more practical for operators to invest in enhanced recovery techniques than to develop a new field. Many of the advanced recovery production techniques used by producers are referred to as Chemical Enhanced Oil Recovery (CEOR). Water availability, cost, and regulations are all careful considerations leading producers to adapt their produced water management methods. Reliable water treatment is critical to a facility that is utilizing a produced water recycle loop for a CEOR process. Poor water quality will increase the quantity of chemicals required to achieve the desired production gains associated with polymer flooding. This is a challenge because the presence of back-produced or returning polymer in the produced water can greatly impact the performance of existing produced water treatment systems.

MYCELX continues to support innovation in unconventional shale plays. As the Permian Basin regains its confidence with an increasing rig count, the demand for produced water continues to increase supported by state and federal regulation, accommodating frac fluid systems and increasing frac water volume.

Upstream onshore: Impact and Opportunities

MYCELX believes Enhanced Oil Recovery is the largest play in the produced water market and has completed numerous successful trials and has the endorsement of the largest polymer producer servicing the oil and gas industry.

We have worked closely with SNF, the world leader in polymer production for the Oil and Gas industry, conducting rigorous testing and successfully proven that MYCELX RE-GEN achieves the performance required to treat water in polymer flood operations.

The fact that our technology allows the polymer to be preserved is also a game changer for the economics of this often overlooked EOR technique.

In the past four years innovation has driven the frac volume required to open some wells from 100,000 barrels of frac water to 1,000,000 barrels of frac water. MYCELX supports the operator utilisation of produced water for this purpose by removing specific contaminants that encumber further innovation for this process.

OUR BUSINESS AT A GLANCE

Taking Water Treatment to a whole new level

MYCELX is a revolutionary clean water technology company that provides superior performance and cost effective solutions primarily for the Oil and Gas industry's water treatment needs.

Water Challenge our customers face

Very often much more water than oil is produced during oil and gas production. Reuse of water, especially in water stressed regions, is part of the industry's every day water management and business calculations. Our technology is industry-recognised as a step change improvement on the now outmoded conventional approaches that are becoming obsolete. In the face of increasingly challenging water treatment requirements across the industry worldwide, new technology adoption is the path forward for operational excellence.

Global Footprint and Ambition

We operate in all segments of the Oil and Gas industry and have installations throughout the world. Outside the Oil and Gas industry, we have also applied our technology to solve water treatment issues for other industries, including the marine, power and utility, mining, manufacturing and air filtration industries.

MYCELX products are currently used in over 20 countries across the globe. Our teams are active, particularly in North America, the Middle East and India. Our systems are installed at some of the leading upstream and downstream operations, including one of the largest ethylene plants in the world and the latest rig designs for a supermajor in the Gulf of Mexico.

Our headquarters in Duluth, Georgia are supported by branch offices in Houston, London, Jubail and our project office in Delhi.

Route to Market

Our proprietary filtration products are delivered in systems that MYCELX has designed for new build facilities like offshore platforms or as performance upgrade retrofits such as enhancement to process water loops in petrochemical plants.

We have established a strategic partnership in the upstream market with Schlumberger to broadcast our successes better throughout their global client base and will consider similar strategic alliances in our other markets if they would be beneficial at expediting our business model.

In tune with current market trends

Water Treatment - A production enhancement opportunity

Oil and Gas producers live in the world of upset conditions during normal everyday operations. These upsets can wreak havoc on produced water quality which adversely impacts operations and production uptime. Upsets are intermittent, can fluctuate wildly, and last hours to days. Additionally, process control varies because some operating environments are more difficult than others. These factors, alone or in combination, can cause slowdown or shutdown of production. To maintain continuous operation the water treatment system must be able to handle the upsets and process control issues and produce the right water quality to keep running without interruption always avoiding downtime.

The Cost of 1%

If a production facility is not operational due to water management issues for even 1% of total run time during a year, the cost of lost production to the producer is significant. Production uptime is paramount to maximizing profits. MYCELX systems protect operators from the costly 1% at risk.

Sustainability Concerns

With increasing value placed on water in areas such as the Middle East and Canada, the opportunity to recycle or reuse water in upstream and downstream operations is now of critical importance not only from a regulatory view but also from a purely economic perspective.

The cost of water or the power required to turn it into steam is a key consideration at the forefront of operators' minds during these challenging times when Oil and Gas companies are looking for cost saving opportunities and performance improvements.

Ensuring Oil Production for the Next Generation

As water cuts rise in mature fields, the use of enhanced oil recovery (EOR) methods becomes increasingly important. MYCELX is leading the field in terms of water treatment solutions for such EOR techniques. The benefits of our unique molecular cohesion approach has the ability to transform the economics of EOR techniques such as Polymer Flooding or Steam Assisted Gravity Drainage.

From Waste to Worth

Our more efficient and cost effective Oil Recovery System recovers saleable oil and turns waste water treatment from a costly expense into a revenue stream for the customers.

MYCELX is molecular cohesion, not just filtration, resulting in true oil-free water

Our patented polymer uses innovative molecular cohesion to reliably and consistently remove oil from water to levels our customers require. We can achieve oil removal to less than 1ppm if necessary. By removing oil at the molecular level we deliver a step change improvement on conventional physical separation methods.

Revolutionary Technology

Our patented polymer was created by our founder, Hal Alper. The polymer and its applications are protected by 38 Global patents.

Recurring Media Sales

MYCELX's patented polymer is infused into purpose built back-washable media as well as standard filters.

Standardised Equipment

MYCELX media is housed inside MYCELX's equipment or specially modified standard vessels.

Engineered solutions based on extensive water expertise

Understanding our clients' water is at the core of ensuring the MYCELX solutions we provide are efficient, cost-effective and operator friendly.

Our engineers design systems leveraging our proven technology which meet our customers' requirements in terms of overall economics, performance and whether they wish us to handle operation of the installation.

Enhanced Customer Performance

The end result is oil free water that allows MYCELX's clients to consistently meet their discharge or process requirements and regulation guidelines.

The ability to reuse or recycle this water offers huge cost savings to our customers.

The reduction of hydrocarbon contamination in their systems allows for greater uptime, reduced maintenance and more consistent performance which ultimately improves production metrics.

FINANCIALS REVIEW

Statements of Operations

(USD, in thousands, except share data)

For the Year Ended 31 December:	2016	2015
Revenue	7,923	13,592
Cost of goods sold	3,820	6,343
Gross profit	4,103	7,249
Operating expenses:
Research and development	-	172
Selling, general and administrative	6,588	9,594
Depreciation and amortisation	499	507
Total operating expenses	7,087	10,273
Operating loss	(2,984)	(3,024)
Other expense
Loss on disposal of equipment	(2)	(76)
Interest expense	(94)	(144)
Loss before income taxes	(3,080)	(3,244)
Provision for income taxes	(199)	(405)
Net loss	(3,279)	(3,649)
Loss per share - basic	(0.17)	(0.20)
Loss per share - diluted	(0.17)	(0.20)
Shares used to compute basic loss per share	18,770,117	18,705,244
Shares used to compute diluted loss per share	18,770,117	18,705,244

The accompanying notes are an integral part of the financial statements.

Balance Sheets

(USD, in thousands, except share data)

as at 31 December:	2016	2015
Assets
Current Assets
Cash and cash equivalents	5,139	5,296
Restricted cash	500	500
Accounts receivable - net	1,941	2,855
Unbilled accounts receivable	94	20
Inventory	3,190	3,790
Prepaid expenses	126	204
Other assets	36	109
Total Current Assets	11,026	12,774
Property and equipment - net	10,487	11,714
Intangible assets - net	852	809
Total Assets	22,365	25,297

Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable	657	485
Payroll and accrued expenses	425	577
Deferred revenue	-	42
Note payable - current	85	75
Other current liabilities	436	115
Total Current Liabilities	1,603	1,294
Note payable - long-term	1,921	2,006
Total Liabilities	3,524	3,300

Stockholders' Equity
Common stock, $0.025 par value, 100,000,000 shares authorised, 18,770,117 shares issued and outstanding at 31 December 2016 and 2015	469	469
Additional paid-in capital	40,325	40,202
Accumulated deficit	(21,953)	(18,674)
Total Stockholders' Equity	18,841	21,997
Total Liabilities and Stockholders' Equity	22,365	25,297

The accompanying notes are an integral part of the financial statements.

Statements of Stockholders' Equity

(USD, in thousands)

	Common Stock		Additional Paid-in Capital	Accumulated Deficit	Stock Subscription Receivable	Total
	Shares	$	$	$	$	$
Balances at 31 December 2014	18,553	464	39,820	(15,025)	(235)	25,024
Issuance of common stock, net of offering costs	217	5	259	-	235	499
Stock-based compensation expense	-	-	123	-	-	123
Net loss for the period	-	-	-	(3,649)	-	(3,649)
Balances at 31 December 2015	18,770	469	40,202	(18,674)	-	21,997
Stock-based compensation expense	-	-	123	-	-	123
Net loss for the period	-	-	-	(3,279)	-	(3,279)
Balances at 31 December 2016	18,770	469	40,325	(21,953)	-	18,841

The accompanying notes are an integral part of the financial statements.

Statements of Cash Flows

(USD, in thousands)

For the Year Ended 31 December:	2016	2015
Cash flow from operating activities
Net loss	(3,279)	(3.649)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortisation	1,384	1,441
Loss from disposition of equipment	2	76
Stock compensation	123	123
Non-cash change in warrant liability	-	(63)
Change in operating assets and liabilities:
Accounts receivable	914	(245)
Unbilled accounts receivable	(74)	71
Inventory	591	1,190
Prepaid expenses	78	324
Other assets	73	31
Accounts payable	172	(716)
Payroll and accrued expenses	(158)	(309)
Deferred revenue	(42)	(240)
Other current liabilities	321	(119)
Net cash provided by (used in) operating activities	105	(2,085)

Cash flow from investing activities
Payments for purchases of property and equipment	(109)	(806)
Proceeds from sale of property and equipment	7	3
Payments for purchases of intangible assets	(85)	(92)
Net cash used in investing activities	(187)	(895)

Cash flows from financing activities
Net proceeds from stock issuance	-	499
Payments on notes payable	(75)	(85)
Payments on lines of credit	-	(3,427)
Net cash used in financing activities	(75)	(3,013)
Net decrease in cash and cash equivalents	(157)	(5,993)
Cash and cash equivalents, beginning of year	5,296	11,289
Cash and cash equivalents, end of year	5,139	5,296

Supplemental disclosures of cash flow information:
Cash payments for interest	86	153
Cash and non cash payments for income taxes	216	403
Non cash movements of inventory and fixed assets	(9)	-

Management considered the effect of exchange rate changes on cash and cash equivalents held or due in foreign currency and deemed it immaterial to the statement of cash flows.

The accompanying notes are an integral part of the financial statements.

Notes to the financial statements

1. Nature of business and basis of presentation

Basis of presentation - These financial statements have been prepared using recognition and measurement principles of Generally Accepted Accounting Principles in the United States of America ("U.S. GAAP").

Nature of business - MYCELX Technologies Corporation ("MYCELX" or the "Company") was incorporated in the State of Georgia on 24 March 1994. The Company is headquartered in Duluth, Georgia with operations in Houston, Texas, Saudi Arabia, India and the United Kingdom. The Company provides clean water technology equipment and related services to the oil and gas, power, marine and heavy manufacturing sectors and the majority of its revenue is derived from the Middle East and United States.

2. Summary of significant accounting policies

Use of estimates - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. The primary estimates and assumptions made relate to depreciation and amortisation, share-based compensation and deferred taxes. Actual results could differ from these estimates and the differences may be material to the financial statements.

Cash and cash equivalents - Cash and cash equivalents consist of short-term, highly liquid investments which are readily convertible into cash within ninety (90) days of purchase. At 31 December 2016, all of the Company's cash and cash equivalent balances were held in non interest-bearing transaction accounts. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. At 31 December 2016 and 2015, cash in non-U.S. institutions was $140,000. The Company has not experienced any losses in such accounts.

Restricted cash - The Company classifies as restricted cash all cash whose use is limited by contractual provisions. As of 31 December 2016 and 2015, restricted cash included $500,000 cash on deposit in a money market account as required by a lender (see Note 9).

Trade accounts receivable - Trade accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company provides credit in the normal course of business to its customers and performs ongoing credit evaluations of those customers and maintains allowances for doubtful accounts, as necessary. Accounts are considered past due based on the contractual terms of the transaction. Credit losses, when realised, have been within the range of the Company's expectations and, historically, have not been significant. The allowance for doubtful accounts at 31 December 2016 and 2015 was $143,000 and $nil, respectively.

Inventories - Inventories consist primarily of raw materials and filter media finished goods as well as equipment to house the filter media and are stated at the lower of cost or market value. Equipment that is in the process of being constructed for sale or lease to customers is also included in inventory (work-in-progress). The Company applies the FIFO method (first in; first out) to account for inventory. Manufacturing work-in-progress and finished products inventory include all direct costs, such as labor and material, and those indirect costs which are related to production, such as indirect labor, rents, supplies, repairs and depreciation costs. A valuation reserve is recorded for slow moving or obsolete inventory items to reduce the cost of inventory to its net realisable value.

Prepaid expenses and other current assets - Prepaid expenses and other current assets include non-trade receivables that are collectible in less than twelve months, security deposits on leased space and various prepaid amounts that will be charged to expenses within twelve months. Non-trade receivables that are collectible in twelve months or more are included in long-term assets.

Property and equipment - All property and equipment are valued at cost. Depreciation is computed using the straight-line method for reporting over the following useful lives:

Buildings	39 years
Leasehold improvements	1-5 years
Office equipment	3-10 years
Manufacturing equipment	5-15 years
Research and development equipment	5-10 years
Purchased software	1-5 years
Equipment leased to customers	3-10 years

Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalised. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation expense includes depreciation on equipment leased to customers and is included in cost of goods sold.

Intangible assets - Intangible assets consist of the costs incurred to purchase patent rights and legal and registration costs incurred to internally develop patents. Intangible assets are reported net of accumulated amortisation. Patents are amortised using the straight-line method over a period based on their contractual lives which approximates their estimated useful lives.

Revenue recognition - The Company's revenue consists of media product and equipment sales. Revenues from media sales are recognised, net of sales allowances and sales tax, when products are shipped and risk of loss has transferred to customers, collection is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. The Company offers customers the option to lease or purchase their equipment. Lease agreements range from one to twenty-four months in length and are renewed at the end of each agreement, if necessary. The lease agreements meet the criteria for classification as operating leases; accordingly, revenue on lease agreements is recognised as income over the lease term. Revenues on long-term contracts related to construction of equipment are recognised, net of sales tax, on the percentage-of-completion basis using costs incurred compared to total estimated costs. Costs are recognised and considered for percentage-of-completion as they are incurred in the manufacture of the equipment. Therefore, revenues may not be related to the progress billings to customers. Revenues are based on estimates, and the uncertainty inherent in estimates initially is reduced progressively as work on the contract nears completion. Revenues on sales in which equipment is pre-fabricated and stocked in inventory are recognised, net of sales tax, upon shipment of the equipment to the customer.

Contract costs include all direct labor and benefits, materials unique to or installed to the project, subcontractor costs, as well as costs relative to contract performance such as travel to a customer site and shipping charges. Provision for estimated losses on uncompleted contracts is recorded in the period in which such losses are probable and estimable. No such provisions have been recognised as of 31 December 2016 and 2015. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognised in the period in which the revisions are determined. Actual results could vary from estimates used in the financial statements.

Unbilled accounts receivable represents revenues recognised in excess of amounts billed. Deferred revenue represents billings in excess of revenues recognised. Contract retentions are recorded as a component of accounts receivable.

Impairment of long-lived assets - Long-lived assets to be held and used, including property and equipment and intangible assets with definite useful lives, are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss, if any, is recognised for the difference between the fair value and carrying value of the assets. Impairment analyses, when performed, are based on the Company's business and technology strategy, management's views of growth rates for the Company's business, anticipated future economic and regulatory conditions, and expected technological availability. For purposes of recognition and measurement, the Company groups its long-lived assets at the lowest level for which there are identifiable cash flows, which are largely independent of the cash flows of other assets and liabilities. No impairment charges were recorded in the years ended 31 December 2016 and 2015.

Shipping and handling costs - Consistent with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 605-45-50 Shipping and Handling Fees and Costs, the Company classifies shipping and handling amounts billed to customers as revenue, and shipping and handling costs as a component of costs of goods sold.

Research and development costs - Research and development costs are expensed as incurred. Research and development expense for the years ended 31 December 2016 and 2015 was approximately $nil and $172,000, respectively.

Advertising costs - The Company expenses advertising costs as incurred. Advertising expense for the years ended 31 December 2016 and 2015 was approximately $4,000 and $7,000, respectively, and is recorded in selling, general and administrative expenses.

Rent expense - The Company records rent expense on a straight-line basis for operating lease agreements that contain escalating rent clauses. The deferred rent liability included in other current liabilities in the accompanying balance sheet represents the cumulative difference between rent expense recognised on the straight-line basis and the actual rent paid.

Income taxes - The provision for income taxes for annual periods is determined using the asset and liability method, under which deferred tax assets and liabilities are calculated based on the temporary differences between the financial statement carrying amounts and income tax bases of assets and liabilities using currently enacted tax rates. The deferred tax assets are recorded net of a valuation allowance when, based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realised in future periods. Decreases to the valuation allowance are recorded as reductions to the provision for income taxes and increases to the valuation allowance result in additional provision for income taxes. The realisation of the deferred tax assets, net of a valuation allowance, is primarily dependent on the ability to generate taxable income. A change in the Company's estimate of future taxable income may require an addition or reduction to the valuation allowance.

The benefit from an uncertain income tax position is not recognised if it has less than a 50 percent likelihood of being sustained upon audit by the relevant authority. For positions that are more than 50 percent likely to be sustained, the benefit is recognised at the largest amount that is more-likely-than-not to be sustained. An uncertain income tax position is not recognised if it has less than a 50 percent likelihood of being sustained. Where a net operating loss carried forward, a similar tax loss or a tax credit carry forward exists, an unrecognised tax benefit is presented as a reduction to a deferred tax asset. Otherwise, the Company classifies its obligations for uncertain tax positions as other non-current liabilities unless expected to be paid within one year. Liabilities expected to be paid within one year are included in the accrued expenses account.

The Company recognises interest accrued related to tax in interest expense and penalties in selling, general and administrative expenses. During the years ended 31 December 2016 and 2015 the Company recognised no interest or penalties.

Earnings per share - Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and potentially dilutive shares outstanding during the period. Potentially dilutive shares consist of the incremental common shares issuable upon conversion of the exercise of common stock options and warrants. Potentially dilutive shares are excluded from the computation if their effect is antidilutive. Total common stock equivalents that were excluded from computing diluted net loss per share were approximately 1,125,640 and 1,150,201 for the years ended 31 December 2016 and 2015, respectively.

Fair value of financial instruments - The Company uses the framework in ASC 820, Fair Value Measurements and Disclosures, to determine the fair value of its financial assets. ASC 820 establishes a fair value hierarchy that prioritises the inputs to valuation techniques used to measure fair value and expands financial statement disclosures about fair value measurements.

The hierarchy established by ASC 820 gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

The three levels of the fair value hierarchy under ASC 820 are described below:

· Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

· Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

· Level 3: Unobservable inputs for the asset or liability.

There were no significant transfers into and out of each level of the fair value hierarchy for assets measured at fair value for the year ended 31 December 2016 or 2015.

All transfers are recognised by the Company at the end of each reporting period.

Transfers between Levels 1 and 2 generally relate to whether a market becomes active or inactive. Transfers between Levels 2 and 3 generally relate to whether significant relevant observable inputs are available for the fair value measurement in their entirety.

The Company's financial instruments as of 31 December 2016 and 2015 include cash and cash equivalents, accounts receivable, accounts payable, the line of credit, and the note payable. The carrying values of cash and cash equivalents, accounts receivable, accounts payable, and the line of credit approximate fair value due to the short-term nature of those assets and liabilities. The Company believes it is impractical to disclose the fair value of the note payable as it is an illiquid financial instrument.

Foreign currency transactions - From time to time the Company transacts business in foreign currencies (currencies other than the United States Dollar). These transactions are recorded at the rates of exchange prevailing on the dates of the transactions. Foreign currency transaction gains or losses are included in selling, general and administrative expenses.

Share-based compensation - The Company issues equity-settled share-based awards to certain employees, which are measured at fair value at the date of grant. The fair value determined at the grant date is expensed, based on the Company's estimate of shares that will eventually vest, on a straight-line basis over the vesting period. Fair value for the share awards representing equity interests identical to those associated with shares traded in the open market is determined using the market price at the date of grant. Fair value is measured by use of the Black Scholes valuation model (see Note 11).

Recently issued accounting standards - In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)", as subsequently amended, which is the new comprehensive revenue recognition standard that will supersede all existing revenue recognition guidance under U.S. GAAP. The standards' core principle is that a company will recognise revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 for all entities by one year. Accordingly, public companies should apply the guidance in ASU 2014-09, as amended, to annual and interim periods beginning on or after 15 December 2017. Early adoption is permitted but not before annual periods beginning after 15 December 2016. Entities will have the option of using either a full retrospective approach or a modified approach to adopt the guidance. The Company is currently evaluating the impact of adopting this guidance but does not expect it to have a material impact on the Company's financial statements.

In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory", which simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realisable value. The standard applies only to inventories for which cost is determined by methods other than last-in first-out and the retail inventory method and is effective for annual reporting periods beginning after 15 December 2016, and interim periods within those fiscal years, with early application permitted. The Company is currently evaluating the impact of adopting this guidance but does not expect it to have a material impact on the Company's financial statements.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)", which requires lessees to recognise on the balance sheet the assets and liabilities for the rights and obligations created by the leases with lease terms of more than twelve months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will continue to primarily depend on its classification as a finance or operating lease. However, unlike current U.S. GAAP, which requires only capital leases to be recognised on the balance sheet, the new standard will require both types of leases to be recognised on the balance sheet. The new standard also requires disclosures about the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The new standard is effective for fiscal years beginning after 15 December 2018, and for interim and annual periods thereafter, with early application permitted. The Company is currently evaluating the impact of adopting this guidance but does not expect it to have a material impact on the Company's financial statements.

In March 2016, the FASB issued ASU 2016-09, "Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting", which amends several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The standard is effective for annual reporting periods beginning after 15 December 2016, and interim periods within those fiscal years, with early application permitted. The Company is currently evaluating the impact of adopting this guidance.

3. Accounts receivable

Accounts receivable and their respective allowance amounts at 31 December 2016 and 2015:

	31 December 2016 US$000	31 December 2015 US$000
Accounts Receivable	2,084	2,855
Less: allowance for doubtful accounts	(143)	-
Total receivable - net	1,941	2,855

4. Inventories

Inventories consist of the following at 31 December 2016 and 2015:

	31 December 2016 US$000	31 December 2015 US$000
Raw materials	756	929
Finished goods	2,434	2,861
Total inventory	3,190	3,790

5. Property and equipment

Property and equipment consists of the following at 31 December 2016 and 2015:

	31 December 2016 US$000	31 December 2015 US$000
Land	709	709
Building	2,724	2,724
Leasehold improvements	341	325
Office equipment	723	745
Manufacturing equipment	854	917
Research and development equipment	514	644
Purchased software	222	222
Equipment leased to customers	8,837	8,610
Construction in progress	730	826
	15,654	15,722
Less: accumulated depreciation	(5,167)	(4,008)
Property and equipment - net	10,487	11,714

During the years ended 31 December 2016 and 2015, the Company removed property, plant and equipment and the associated accumulated depreciation of approximately $183,000 and $41,000, respectively, to reflect the disposal of property, plant and equipment.

Depreciation expense for the years ended 31 December 2016 and 2015 was approximately $1,342,000 and $1,403,000, respectively, and includes depreciation on equipment leased to customers. Depreciation expense on equipment leased to customers included in cost of goods sold for the years ended 31 December 2016 and 2015 was $885,000 and $934,000, respectively.

6. Intangible assets

During 2009, the Company entered into a patent rights purchase agreement with a shareholder. The agreement provided for the immediate payment of $28,000 in 2009 with the possibility of an additional $72,000 based on profits on the sales of a particular product. During 2010, the Company paid $22,000 based on profits on the sales of the product and paid the remaining $50,000 in 2011. The patent is amortised utilising the straight-line method over a useful life of 17 years which represents the legal life of the patent from inception. Accumulated amortisation on the patent was approximately $39,000 and $32,000 as of 31 December 2016 and 2015, respectively.

In addition to the purchased patent, the Company has internally developed patents. Internally developed patents include legal and registration costs incurred to obtain the respective patents. The Company currently holds various patents and numerous pending patent applications in the United States, as well as numerous foreign jurisdictions outside of the United States.

Intangible assets as of 31 December 2016 and 2015 consist of the following:

	Weighted Average Useful lives	31 December 2016 US$000	31 December 2015 US$000
Internally developed patents	15 years	1,240	1,155
Purchased patents	17 years	100	100
		1,340	1,255
Less accumulated amortisation		(488)	(446)
Intangible assets - net		852	809

Approximate aggregate future amortisation expense is as follows:

Year Ending 31 December (USD, in thousands)
2017	46
2018	46
2019	42
2020	41
2021	41
Thereafter	223

Amortisation expense for the years ended 31 December 2016 and 2015 was approximately $42,000 and $38,000, respectively.

7. Income taxes

The components of income taxes shown in the consolidated statements of operations are as follows:

	31 December 2016 US$000	31 December 2015 US$000
Current:
Federal	-	-
Foreign	197	392
State	2	13
Total current provision	199	405
Deferred:
Federal	-	-
Foreign	-	-
State	-	-
Total deferred provision	-	-
Total provision for income taxes	199	405

The provision for income tax varies from the amount computed by applying the statutory corporate federal tax rate of 34 percent, primarily due to the effect of certain nondeductible expenses, foreign withholding tax, and changes in valuation allowances.

A reconciliation of the differences between the effective tax rate and the federal statutory tax rate is as follows:

	31 December 2016	31 December 2015
Federal statutory income tax rate	34.0%	34.0%
State tax rate, net of federal benefit	(0.1%)	0.4%
Valuation allowance	(36.2%)	(25.1%)
Other	0.1%	(13.8%)
Foreign withholding tax	(4.2%)	(8.0%)
Effective income tax rate	(6.4%)	(12.5%)

The significant components of deferred income taxes included in the balance sheets are as follows:

	31 December 2016 US$000	31 December 2015 US$000
Deferred tax assets
Net operating loss	7,140	6,056
Equity compensation	413	404
Research and development credits	159	159
Allowance for bad debts	49	-
Accrued liability	7	44
Charitable contributions	10	9
Other	37	25
Total gross deferred tax asset	7,815	6,697

Deferred tax liabilities
Property and equipment	(971)	(968)
Total gross deferred tax liability	(971)	(968)

Net deferred tax asset before valuation allowance	6,844	5,729
Valuation allowance	(6,844)	(5,729)
Net deferred tax asset (liability)	-	-

Deferred tax assets and liabilities are recorded based on the difference between an asset or liability's financial statement value and its tax reporting value using enacted rates in effect for the year in which the differences are expected to reverse, and for other temporary differences as defined by ASC-740, Income Taxes. At 31 December 2016, the Company has recorded a valuation allowance of $6.8 million for which it is more likely than not that the Company will not receive future tax benefits due to the uncertainty regarding the realisation of such deferred tax assets.

As of 31 December 2016, the Company has approximately $20.4 million of gross U.S. federal net operating loss carry forwards and $5.3 million of gross state net operating loss carry forwards that will begin to expire in the 2019 tax year.

The FASB issued Interpretation ASC-740-10-25, Income Taxes, an interpretation of ASC-740 which clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognised in the financial statements. Under ASC-740, the impact of an uncertain income tax position on the income tax return must be recognised at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. ASC-740 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. ASC-740 applies to all tax positions related to income taxes.

As a result of the adoption and implementation of ASC-740, a tax position is recognised as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognised is the largest amount of tax benefit that has a greater than 50 percent likelihood of being realised on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. The Company recognises interest and penalties related to tax positions in income tax expense. At 31 December 2016 and 2015, there was no accrual for uncertain tax positions or related interest.

The Company's tax years 2012 through 2016 remain subject to examination by federal, state and foreign income tax jurisdictions.

8. Line of credit

In October 2014, the Company entered into a bank line of credit that allows for borrowings up to $500,000. The line of credit is revolving and is payable on demand. There was no balance on the line of credit at 31 December 2016 and 2015. The facility matures in October 2017 and is secured by the assignment of a deposit account held by the lender. The line of credit carries a variable interest rate of 0.5 percentage points under an independent index which is the Wall Street Journal Prime and is calculated by applying the ratio of the interest rate over a year of 360 days multiplied by the outstanding principal balance multiplied by the actual number of days the principal balance is outstanding. The interest rate on 31 December 2016 and 2015 was 3.25 percent and 3.00 percent, respectively. There was no interest expense related to this loan for the years ended 31 December 2016 and 2015.

9. Notes payable

On 27 March 2013, the Company entered into a term loan agreement with a lender for the purchase of property and a building for its manufacturing operations and corporate offices. The note is secured by the property and building. The Company borrowed proceeds of $2,285,908 at a fixed interest rate of 4.45 percent. The loan has a ten year term with monthly payments based on a twenty year amortisation. There is a one-time payment at the end of the term of the note of approximately $1,400,000. In accordance with the terms of the agreement, the Company is required to keep $500,000 in a deposit account with the lending bank. As of 31 December 2016 and 2015, the Company had restricted cash of $500,000 related to the loan agreement. Future maturities of long-term debt are as follows as of 31 December 2016:

Year Ending 31 December (USD, in thousands)
2017	85
2018	89
2019	93
2020	97
2021	102
Thereafter	1,540
	2,006

10. Public Offering of Common Stock

Authorised shares and shares issuance

In December 2014, the Company issued an additional 5,295,069 shares of common stock for $2.35 per share ("the Public Offering"). The Company incurred costs in the issuance of these shares of approximately $657,000. The Company received net proceeds of approximately $11,786,000. In January 2015, the Company completed the final closing of the share offering and issued 78,977 shares of common stock for $2.35 per share raising approximately $186,000.

11. Stock compensation

Stock options

In July 2011, the Company's shareholders approved the Conversion Shares and the Directors' Shares, as well as the Plan Shares and Omnibus Performance Incentive Plan ("Plan"). This included the termination of all outstanding stock incentive plans, cancellation of all outstanding stock incentive agreements, and the awarding of stock incentives to Directors and certain employees and consultants. The Company established the Plan to attract and retain Directors, officers, employees and consultants. The Company reserved an amount equal to 10 percent of the Common Shares issued and outstanding immediately following the Public Offering.

Upon the issuance of these additional shares, an award of share options was made to the Directors and certain employees and consultants, and a single award of restricted shares was made to a former Chief Financial Officer. In addition, additional stock options were awarded in each year subsequent. The awards of stock options and restricted shares made upon issuance were in respect of 85 percent of the Common Shares available under the Plan, equivalent to 8.5 percent of the Public Offering. The total number of shares reserved for stock awards and options under this Plan is 1,877,011 with 1,139,556 shares allocated as of 31 December 2016. The shares are all allocated to employees, executives and consultants.

The options granted to Non-Executive Directors, unless otherwise agreed, vest contingent on continuing service with the Company at the vesting date and compliance with the covenants applicable to such service.

Employee options either vest over three years with a third vesting ratably each year, or partially on issuance and partially over the following 24 month period. Vesting accelerates in the event of a change of control. Options granted to Non-Executive Directors and one executive vest partially on issuance and will vest partially one to two years later. The remaining Non-Executive Director options expired at the end of 2016.

As discussed in Note 2, the Company uses the Black Scholes valuation model to measure the fair value of options granted. Since the Company does not have a sufficient trading history from which to calculate its historical volatility, the Company's expected volatility is based on a basket of comparable companies' historical volatility. As the Company's initial options were granted in 2011, the Company does not have sufficient history of option exercise behavior from which to calculate the expected term. Accordingly, the expected terms of options are calculated based on the short-cut method commonly utilised by newly public companies. The risk free interest rate is based on a blended average yield of two and five year United States Treasury Bills at the time of grant. The assumptions used in the Black Scholes option pricing model for options granted in 2015 and 2016 were as follows:

	Number of Options Granted	Grant Date	Risk-Free Interest Rate	Expected Term	Volatility	Exercise Price	Fair Value per option
2015	299,000	20/05/2015	1.29%	6 years	58.00%	$2.15	$1.16

2016	25,000	01/02/2016	1.62%	5.75 years	56.00%	$0.34	$0.18
	345,000	14/03/2016	1.70%	5.75 years	54.50%	$0.40	$0.20

The Company assumes a dividend yield of 0.0%.

The following table summarises the Company's stock option activity for the years ended 31 December 2016 and 2015:

Stock Options	Shares	Weighted-Average Exercise Price	Weighted-Average Remaining Contractual Term (in years)	Average Grant Date Fair Value
Outstanding at 31 December 2014	1,151,274	$3.79	5.5	$2,544,210
Granted	299,000	$2.15	6.0	$346,840
Exercised	(170,007)	$0.86
Forfeited	(454,711)	$4.03
Outstanding at 31 December 2015	825,556	$3.48	5.8	$1,476,970

Granted	370,000	$0.40	5.8	$73,500
Forfeited	(56,000)	$4.36
Outstanding at 31 December 2016	1,139,556	$2.56	5.9	$1,372,852
Exercisable at 31 December 2016	797,723	$3.13	6.3

A summary of the status of unvested options as of 31 December 2016 and changes during the years ended 31 December 2016 and 2015 is presented below:

Unvested Options	Shares	Weighted-Average Fair Value at Grant Date
Unvested at 31 December 2014	105,002	$3.83
Granted	299,000	$1.16
Vested	(38,334)	$3.92
Forfeited	(116,668)
Unvested at 31 December 2015	249,000	$1.16

Granted	370,000	$0.20
Vested	(262,167)	$1.49
Forfeited	(15,000)
Unvested at 31 December 2016	341,833	$0.65

As of 31 December 2016, total unrecognised compensation cost of $171,000 was related to unvested share-based compensation arrangements awarded under the Plan.

12. Employee benefit plan

The Company maintains an active defined contribution retirement plan for its employees (the "Benefit Plan"). All employees satisfying certain service requirements are eligible to participate in the Benefit Plan. The Company makes cash contributions each payroll period up to specified percentages of employees' contributions as approved by the Board of Directors. In September 2015, the Company changed its policy of making contributions under which it chose not to contribute to the plan. The Company may elect to change its policy in the future. The Company's contributions to the Benefit Plan were approximately $nil and $72,000 for the years ended 31 December 2016 and 2015, respectively.

13. Commitments and contingencies

Operating leases - The Company leases certain facilities and equipment under non-cancelable operating leases which expire at varying times between January 2018 and May 2019. Certain of these leases have escalating rent payments which result in the Company recording a deferred rent liability.

Future minimum lease payments under the operating leases, together with the present value of minimum lease payments as of 31 December 2016 are as follows:

Year Ending 31 December		Future Lease Payments US$000
2017		314
2018		116
2019		45
Total future lease payments		475

Rent expense for the years ended 31 December 2016 and 2015 was approximately $337,000 and $613,000, respectively.

14. Related party transactions

The Company has held a patent rights purchase agreement since 2009 with a shareholder as described in Note 6.

15. Segment and geographic information

ASC 280-10, Disclosures About Segments of an Enterprise and Related Information (ASC 280-10), establishes standards for reporting information about operating segments. ASC 280-10 requires that the Company report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker (CODM) in deciding how to allocate resources and in assessing performance. The Company's CODM is the Chief Executive Officer (CEO). While the CEO is apprised of a variety of financial metrics and information, the business is principally managed on an aggregate basis as of 31 December 2016. For the year ended 31 December 2016, the Company's revenues were generated primarily in the Middle East and the United States (U.S.). Additionally, the majority of the Company's expenditures and personnel either directly supported its efforts in the Middle East and the U.S., or cannot be specifically attributed to a geography. Therefore, the Company has only one reportable operating segment.

Revenue from customers by geography is as follows:

Year Ending 31 December	2016	2015
Middle East	3,989	10,604
United States	1,766	1,897
Other	2,168	1,091
Total	7,923	13,592

Equipment leased to customers by geography is as follows:

Year Ending 31 December	2016	2015
Middle East	6,391	6,301
United States	2,071	1,813
Other	375	496
Total	8,837	8,610

16. Concentrations

At 31 December 2016, two customers, one with three contracts with three separate plants, represented 61 percent of accounts receivable. During the year ended 31 December 2016, the Company received 67 percent of its gross revenue from two customers, one with three separate plants.

At 31 December 2015, two customers, one with three contracts with three separate plants, represented 74 percent of accounts receivable. During the year ended 31 December 2015, the Company received 78 percent of its gross revenue from two customers, one with three separate plants.

17. Subsequent Events

The Company discloses material events that occur after the balance sheet date but before the financials are issued. In general, these events are recognised in the financial statements if the conditions existed at the date of the balance sheet, but are not recognised if the conditions did not exist at the balance sheet date. Management has evaluated subsequent events through 10 May 2017, the date the financial statements were available to be issued, and no events have occurred which require further disclosure.

This information is provided by RNS

The company news service from the London Stock Exchange

END

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