18 May 2023

MYCELX TECHNOLOGIES CORPORATION (AIM: MYX)

Final Results for the Year Ending 31 December 2022

MYCELX Technologies Corporation ("MYCELX" or the "Company"), the clean water and clean air technology company transforming the environmental impact of industry, announces its audited results for the year ended 31 December 2022.

Highlights

Financial

·      Revenue of $10.0 million (2021: $8.5 million)

·      Gross profit of $4.4 million (2021: $3.3 million)

·      EBITDA¹ of negative $2.5 million (2021: $19,000)

·      Loss before tax of $3.6 million (2021: loss before tax $1.1 million)

·      Cash & cash equivalents of $1.7 million (2021: $3.2 million)

Operational

Continued focus on high quality projects with high margins that deliver recurring revenue

PFAS Remediation

·      A successful trial was completed in Australia using MYCELX proprietary technology for the treatment of PFAS

·      Post period end: signed three pilot testing agreements for PFAS remediation in landfill leachate sites in the U.S.

REGEN in EOR

·      Secured a second REGEN sale for water treatment during Enhanced Oil Recovery ("EOR") production

Middle East Downstream

·      Continued momentum in Saudi Arabia:

o  Converted an emergency response project into a longer-term deployment.

o  New project secured on contaminated industrial wastewater.

·      Fourth project signed with existing customer to provide clean water at a fertiliser production facility

Corporate

·      Secured Global Contract with SABIC to treat targeted, difficult wastewater streams

·      Added an experienced Business Development Director for the PFAS business segment

·      Awarded the London Stock Exchange's Green Economy Mark

Connie Mixon, CEO, commented:

"I am pleased to report that MYCELX continued to make solid progress in 2022 securing high quality contracts in the Middle East in EOR and REGEN, and the petrochemical market. Laying critical groundwork in the PFAS remediation market was a top priority and is accelerating in 2023.

During the period and into 2023, we remain committed to further penetrating our three core markets of focus; PFAS remediation, REGEN product for Enhanced Oil Recovery ("EOR") and Middle East downstream. I am pleased to report that substantial progress has been made in our core markets as evidenced by the range of new awards we have won.

I would like to thank the MYCELX team and Board for their diligence and hard work during the period and into 2023. The targeting of our three core markets, along with the focus on strategic partnerships, is building momentum, producing results, and is designed to generate substantial returns for our investors. Following the strong start we have made in 2023, we look forward to updating the market on further developments over the coming months."

For further information, please contact: 

¹ EBITDA is a non-U.S. GAAP measure that the Company uses to measure and monitor performance and liquidity and is calculated as net profit before interest expense, provision for income taxes, and depreciation and amortisation of fixed and intangible assets, including depreciation of leased equipment which is included in cost of goods sold. This non-U.S. GAAP measure may not be directly comparable to other similarly titled measures used by other companies and may have limited use as an analytical tool.

Chairman's Statement

MYCELX made continued progress in its core initiatives in 2022, while successfully navigating a highly volatile macro environment. Due to this progress, we remain in a strong position to capitalise on increasing demand for our innovative technologies that help companies achieve their environmental and operational objectives.

Following subdued energy markets in previous years, 2022 saw the price of oil and natural gas increase significantly with the price of oil exceeding $100 per barrel for the first time since 2014. This increase was due to events that occurred in Ukraine, changing travel policies and countries opening up post the COVID-19 pandemic. Natural gas prices across the world also soared, as countries, mainly in Europe, sought to bolster supply, with energy security becoming a highly important theme during the year.

These trends led to strong demand for our innovative technologies in the downstream Middle East market as well as with our REGEN media used in upstream EOR production. Operators are requiring better performance from their water treatment technologies in order to cost-effectively meet their production targets and their environmental goals. Both of these oil and gas markets benefit from our technology by having the ability to significantly improve their overall water process management.

In addition to these opportunities in the Oil and Gas market, the PFAS Remediation market presents an exciting target segment because of its long-term growth potential. PFAS contamination is a global threat and its remediation presents a large potential market. The Company believes MYCELX's unique technology can become an industry leader in completely removing PFAS from contaminated streams and eliminating future liability. Following the signing of three paid trials in Q1 2023, we have taken important steps in proving the efficacy of our technology in the PFAS market.

In recent years, shareholders and the public have placed increasing importance on companies' adoption of Environmental, Social and Governance ("ESG") principles, thus increasing the expectation that organisations will behave in an environmentally sustainable and ethical manner. As a Board, we believe this trend will continue in the coming years and will fuel increased demand for MYCELX's innovative technologies. We are therefore highly focused on delivering on the promise of helping our partners to cost effectively improve the environment. 

I would like to take the opportunity to thank the new and existing investors that participated in the $2.3 million fundraise conducted in March 2022. Our rationale was that additional funds would allow us to accelerate our progress in capturing the significant opportunity presented by the PFAS remediation segment at a critical time in the market's development. I am pleased to report that since the raise we have made good progress in positioning our technology as a leader in the burgeoning PFAS Remediation market.

We remain highly upbeat about our prospects in the Middle East and with our REGEN offering globally. Historically we have experienced heightened bidding activity in stronger energy markets as operators look to increase margins and maximise output, especially in the EOR segment.

We are also bullish about our PFAS market opportunity and continue to believe that countries are just realising the significant threat of PFAS contamination to the environment. Addressing this problem will require significant levels of investment for remediation at the federal, state and local government levels, as well as by corporate entities. With our progress so far in 2023 and the favourable industry trends, we are optimistic about the growth prospects across the business for the remainder of the year.

In closing, we are very excited about MYCELX's position in our target markets. We have developed a unique and highly valued technological offering for our customers that is proven to address the industry's significant environmental challenges. We have shown that our products can help companies achieve pressing environmental goals which are priorities for the investment community and for the broader population. As a Board and Management team, we therefore look forward to further progress this year and continuing our journey to positively affect the impact our customers have on the environment.

Chief Executive Officer's Statement

I am pleased to report that MYCELX continued to make solid progress in 2022 securing high quality contracts in the Middle East in EOR and REGEN, and the petrochemical market. Laying critical groundwork in the PFAS remediation market was a top priority and is accelerating in 2023.

During the period and into 2023, we remain committed to further penetrating our three core markets of focus; PFAS remediation, REGEN product for Enhanced Oil Recovery ("EOR") and Middle East downstream. I am pleased to report that substantial progress has been made in our core markets as evidenced by the range of new awards we have won.

In the Middle East, we made a strong start to 2022 with a contract extension signed in Q1 and an emergency response system, which was operational in Q2 2022. Furthermore, in Saudi Arabia, the Company commenced a rapid response project, the fifth ammonia removal installation undertaken with a global leader in fertiliser production. In addition, due to the superior results delivered by our technology, a project extension with a leading independent petrochemical company was secured. The aforementioned projects were sufficient to ensure the company achieved its 2022 financial guidance.

The Company continues to generate momentum in Saudi Arabia with the conversion of an emergency response project into a longer-term deployment and a new project win to treat some of the most contaminated industrial wastewater in the country. Given Saudi Arabia has significant growth plans, we look forward to further establishment of our product offering in the region, not only in the downstream market, but upstream as well with our unique REGEN product for EOR.

During the period MYCELX was pleased with the number of REGEN related orders secured, including a successful EOR trial with a major producer in the Middle East. A REGEN produced water system was also installed and commissioned in Nigeria, a region that we continue to focus on. In February 2023, we secured our second REGEN project to a National Oil Company in the Middle East for water treatment during EOR production.

Our unique REGEN offering has proven to outperform other technologies when applied to treatment for EOR water. Given the number of regions across the world where EOR production is either stable or increasing, this technology will continue to be in demand to tackle all of the wastewater operational issues associated with this type of production. Again, further evidence of our efforts to help our customers achieve the highest of environmental standards.

The PFAS remediation market remains one of the most exciting areas for MYCELX. This is a widespread global human health and environmental issue, and one that many governments have yet to acknowledge. Given that our technology is already installed and performing in Australia paves the way to success in the U.S. and globally. In August 2022, we hired an experienced Business Development Director for the PFAS segment of our business which has accelerated securing trials and a lease-to-own contract. 

The work we did in 2022 is now reaping rewards. We targeted a number of global water treatment companies, environmental engineering firms and U.S. water treatment companies building relationships through technical webinars and presentations. We believe adoption of our PFAS solution will be accelerated with strategic partnerships we form in the early stages of trials and technology vetting. Since then, in 2023, we signed a six-month paid trial for treatment of PFAS contaminated leachate from a solid waste landfill in the United States. Then in March, we were pleased to secure two pilot testing agreements for PFAS remediation of landfill leachate in the U.S. A successful outcome at these paid trials will boost our position as the industry leader in PFAS remediation, but it will also enable us to leverage the successful sites and gain further market share with new contract wins.

As seen with the recently announced project wins, we are focusing on projects that have shorter cash conversion cycles, with longer total durations. Projects of this nature ensure regular cash flows that can support MYCELX's working capital requirements. Maintaining healthy operating margins on the projects we are involved in is also a priority for the Company, as we will continue to build our cash position.

In January 2022, we were pleased to announce that MYCELX was awarded the Green Economy Mark by the London Stock Exchange. The award validates the Company's claims that its product offering is supporting the transition to a low or net zero economy by enabling companies to reduce their impact on the environment. At a time when ESG related themes are at the front of investors' minds, we believe that our commitment to providing technologies that have a positive impact on the environment remains strong.

I would like to thank the MYCELX team and Board for their diligence and hard work during the period and into 2023. The targeting of our three core markets, along with the focus on strategic partnerships, is building momentum, producing results, and will generate substantial returns for our investors. Following the strong start we have made in 2023, we look forward to updating the market on further developments over the coming months.

Financial Review

Due to increased demand in the Middle East and growth in legacy media sales, we saw revenue rise 18% to $10.0 million for 2022, compared to $8.5 million for 2021. Revenue from equipment sales and leases decreased by 5% to $3.6 million for 2022 (FY21: $3.8 million) and revenue from consumable filtration media and service increased by 36% to $6.4 million (FY21: $4.7 million). Whilst the equipment sales are one-off by nature, there is longevity to the media sales and ongoing lease and service revenues.

Gross profit increased by 33% to $4.4 million during the year, compared to $3.3 million in 2021, and gross profit margin increased to 44% (FY21: 39%).

Total operating expenses for 2022, including depreciation and amortisation and the gain on sale of property and equipment, increased by 67% to $8.0 million (FY21: $4.8 million). Operating expenses in 2021 were reduced by a financial gain of approximately $2.6 million from the sale of the Company's building in Duluth, Georgia, USA.

The largest component of operating expenses was selling, general and administrative expenses, which increased by approximately 10% to $7.6 million (FY21: $6.9 million) due to moving expenses, maintenance on lease equipment and payroll tax credits that did not extend to 2022. Depreciation and amortisation within operating expenses increased by 2% to $210,000 (FY21: $205,000).

EBITDA was negative $2.5 million, compared to $19,000 in 2021. Normalised EBITDA excluding the sale of the Company's building in Duluth, Georgia was negative $2.5 million in 2021. EBITDA is a non-U.S. GAAP measure that the Company uses to measure and monitor performance and liquidity and is calculated as net profit before interest expense, provision for income taxes, and depreciation and amortisation of fixed and intangible assets, including depreciation of leased equipment which is included in cost of goods sold. This non-U.S. GAAP measure may not be directly comparable to other similarly titled measures used by other companies and may have limited use as an analytical tool.

The Company recorded a loss before tax of $3.6 million in 2022, compared to a loss before tax of $1.1 million in 2021. The 2021 net loss included the $2.6 million gain the Company recognised on the sale of its building. Without the gain, net loss would have been $3.7 million in 2021. Basic loss per share was 17 cents in 2022, compared to basic loss per share of 7 cents in the previous year.

As of 31 December 2022, total assets were $13.6 million with the largest assets being inventory of $3.7 million, property and equipment of $3.2 million, $2.8 million of accounts receivable and $1.7 million of cash and cash equivalents including restricted cash.

Total liabilities as of 31 December 2022 were $2.8 million and stockholders' equity was $10.8 million, resulting in a debt-to-equity ratio of 26%.

In March 2022, the Company completed the closing of a placing of 3,539,273 Common Shares at a price of US$0.66 (50 pence) per new share raising gross proceeds of approximately $2.3 million before expenses. The Company incurred costs in the issuance of these shares of approximately $267,000. The proceeds from the transaction were used to accelerate the commercialisation of the Company's PFAS remediation system in the U.S. and in order to support working capital across the Company's core markets.

The Company ended the period with $1.7 million of cash and cash equivalents, including restricted cash, compared to $3.2 million in total at 31 December 2021. The Company used approximately $2.7 million of cash in operations in 2022 (FY21: $3.4 million used in operations) and $800,000 was used in investing activities (FY21: $5.1 million provided by investing activities). Proceeds from the placing of Common Shares contributed $2.0 million provided by financing activities.

Statements of Operations

(USD, in thousands, except share data)

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

Balance Sheets

(USD, in thousands, except share data)

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

Statements of Stockholders' Equity

(USD, in thousands, except share data)

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

Statements of Cash Flows

(USD, in thousands)

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 Norcross, Georgia with operations in Houston, Texas, Saudi Arabia 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 the United States.

Liquidity - The Company meets its day-to-day working capital and other cash flow requirements through cash flow from operations. The Company had a Note Payable (Note 10) with an original maturity in March 2023 and access to a line of credit (Note 8) that renewed annually. However, the Note and the line of credit were paid in full, and $500,000 of cash was reclassified from restricted cash, during H1 2021 when the Company completed the sale of its building in Duluth, Georgia, USA for total consideration of $5.4 million. The sale enabled the Company to right-size its office space needs across its main operating locations and provided cash proceeds, after repayment of the Note Payable and line of credit, of $2.8 million, which is being used for working capital purposes to support the business needs. In March 2022, the Company completed the closing of a placing raising gross proceeds of approximately $2.3 million before expenses. The proceeds from the transaction are being used to accelerate the commercialisation of the Company's PFAS remediation system in the U.S., and in order to support working capital across the Company's core markets. The Company actively manages its financial risk by operating Board-approved financial policies that are designed to ensure that the Company maintains an adequate level of liquidity and effectively mitigates financial risks.

Whilst macro events are creating uncertainty within world markets and volatility in oil prices, today's high oil price bodes well for the completion of new commercial agreements with both existing and new international customers. On the basis of current financial projections, including a downside scenario sensitivity analysis considering only revenues that are contracted or that the Company considers probable and adjusting for direct cost of goods sold within the analysis, the Company believes that it has adequate resources to continue in operational existence for the foreseeable future of at least 12 months from the date of the issuance of these financial statements and, accordingly, consider it appropriate to adopt the going concern basis in preparing these Financial Statements. Should the projected cash flow not materialise under certain scenarios, alternative actions to increase liquidity may need to be considered.

2. Summary of Significant Accounting Policies

Use of estimates - The preparation of financial statements in conformity with U.S. GAAP requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the amounts reported in the financial statements and accompanying notes. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised. The primary estimates and assumptions made by management relate to the inventory valuation, accounts receivable valuation, useful lives of property and equipment, volatility used in the valuation of the Company's share-based compensation and the valuation allowance on deferred tax assets. Although these estimates are based on management's best knowledge of current events and actions the Company may undertake in the future, actual results ultimately may differ from the estimates and the differences may be material to the financial statements.

Revenue recognition - The Company's revenue consists of filtration media product, equipment leases, professional services to operate the leased assets, turnkey operations and equipment sales. These sales are based on mutually agreed upon pricing with the customer prior to the delivery of the media product and equipment. The Company recognises revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.

Revenue from filtration media sales and spare parts is billed and recognised when products are shipped to the customer. Revenue from equipment leases is recognised over time as the equipment is available for customer use and is typically billed monthly. Revenue from professional services provided to monitor and operate the equipment is recognised over time when the service is provided and is typically billed monthly. Revenue from turnkey projects whereby the Company is asked to manage the water filtration process end to end is recognised on a straight-line basis over time as the performance obligation, in the context of the contract, is a stand-ready obligation to filter all water provided. Revenue from contracts related to construction of equipment is recognised upon shipment of the equipment to the customer because the contractual terms state that control transfers at the point of shipment and there is no enforceable right to payments made as customer deposits prior to that date. Customer deposits for equipment sales represent payments made prior to transferring control at the point of shipment that can be refunded at any time when requested by the customer.

Sales tax charged to customers is presented on a net basis within the statements of operations and therefore recorded as a reduction of net revenues. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfilment cost and are included in cost of goods sold.

The Company's contracts with the customers state the final terms of the sales, including the description, quantity, and price of media product, equipment (sale or lease) and the associated services to be provided. The Company's contracts are generally short-term in nature and in most situations, the Company provides products and services ahead of payment and has fulfilled the performance obligation prior to billing.

The Company believes the output method is a reasonable measure of progress for the satisfaction of its performance obligations that are satisfied over time, as it provides a faithful depiction of (1) performance toward complete satisfaction of the performance obligation under the contract and (2) the value transferred to the customer of the services performed under the contract. All other performance obligations are satisfied at a point in time upon transfer of control to the customer.

The Company's contracts with customers often include promises to transfer multiple products and services. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgement. Judgement is required to determine stand-alone selling price ('SSP') for each distinct performance obligation. The Company develops observable SSP by reference to stand-alone sales for identical or similar items to similarly situated clients at prices within a sufficiently narrow range.

All equipment sold by the Company is covered by the original manufacturer's warranty. The Company does not offer an additional warranty and has no related obligations.

Unbilled accounts receivable represents revenue recognised in excess of amounts billed. Contract liability represents billings in excess of revenue recognised. Unbilled accounts receivable at 31 December 2022 and 2021, and 1 January 2021 was $nil, $175,000 and $nil, respectively. Contract liability at 31 December 2022 and 2021, and 1 January 2021 was $nil, $54,000 and $745,000, respectively.

Timing of revenue recognition for each of the periods and geographic regions presented is shown below:

Contract costs - The Company capitalises certain contract costs such as costs to obtain contracts (direct sales commissions) and costs to fulfil contracts (upfront costs where the Company does not identify the set-up fees as a performance obligation). These contract assets are amortised over the period of benefit, which the Company has determined is customer life and averages one year.

During the years ended 31 December 2022 and 2021, the Company did not have any costs to obtain a contract and any costs to fulfil a contract were inconsequential.

Cash, cash equivalents and restricted cash - 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 2022, all of the Company's cash, cash equivalent and restricted cash balances were held in checking and money market accounts. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. At 31 December 2022 and 2021, cash in non-U.S. institutions was $159,000 and $25,000, respectively. The Company has not experienced any losses in such accounts. The Company classifies as restricted cash all cash whose use is limited by contractual provisions. At 31 December 2022 and 2021, restricted cash included $84,000 in a money market account to secure the Company's corporate credit card and a stand-by letter of credit.

Reconciliation of cash, cash equivalents and restricted cash at 31 December 2022 and 2021:

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 2022 and 2021 was $168,000 and $90,000, 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 net realisable 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 Average Cost method to account for its inventory. Manufacturing work-in-progress and finished products inventory include all direct costs, such as labour and materials, and those indirect costs which are related to production, such as indirect labour, 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. The Company determines the valuation by evaluating expected future usage as compared to its past history of utilisation and future expectations of usage. At 31 December 2022 and 2021, the Company had REGEN-related inventory of 41 percent and 39 percent of the total inventory balance, respectively, which is in excess of the Company's current requirements based on the recent level of sales. The inventory is associated with efforts to expand into the Enhanced Oil Recovery and Beneficial Reuse markets that the Company has identified as large global markets. These efforts should reduce this inventory to desired levels over the near term and Management believes no loss will be incurred on its disposition. However, there is a risk that management will sustain a loss on the value of the inventory before it is sold. No estimate can be made of a range of amounts of loss that are reasonably possible should the efforts not be successful.

Prepaid expenses and other current assets - Prepaid expenses and other current assets include non-trade receivables that are collectible in less than 12 months, security deposits on leased space and various prepaid amounts that will be charged to expenses within 12 months. Non-trade receivables that are collectible in 12 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:

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.

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 2022 and 2021.

Research and development costs - Research and development costs are expensed as incurred. Research and development expense for the years ended 31 December 2022 and 2021 was approximately $218,000 and $223,000, respectively.

Advertising costs - The Company expenses advertising costs as incurred. Advertising expense for the years ended

31 December 2022 and 2021 was $nil and $5,000, respectively, and is recorded in selling, general and administrative expenses.

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. 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 2022 and 2021 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. Potentially dilutive shares are excluded from the computation if their effect is antidilutive. Total common stock equivalents consisting of unexercised stock options that were excluded from computing diluted net loss per share were approximately 2,019,118 for the year ended 31 December 2022 and there were no adjustments to net income available to stockholders as recorded on the statement of operations.

The following table sets forth the components used in the computation of basic and diluted net (loss) profit per share for the periods indicated:

Fair value of financial instruments - The Company uses the framework in ASC 820, Fair Value Measurements, 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 transfers into and out of each level of the fair value hierarchy for assets measured at fair value for the years ended 31 December 2022 or 2021.

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 2022 and 2021 include cash and cash equivalents, restricted cash, accounts receivable and accounts payable. The carrying values of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value due to the short-term nature of those assets and liabilities.

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.

Stock 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 June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which requires measurement and recognition of expected credit losses for financial assets held. The standard is to be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The guidance will become effective for the Company in fiscal years beginning after 15 December 2022, including interim periods within that reporting period. 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 December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is expected to simplify income tax accounting requirements in areas deemed costly and complex. The Company adopted this guidance effective 1 January 2021. The adoption of this new guidance did not have a material impact on the financial statements.

Recent accounting pronouncements pending adoption not discussed above are either not applicable or are not expected to have a material impact on the Company.

3. Accounts Receivable

Accounts receivable and their respective allowance amounts at 31 December 2022 and 2021:

4. Inventories

Inventories consist of the following at 31 December 2022 and 2021:

5. Property and Equipment

Property and equipment consist of the following at 31 December 2022 and 2021:

In March 2021, the Company completed the sale of its building in Duluth, Georgia for total consideration of $5.4 million enabling the Company to right-size its office space needs across its main operating locations. The net book value of the building and land was $2.8 million so the Company recognised a financial gain of approximately $2.6 million. 

During the years ended 31 December 2022 and 2021, the Company removed property and equipment and the associated gross and accumulated depreciation of approximately $742,000 and $856,000, respectively, to reflect the disposal of property and equipment.

Depreciation expense for the years ended 31 December 2022 and 2021 was approximately $1,022,000 and $1,066,000, 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 2022 and 2021 was $881,000 and $919,000, respectively.

6. Intangible Assets

During 2009, the Company entered into a patent rights purchase agreement. 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 $77,000 and $70,000 as of 31 December 2022 and 2021, 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. In 2022, there was $47,000 of new internally developed patents and fees on patents in progress.

Intangible assets as of 31 December 2022 and 2021 consist of the following:

At 31 December 2022, internally developed patents include approximately $361,000 for costs accumulated for patents that have not yet been issued and are not depreciating.

Approximate aggregate future amortisation expense is as follows:

Amortisation expense for the years ended 31 December 2022 and 2021 was approximately $69,000 and $58,000, respectively.

7. Income Taxes

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

The provision for income tax varies from the amount computed by applying the statutory corporate federal tax rate of 21 percent, primarily due to the effect of certain non-deductible 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:

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

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 2022 and 2021, the Company has recorded a valuation allowance of $6.8 million and $6.1 million, respectively, a change of $670,000 and $300,000 for each year, 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 2022, the Company has approximately $30.2 million of gross U.S. federal net operating loss carry forwards and $3.7 million of gross state net operating loss carry forwards that will begin to expire in the 2023 tax year and will continue through 2042 when the current year net operating losses will expire. As of 31 December 2021, the Company had approximately $26.5 million of gross U.S. federal net operating loss carry forwards and $3.6 million of gross state net operating loss carry forwards.

On 27 March 2020, the U.S. Government enacted the Coronavirus Aid, Relied, and Economic Security Act (the 'CARES Act'). The CARES Act includes, but is not limited to, tax law changes related to (1) accelerated depreciation deductions for qualified improvement property placed in service after 27 September 2017, (2) reduced limitation of interest deductions, and (3) temporary changes to the use and limitation of NOLs. There was no material impact of the CARES Act to the Company's income tax provision for 2022 or 2021.

The Company's tax years 2018 through 2022 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 allowed for borrowings up to $500,000. The line of credit was revolving and was payable on demand. In November 2018, the maximum borrowing capacity was increased to $1,875,000. The facility renewed annually and was secured by the assignment of a deposit account held by the lender and a second deed to the property owned by the Company in Duluth, Georgia. The line of credit carried a floating rate of interest equal to the lender's Prime Rate and was subject to change any time the Prime Rate changed. Under terms of the line of credit, the Company was required to maintain a minimum cash balance and a specified cash flow coverage ratio, as those terms were defined, and the Company was in compliance as throughout the term of the facility. In March 2021, the line of credit was paid in full with proceeds from the sale of the Company's building in Duluth, Georgia and the facility was closed. Interest expense related to this loan was $9,000 for the year ended 31 December 2021.

9. Paycheck Protection Program Loan

In December 2020, Congress enacted the Consolidated Appropriations Act, 2021. The Act is an approximately $900 billion COVID-19 relief package and includes $284 billion for a second round of the Paycheck Protection Program ('PPP Loan'), Title I of the CARES Act, which was enacted 27 March 2020. In January 2021, the Company applied for and was granted a PPP Loan from Pinnacle Bank in the amount of approximately $401,000. The PPP Loan issued to the Company matures in January 2026 and bears an interest rate of 1 percent per annum and may be prepaid in whole or in part without penalty. No interest payments are due within the initial six months of the PPP Loan. The interest accrued during the initial six-month period is due and payable, together with the principal, on the maturity date. On 5 August 2021, the Company's PPP Loan was forgiven in full, including all principal and interest outstanding as of the date of the forgiveness. Any amount forgiven when the Company was legally released as the primary obligor under the loan was recognised in the Statement of Operations as a gain upon the extinguishment of the loan.

10. Note 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 was secured by the property and building from which the Company continued to operate through March 2022. The carrying amount of the property and building was $2.9 million as of 31 December 2020. Upon selling the collateral, the Company was required to repay the term loan in full. The lender was not allowed to sell the collateral during the term of the loan. The Company borrowed proceeds of $2,285,908 at a fixed interest rate of 4.45 percent. The loan had a 10-year term with monthly payments based on a 20-year amortisation. The result was a one-time balloon payment at the end of the term of the note of approximately $1,400,000 during 2023. In accordance with the terms of the agreement, the Company was required to keep $500,000 in a deposit account with the lending bank. In March 2021, the Note Payable was paid in full with proceeds from the sale of the Company's building in Duluth, Georgia and $500,000 of cash was reclassified from restricted cash.

11. Stock Compensation

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 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.

In July 2019, the Company's shareholders approved the extension of the Plan to 2029 and the increase in the possible number of shares to be awarded pursuant to the Plan to 15 percent of the Company's issued capital at the date of any award. The total number of shares reserved for stock options under this Plan is 3,447,453 with 2,105,080 shares allocated as of 31 December 2022. The shares are all allocated to employees, executives and consultants.

Any 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 vest over three years with a third vesting ratably each year, partially on issuance and partially over the following 24-month period, or if there is a change of control, and expire on the tenth anniversary date the option vests. Vesting accelerates in the event of a change of control. Options granted to Non-Executive Directors, Consultants 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 on the five-year anniversary date of the grant.

As discussed in Note 2, the Company uses the Black Scholes valuation model to measure the fair value of options granted. The Company's expected volatility is calculated as the historical volatility of the Company's stock over a period equal to the expected term of the awards. The expected terms of options are calculated using the weighted average vesting period and the contractual term of the options. 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 2022 and 2021 were as follows:

The Company assumes a dividend yield of 0.0 percent.

The following table summarises the Company's stock option activity for the years ended 31 December 2022 and 2021:

The total intrinsic value of the stock options exercised during the years ended 31 December 2022 and 2021 was approximately $nil.

A summary of the status of unvested options as of 31 December 2022 and changes during the years ended 31 December 2022 and 2021 is presented below:

As of 31 December 2022, total unrecognised compensation cost of approximately $171,000 was related to unvested share-based compensation arrangements awarded under the Plan.

Total stock compensation expense for the years ended 31 December 2022 and 2021 was approximately $156,000 and $255,000, respectively.

12. Commitments and Contingencies

Operating leases - As of 31 December 2022, the Operating Lease ROU Asset has a balance of $1,176,000, net of accumulated amortisation of $567,000, and an Operating Lease Liability of $1,216,000, which are included in the accompanying balance sheet. The weighted average discount rate used for leases is 5.25 percent, which is based on the Company's secured incremental borrowing rate.

The Company's leases do not include any options to renew that are reasonably certain to be exercised. The Company's leases mature at various dates through March 2027 and have a weighted average remaining life of 3.86 years.

Future maturities under the Operating Lease Liability are as follows for the years ended 31 December:

Total lease expense for the years ended 31 December 2022 and 2021 was approximately $341,000 and $259,000, respectively.

Total cash paid for leases for the years ended 31 December 2022 and 2021 was $307,000 and $227,000, respectively, and is part of prepaid operating leases on the Statements of Cash Flows.

The Company has elected to apply the short-term lease exception to all leases of one year or less and is not separating lease and non-lease components when evaluating leases. Total costs associated with short-term leases was $322,000 and $447,000 for the years ended 31 December 2022 and 2021, respectively.

Legal - From time to time, the Company is a party to certain legal proceedings arising in the ordinary course of business. In the opinion of management, there are no current legal proceedings or other claims outstanding which could have a material adverse effect on the results of operations or financial position of the Company.

13. Related Party Transactions

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

14. Segment and Geographic Information

ASC 280-10, Disclosures About Segments of an Enterprise and Related Information, 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 2022. For the year ended 31 December 2022, 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:

Long lived assets, net of depreciation, by geography is as follows:

15. Concentrations

At 31 December 2022, two customers, one with four contracts with four separate plants, represented 88 percent of accounts receivable. During the year ended 31 December 2022, the Company received 85 percent of its gross revenue from five customers, one with four contracts with four separate plants.

At 31 December 2021, two customers, one with four contracts with four separate plants, represented 82 percent of accounts receivable. During the year ended 31 December 2021, the Company received 78 percent of its gross revenue from five customers, one with six contracts with four separate plants.

16. Subsequent Events

The Company discloses material events that occur after the balance sheet date but before the financials are issued. In general, these events are recognised in the financial statements if the conditions existed at the date of the balance sheet, but are not recognised if the conditions did not exist at the balance sheet date. Management has evaluated subsequent events through 17 May 2023, the date the financial statements were available to be issued, and no events have occurred which require further disclosure.