EGI.L Regulatory News (EGI)

Electrical Geodesics, Inc.

Results for the year ended 31 December 2015

EUGENE, OREGON, US, 30 March 2016 - Electrical Geodesics, Inc. ("EGI" or the "Company"), a leading neurodiagnostic medical technology company, today announces its audited results for the year ended 31 December 2015. The results are reported under US GAAP rather than IFRS as in previous periods.

 Operating Highlights

· Development and launch of its flagship next generation Net Station 5.2 software

· Significant software enhancements on track to be released in Q2 of 2016

· Receipt of IDE from the FDA for feasibility studies using GTEN for treatment of epilepsy

· Agreement with EB Neuro of Italy to distribute their clinical neurology products, including an advanced MRI-registered Transcranial Magnetic Stimulation (TMS) system for noninvasive neuromodulation

· Agreement with Northern Digital Imaging for exclusive distribution of their computer vision technology for EEG sensor location, labeled by EGI as Geoscan

· Agreement to supply GES 400 systems for use with ElMindA's Brain Network Activation platform

· Placing of 3.1m new shares raising £2.0m ($2.9m) before expenses in March 2015

Financial Highlights

· Revenues up 3.2% to $13.6m (2014: $13.2m)

o North American sales $7.7m (2014: $5.5m)

o International sales decreased to $6.0m (2014: $7.7m)

· Grant income increased to $1.5m (2014: $0.6m)

· 170 dEEG systems and upgrades shipped at an average $42k (2014:139 systems at $58k)

· Decrease in gross margins to 55% from 58% in 2014 as a result of a shift in product mix to lower channel count systems

· Strong cost controls led to a reduced net loss of $2.8m (2014:$4.3m)

· Net cash at year end $1.2m (2014: $1.2m)

Don Tucker, CEO of EGI, commented: "The funding secured in March of 2015 enabled us to make significant progress on a series of new and improved diagnostic and imaging products destined for launch to the research and clinical markets in 2016. The planned introduction of the Geodesic Transcranial Electrical Neuromodulation (GTEN) system for research has led to immediate sales interest from both existing and new research customers. The clinical recognition of the importance of our dense array EEG systems for epilepsy diagnosis is evidenced not only by an increasing number of publications, but also by growing sales to advanced epilepsy neurosurgery centers. As we near completion of the diagnostic phase of our clinical trial for GTEN treatment of epilepsy at Harborview Hospital in Seattle and begin the treatment phase, we are extending this trial to Huashan Hospital in Shanghai. As international research laboratories integrate GTEN studies with their studies utilizing our dense array EEG systems, we believe it is becoming clear that an increasing number of neurological disorders will be able to be treated with noninvasive neuromodulation technology."

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Notes to Editors

Electrical Geodesics, Inc. in Summary

Founded in 1992, EGI designs, develops and commercialises a range of non-invasive neurodiagnostic and neuromodulation products used to monitor, interpret and modulate brain activity, based on its proprietary dense array electroencephalography ("dEEG") platform technology. The Company's technology uses up to 256 sensors, providing much higher resolution brain activity data compared to conventional 8 or 16 channel EEG and is used in medical, clinical and research settings in a diverse range of applications including important areas such as the diagnosis and monitoring of epilepsy, neurosurgical planning, sleep assessment, and many others.

EGI's dEEG systems, available in the GES 300 and now the GES 400 lines, capitalise on the Company's unique Hydrocel Geodesic Sensor Net which allows faster, easier, and more convenient placement of many EEG sensors in an even distribution over the entire scalp, providing more accurate and precise diagnosis and measurement. EGI's technology is now widely used in neuroscience research laboratories and is becoming more commonly used in clinics, care centers, and hospitals around the world. Data is measured and visualised using EGI's proprietary amplifier technology and software, providing a complete, advanced, high-resolution EEG platform. The Company's products are compatible with multiple diagnostic and imaging technologies, including magnetic resonance (MR) imaging, functional MRI (fMRI), and magneto-encephalography (MEG).

See our Website www.egi.com

Glossary

Operating Review

Our mission is to transform advances in neuroscience into efficient, cost‑effective tools for the research and treatment of disease and the promotion of brain health to meet the increasing awareness of the need for better diagnostics and treatments.

Revenues for the year ended 31 December 2015 were $13.6m, an increase of 3.2% over the $13.2m reported for 2014. In addition, we recognised grant income of some $1.5m for 2015 (2014: $0.6m). Following a somewhat disappointing first half performance when revenues of $5.2m were recorded (10% down on the prior year), revenues in the second half of 2015 were strong at $8.4m, representing a 14% increase over the same period in 2014. The Company closed the year with approximately $1.0m of unfilled orders, around half of which should be fulfilled in the first half, with the balance being pre-orders for GTEN (Geodesic Transcranial Electrical Neuromodulation) systems likely to be filled in the second half of 2016. The balance ($1.4m) of the ElMindA supply contract should also be filled during 2016.

The Company's cash reserves as at 31 December 2015 were $1.2m ($1.4m at 30 June 2015) and an invoice-factoring facility is in place to help manage cash flows. The Company expects the recent pattern of revenues being materially second half weighted to be a feature of the current financial year. The Directors are carefully managing the Company's cash flows whilst also reviewing options to increase the working capital available to the Group so that growth opportunities can be exploited.

Our product development activities include the following highlights:

· Product development is on track for a Q3 2016 research release of the Company's flagship source imaging program GeoSource 3.0, which will feature both individual head modeling capabilities and expanded "atlas" modeling. This product will be a companion product to GTEN which is also expected to be released to the research market in Q3 2016. During 2016, the Company intends to seek FDA 510(k) approval of Geosource 3 for clinical applications.

· The clinical trial for dense array EEG localisation and GTEN treatment of focal epilepsy is under way. At the US site, Harborview Hospital University of Washington (Seattle), 15 patients have been evaluated in the diagnostic phase and the intervention phase is planned to start in April 2016. The diagnostic phase is now underway at the China site, Huashan Hospital, Fudun University (Shanghai).

· The release in Q4 2015 of a range of Geodesic Sensor Nets targeted at the particular needs of the underserved neonatal intensive care market. 

· The submission of an Investigational Device Exemption (IDE) for the study of dense array EEG localisation and rTMS (repetitive Transcranial Magnetic Stimulation) treatment of focal epilepsy. The study will take place at Stanford University Hospital.

We believe that our dEEG technology provides a strong basis for EGI's continuing growth in the neuroscience research market and see significant growth opportunities in the clinical market, particularly in the diagnosis and treatment of epilepsy, and the use of our technology for therapeutic neuromodulation for which we are seeking FDA approval. In the clinical market, our products offer ease of use, more precise data acquisition and visualization, and faster recording times than conventional EEG products. Our growth opportunity within the clinical market is "three dimensional," with the primary facets being: 1) deeper sales penetration of the market for epilepsy diagnosis and surgical planning where we have existing high profile customers, 2) the addition of newly‑maturing clinical opportunities in areas such as autism, and 3) providing other companies with a platform technology on which they can build their own application‑specific products and software.

In the longer term, we also intend to pursue neuromodulation opportunities that leverage our existing dEEG products for therapeutic uses with our GTEN product. This neuromodulation opportunity will build upon our existing GES, source imaging and Sensor Net technologies in order to target electrical stimulation to the brain and disrupt, reset or modify the brain's functioning. We expect to release GTEN for non‑therapeutic uses to our existing research market customers in 2016.

We are pleased to welcome Gary Weber who has joined EGI as its CFO on an interim basis. Gary has extensive experience with American publicly traded companies and recently served as CFO for the fine chemicals company, Synthetech Inc. Christine Soden, the Company's former CFO remains on the Board as a non-executive Director.

Financial Review

Basis of Accounting; Reconciliation between IFRS and US GAAP:

The accompanying 2015 and 2014 consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (US GAAP). In previous years EGI's financial statements were presented under IFRS accounting principles. The principal differences between the two methods of accounting as they impact EGI relate to the accounting for research and development expenses and deferred tax assets.

Under US GAAP substantially all development costs are expensed as incurred whilst IFRS requires the capitalization and related amortization of certain development costs. Within EGI's activities, no costs met the US GAAP criteria for capitalization and as such no assets relating to product development costs are included in the balance sheet as at either 31 December 2014 or 2015. The basis of recognition of deferred tax assets also varies between the two accounting conventions.

The balance sheet as at 31 December 2014 under US GAAP does not reflect $2.7m of capitalized development projects which were reported as non-current assets on the 2014 balance sheet under IFRS accounting. Additionally, under IFRS accounting, the 31 December 2014 balance sheet included a net deferred tax asset of $0.8m (being a non-current deferred tax asset of $1.9m and a non-current deferred tax liability of $1.1m) whilst the comparable US GAAP reporting has established a reserve for the full amount of the net deferred tax asset, reporting no deferred tax assets or liabilities.

Within the income statement, revenue for the year ended 31 December 2014 under both US GAAP and IFRS reporting was $13.2m. The net loss for the year ended 31 December 2014 as reported under IFRS was $3.3m, compared to a net loss of $4.3m reported under US GAAP based financial statements. The difference of $1.0m between the two reporting methods is primarily explained by the difference in the accounting for development costs (under IFRS $1.5m of development costs were capitalized and $0.6m of amortization expense charged) and some minor timing and recognition differences.

Consolidated Statements of Operations:

Revenues increased by 3.2% to $13.6m for the year ended 31 December 2015 compared to $13.2m in 2014. A total of 170 GES systems and upgrades were shipped in 2015, compared to 139 GES systems in 2014.

Revenues from sales in North America increased to $7.7m in 2015 from $5.5m in 2014, primarily due to organic growth within the US, shipments under the ElMindA supply contract and increased activity in Canada. Revenues from international sales decreased by $1.7m, or 22.6%, to $6.0m in 2015. Sales in each of Europe and Asia were $2.6m in 2015, compared to $4.6m and $2.9m, respectively, for 2014. Revenues from sales to both Europe and Asia were constrained in 2015 by the strengthening of the US dollar against the Euro and Chinese yuan, respectively. The market for our products was further adversely impacted by a cautious spending environment in China.

Sales by product type were as follows:

Cost of revenues were $6.1m in 2015, compared to $5.5m in 2014, resulting in gross profits of $7.5m in 2015 and $7.7m in 2014. The gross margin was 55.2% in 2015 compared to 58.2% in 2014. The decrease in gross margin between the two periods was largely a factor of product mix, particularly the number of lower-channel count systems sold.

EGI has been awarded research grants in support of various EEG‑related projects and grant and contract revenue was recognized to the extent of $1.5m in 2015 and $0.6m in 2014. Direct grant related expenses totaled $1.2m in 2015 and $0.4m in 2014 including subcontractor costs of $0.6m in 2015 and $0.3m in 2014.

Selling and marketing expense remained relatively constant at $4.0m in 2015 compared to $4.1m in 2014 and as a percent of total revenue improved to 29.1% in 2015, compared to 30.8% in 2014. General and administrative expense decreased approximately $0.3m, or 8.3%, to $3.8m in 2015, from $4.1m in 2014. This decrease is primarily due to cost control measures implemented during the period. General and administrative expense as a percent of total revenue decreased to 27.5% in 2015, compared to 31.0% in 2014. Research and development expenses decreased approximately $1.0m, or 24.6%, to $2.9m in 2015, compared to $3.9m in 2014. The decrease was primarily due to allocation in 2015 of resources to grant related activities due to higher grant activity. Research and development expense as a percent of total revenue decreased to 21.6% in 2015, compared to 29.6% in 2014.

Overall the business generated a net loss of $2.8m for 2015 compared to a net loss of $4.3m in 2014. The basic and diluted net loss per share was $0.10 and $0.17 for 2015 and 2014, respectively.

Balance Sheet:

Cash and cash equivalents totaled $1.2m at both 31 December 2015 and 2014.

Overall, working capital remained reasonably consistent increasing $0.1m to $2.9m as at 31 December 2015 compared to $2.8m at the previous year-end. Trade accounts receivable increased $0.4m to $3.3m at 31 December 2015 compared to $2.9m at 31 December 2014 and deferred revenue increased by $0.3m to $1.9m at 31 December 2015 compared to $1.6m at 31 December 2014, each broadly in line with the timing of customer shipments and related payment terms. Inventories increased $0.3m to $2.0m at 31 December 2015 compared to $1.7m at 31 December 2014 reflecting the backlog of unshipped orders at the year-end. Accounts payable and accrued expenses increased $0.5m to $1.6m at 31 December 2015 compared to $1.1m at the prior year-end.

In the year ended 31 December 2015 capital expenditure was $0.3m and depreciation for the year was $0.5m resulting in a net decrease in property and equipment between the two periods of $0.2m.

Our fundraising in March 2015 resulted in the receipt of $2.9m with expenses of $0.4m and the issue of 3,076,923 new shares of common stock at £0.65, increasing the number of shares in issue to 27,525,709 at the year-end.

Growth Strategy

Our goal is to become a leading provider of dEEG solutions across both the research and clinical market by capitalizing on our technology platform and continuing to develop, manufacture and commercialize novel diagnostic and interventional products. The key components of our growth strategy include:

• Grow sales in our already established research market.  Since inception we have primarily targeted our products toward the strategically important neuroscience research market. We have grown annual sales to this market from $9.6 million in 2013 to $11.2 million in 2015. With additional sales and marketing efforts, we believe we can continue to achieve solid and steady sales growth in this market. As we continue to grow our sales of GES 400 systems, we can expect to see corresponding growth in recurring sales of our Sensor Nets and other related peripheral products.

• Pursue opportunities to sell our products as an OEM.  We intend to expand our efforts in identifying OEM (original equipment manufacturer) sales opportunities to customers that bundle EGI products with their own products or services and sell them into different market verticals. In October 2015, we received an order to supply 100 GES 400 units to ElMindA, Inc. for use as part of their Brain Network Activation software platform, which is being used to assess concussion risks in high school and college athletes across the US. Customers who purchase our products on an OEM basis and integrate them with their own products or services take on the responsibility and costs for any regulatory clearances necessary for their integrated product offering to go to market. This allows our products to reach new markets and new medical indications outside our already established research market with limited additional development and regulatory costs to us. We believe that expansion of our OEM sales efforts will lead to additional sales of our products into new clinical and research markets that we would not otherwise target with direct sales.

• Expand commercialization opportunities for our dEEG solutions in the clinical and neurosurgical markets.  The clinical and neurosurgery markets represent an opportunity that we estimate is over ten times the size of our current core research market. In 2015, our sales to these non‑research markets represented approximately 18% of our revenues. We believe our products offer potential diagnostic and clinical utility in multiple areas of neurology, including epilepsy, depression, autism, planning brain surgery, traumatic brain injury, schizophrenia, stroke, tinnitus and concussion. Compared to standard low‑channel EEG products, which are already widely in use in clinical settings, we believe our products offer greater ease of use, more precise data acquisition and visualization, and faster recording times. Our strategy for growth in the clinical market includes three dimensions:

• Expand our market penetration in our existing vertical markets in epilepsy diagnosis and pre‑surgical planning by enhancing our marketing and sales capabilities and continuing to expand our product offerings, particularly with respect to epilepsy monitoring units. We believe this expansion will allow us to grow our network of customers to include mid‑market hospitals and neurology practices.

• Adaptation of our products, through additional software offerings or specialized diagnostic add‑ons, for specific new clinical opportunities within clinical neurology, neurosurgery, psychiatry and psychology, for indications such as autism, tinnitus and stroke rehabilitation.

• Apply our technology to develop new products in therapeutic neuromodulation.  We believe that our technology could be successfully adapted to offer clinicians the ability to perform therapeutic neuromodulation interventions to treat a variety of diseases such as epilepsy and depression. Our GTEN software, when integrated with our GES 400 system and a Sensor Net, will allow a user to accurately deliver electrical stimulation to targeted parts of the brain while at the same time recording EEG measurements. In June 2015, we received our IDE from the FDA for feasibility studies using GTEN for treatment of epilepsy and we intend to pursue further clinical trials using GTEN in the therapeutic treatment of epilepsy.

We believe that GTEN may also offer potential utility in therapeutic treatment of other diseases, disorders and chronic conditions, such as depression, schizophrenia, tinnitus, chronic pain, Parkinson's disease, stroke, limb transplant, Alzheimer's disease, Attention Deficit Hyperactivity Disorder, insomnia, autism and migraine. We believe the most effective path toward adapting our products to treatment of these conditions is to continue our research and development efforts and to partner with other, larger companies pursuing neuromodulation treatments for these conditions.

Key Performance Indicators Outlook & Strategic Goals

The Board set a number of key performance indicators (KPIs) and targets for the business in 2015.

Sales growth achieved for 2015 was lower than the target, with actual sales growth of 3.2%. Although overall sales growth was lower than the target, the strong growth in the second half (14% over H2 2014) together with the order backlog at the end of 2015, indicate that increased sales growth in 2016 should be achievable. The Company closed 2015 with approximately $1.0m of unfilled orders and the balance ($1.4m) of the ElMindA supply contract which should be shipped during 2016.

A gradual improvement in gross margins was targeted for 2015. This target was not met, largely as a result in delays to the launch of GTEN and GeoSource 3 with their expected attendant higher-margin software sales. The Board believes that increased sales of higher-margin software and other products and efficiencies of scale will lead to gross margin percentages being maintained and gradually increased, although the overall goal is to target increases in gross profits through revenue growth and cost management.

The target of controlling costs was strongly met with operating expenses for 2015 some 12% lower than those for 2014. Cost controls will be maintained for 2016, balanced against increased revenues. However, some increases will be necessary in order to deliver the planned increase in sales and customer base.

Key performance indicators for 2016 include a target of double-digit sales growth with increased sales to the research market supported by organic growth and the planned launch of GTEN, and increased sales to the clinical market supported by both new and enhanced products. Current expectations are for operating expenses to remain tightly controlled with increases being in support of increased sales.

Product development goals for 2016 include the research launch of GTEN in H2 2016 and the release of major software enhancements to Net Station, GeoSource and NOLIS.

Clinical trials for GTEN treatment of epilepsy at Harborview Hospital in Seattle and a similar trial at Huashan Hospital in Shanghai will also be an area of focus for 2016.

The Directors intend to develop the value of the underlying diagnostic and monitoring business and to deliver and retain value in GTEN, bringing the feasibility study to completion during 2016 whilst assessing options to develop the product fully, including assessing relevant grant funding and strategic industrial partnerships.

EGI's strategic goals for the near to mid-term are as follows:

· to maintain EGI's position as the leading provider of EEG solutions and tools to the neuroscience research community;

· to provide clinical customers with a full range of compatible, upgradeable solutions for their EEG imaging and neuromodulation needs and build market share;

· to establish EGI's technology as the leading solution for targeting and imaging brain activity to map and guide brain surgery in epilepsy and general neurosurgery using dEEG and GTEN;

· to establish GTEN as a leading neuromodulation tool in research and deliver effective, targeted non-invasive neuromodulation in epilepsy to build clinical utility;

· to improve market share through OEM services, strengthening of sales channels, strategic alliances, continued product improvement and innovation.

ELECTRICAL GEODESICS, INC.

 Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

ELECTRICAL GEODESICS, INC.

Consolidated Statements of Operations

See accompanying notes to consolidated financial statements.

ELECTRICAL GEODESICS, INC.

Consolidated Statements of Stockholders' Equity

For the years ended December 31, 2015 and 2014

See accompanying notes to consolidated financial statements.

ELECTRICAL GEODESICS, INC.

Consolidated Statements of Cash Flows

See accompanying notes to consolidated financial statements.

Note 1 ‑ Nature of Business

Electrical Geodesics, Inc., a Delaware corporation, is a developer and manufacturer of hardware and software for dense sensor array methods of human electroencephalographic and event‑related research. Revenues are derived from sales of neuroimaging/neuro‑monitoring equipment and evaluative software to research and clinical organizations worldwide and from Small Business Innovation Research (SBIR) grants, and grants or grant sub‑contracts from various federal agencies. In January 2005, the Company established Geomedica, Inc., an Oregon corporation, and it is a wholly owned subsidiary of EGI. In January 2006, Cerebral Data Systems, Inc., an Oregon corporation ("CDS"), was formed and it is a 93% owned subsidiary of EGI. Geomedica, Inc. and CDS are currently dormant. On September 30, 2013, EGI acquired 100% of the shares of Avatar EEG Solutions Incorporated, a Canadian corporation ("Avatar"), and it remains a wholly-owned subsidiary of EGI.

Note 2 ‑ Summary of significant accounting policies

Accounting principles. The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (US GAAP).

Principles of consolidation. The accompanying consolidated financial statements include the accounts of Electrical Geodesics, Inc., Geomedica, Inc., CDS, and Avatar (collectively, "EGI" or the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation.

Use of estimates. The preparation of the consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include allowances for potentially uncollectible accounts receivable, valuation of inventory, intangible assets, goodwill, share-based compensation, deferred income taxes, reserve for warranty obligations and the provision for income taxes among others. Actual results could differ from those estimates.

Cash and cash equivalents. Cash and cash equivalents are comprised of cash in banks, certificates of deposits, and money market funds. EGI considers deposits that can be redeemed on demand and investments that have original maturities of less than three months, when purchased, to be cash equivalents. At times, EGI's cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation.

Fair value of financial instruments. The carrying amounts of financial instruments, including cash, recourse debt on factoring agreement and notes payable, approximate fair value due to the short maturity of these instruments.

Receivables. The majority of EGI's trade accounts receivable arise from sales to universities, research hospitals and other clinical institutions. Credit is extended based on evaluation of a customer's financial condition and, generally, collateral is not required. Trade accounts receivable are due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts, if any. Accounts outstanding longer than the contractual payment terms are considered past due. EGI determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history, the customer's current ability to pay its obligations, and the condition of the general economy and the industry as a whole. EGI's grants and contracts are receivable from the U.S. government and are considered to be fully collectible.

Concentration of credit risk. Financial instruments that potentially subject EGI to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. EGI places its cash and cash equivalents with high quality financial institutions and limits the amount of credit exposure with any one institution. Concentrations of credit risk with respect to accounts receivable are limited because a large number of geographically diverse customers make up EGI's customer base, thus spreading the trade credit risk. At December 31, 2015 one customer had an accounts receivable balance of 12% of total accounts receivable. At December 31, 2014 no single group or customer represents greater than 10% of total accounts receivable. EGI controls credit risk through credit approvals, credit limits, and monitoring procedures. EGI performs credit evaluations of its commercial customers but generally does not require collateral to support accounts receivable.

Inventories.  Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method for all inventories of the Company. EGI regularly evaluates the technological usefulness and anticipated future demand for various inventory components and the expected use of the inventory. When EGI determines it is not likely the cost of inventory items will be recovered through future sales, EGI writes-down the related inventory to net realizable salvage value.

Property and equipment. Property and equipment is recorded at cost and depreciated over the estimated useful lives (generally three to seven years) of the assets, using the straight‑line method. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter. Repairs and maintenance are charged to expense as incurred.

EGI reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on this assessment there was no impairment at December 31, 2015 or 2014.

Goodwill and other intangible assets. Goodwill is not amortized, but is tested annually for impairment. An impairment charge is recognized if the carrying amount of a reporting unit exceeds its fair value and the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill. The cost of other intangible assets is amortized on a straight‑line basis over the asset's estimated useful life.

Product warranty reserve. EGI offers warranties of various lengths to its customers depending on the specific product and terms of the customer purchase agreement. The average length of the warranty period is 12 months. EGI's warranties require it to repair or replace defective products during the warranty period at no cost to the customer. At the time product revenue is recognized, EGI records a liability for estimated costs that may be incurred under its warranties. The costs are estimated based on historical experience and any specific warranty issues that have been identified. Although historical warranty costs have been within expectations, there can be no assurance that future warranty costs will not exceed historical amounts. EGI periodically assesses the adequacy of its recorded warranty liability and adjusts the balance as necessary.

Share‑based compensation. EGI measures compensation cost for share‑based payment awards at fair value and recognizes it as compensation expense over the service period for awards expected to vest. Share‑based compensation expense is recognized for all share‑based payment awards, net of an estimated forfeiture rate. Compensation cost is only recognized for those share‑based payment awards expected to vest on a straight‑line basis over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of share‑based payment awards requires subjective assumptions, including the expected life of the share‑based payment awards and stock price volatility. EGI utilizes the Black‑Scholes options pricing model to value the stock options granted under its options plans. In this model, the assumptions utilized relate to stock price volatility, stock option term and forfeiture rates that are based upon both historical factors as well as management's judgment. Stock options awarded to EGI's employees have an exercise price denominated in British Pounds Sterling (GBP), which is the currency of AIM, a small company exchange operated by the London Stock Exchange, the market in which EGI's securities trade.

Deferred stock issuance costs. Costs incurred to underwriters, legal counsel, printers and advisors, and other costs directly attributable to an identifiable offering of securities are deferred until charged against the gross proceeds of the offering. If an offering is terminated prior to funding, any related deferred costs are immediately expensed.

Income taxes. EGI is treated as a C‑corporation for purposes of filing its federal income tax return. Income taxes consist of taxes currently due or refundable plus deferred taxes arising from the timing differences between financial and income tax reporting. EGI recognizes deferred tax liabilities and assets for expected future income tax consequences of events that have been recognized in EGI's financial statements which will either be taxable or deductible when the assets and liabilities are recovered or settled and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. EGI is subject to taxation in various jurisdictions. EGI continues to remain subject to examination by various state and US federal authorities for years 2012 through 2015.

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and operating loss and tax credit carryforwards and are measured using the enacted tax rates and laws that will be in effect when the differences and carryforwards are expected to be recovered or settled. A valuation allowance for deferred tax assets is provided when we estimate that it is more likely than not that all or a portion of the deferred tax assets may not be realized through future operations. This assessment is based upon consideration of available positive and negative evidence, which includes, among other things, our recent results of operations and expected future profitability. EGI considers its actual historical results over several years to have stronger weight than other more subjective indicators, including forecasts, when considering whether to establish or reduce a valuation allowance on deferred tax assets.

EGI continues to provide a full valuation allowance against its deferred tax assets as the realization of such assets is not considered to be more likely than not at this time. If EGI's conclusion about the realization of its deferred tax assets and therefore the appropriateness of the valuation allowance changes in a future period, EGI could record a substantial tax provision or benefit in its Consolidated Statements of Operations when that occurs.

EGI recognizes the income tax benefit from a tax position only if it is more likely than not that the tax position will be sustained on examination by the applicable taxing authorities, based on the technical merits of EGI's position. The tax benefit recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.

Estimated interest and penalties are recorded as a component of interest expense and other expense, respectively. EGI has reviewed potential tax uncertainties and determined that the exposure to those uncertainties did not have a material impact on EGI's results of operations or financial condition as of December 31, 2015 or 2014.

Revenue recognition. Revenues from product sales are recognized in the period the product is shipped, title passes to the customer and all obligations have been met or are deemed inconsequential, the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. The product includes both hardware and software to operate the equipment. Shipping and handling charges to customers are included in revenues. Shipping and handling costs incurred by EGI are included in cost of revenues.

EGI enters into multiple‑deliverable arrangements that include a medical device, with embedded diagnostic software, and one or two year(s) of post‑contract customer support (PCS). The diagnostic software and hardware function together to provide the device's essential functionality. Arrangements generally do not include any performance, cancellation, termination, or refund provisions. Devices are generally delivered to customers upon arrangement inception together with PCS provided over a one‑year or two‑year service period. The medical device, including the diagnostic software, is considered a single unit of accounting and PCS is the second unit of accounting. Arrangement consideration allocated to the device is recognized as revenue upon delivery. Consideration allocated to PCS is recognized as revenue ratably over the agreed service period.

Consideration is allocated to the deliverables at inception of an arrangement using the relative selling price method. Selling price is determined based on a selling price hierarchy. EGI has not established vendor specific objective evidence of fair value (VSOE) nor is it able to obtain sufficient third‑party evidence of selling price for any of its devices or related PCS. As a result, selling price for the devices and PCS is determined using management's best estimate of selling price.

EGI determines its best estimate of selling price through a weighting of several factors including market competition, manufacturing costs, and gross profit margin objectives, and level of technical complexity of the product. The gross profit margin is initially obtained from an average of historic sales of arrangements with bundled elements, segregated by device model and geographic area. EGI considers several other factors in adjusting the profit margin, including the device's enhanced technological features as compared to its competitor's products, the expected remaining life of the device and customer demand. Selling price for PCS is determined using a similar cost plus margin approach. EGI considers its employee staffing costs required to provide support for its devices, research, and development costs related to upgrades for the diagnostic software while considering other inputs such as PCS renewal rates for similar services.

Revenues from sales of standalone items of hardware and software where there are no further performance obligations on the Company are recognized when shipped.

Grant and contract revenues are recognized as qualified expenses are incurred. Unreimbursed expenses are recognized as grants and contracts receivables at year end. Receipts in excess of qualified expenses, if any, are deferred until earned.

Research and development. All research and development expenditures are expensed as incurred. Research and development costs include costs of all basic research activities as well as other research, engineering, and technical effort required to develop a new product or service or make significant improvement to an existing product or manufacturing process. However, the costs incurred for the development of computer software that will be sold, leased, or otherwise marketed are capitalized when technological feasibility has been established. Once technological feasibility is established, all software costs are capitalized until the product is available for release to customers. Judgment is required in determining when technological feasibility of a product is established. To date, management has determined that technological feasibility of software products is reached shortly before the products are released. Costs incurred after establishment of technological feasibility have not been material, and therefore, management has expensed all research and development costs as incurred.

Advertising. All advertising costs are expensed as incurred. Advertising expense totaled $12,000 and $30,000 in 2015 and 2014, respectively.

Taxes collected from customers and remitted to governmental authorities ‑ net basis. EGI's policy is to present taxes collected from customers and remitted to governmental authorities on a net basis. EGI records the amounts collected as a current liability and relieves such liability upon remittance to the taxing authority without impacting revenues or expenses.

Foreign currency transaction. EGI uses the U.S. dollar as its functional and reporting currency. Wherever possible, EGI transacts in U.S. dollars although a small number of sales are denominated in foreign currency. EGI minimizes foreign currency risk by requiring its overseas customers to adhere to strict payment terms or to operate through letters of credit.

Net loss per share. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding during the period, calculated using the treasury stock method. Common stock equivalents (common stock options only) are not used to calculate diluted loss per share because their effect would be anti-dilutive.

Subsequent Events. Management of EGI has evaluated subsequent events through the date these financial statements were available to be issued, which was March 28, 2016.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2014‑09, Revenue from Contracts with Customers: Topic 606 (ASU 2014‑09), to supersede nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014‑09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014‑09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014‑09 is effective for the fiscal and interim reporting periods beginning after December 15, 2016 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014‑09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014‑09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014‑09.

In August 2015, FASB issued Accounting Standards Update No. 2015‑14, Revenue from Contracts with Customers ‑ Deferral of the Effective Date: Topic 606 (ASU 2015‑14) that deferred the effective date of ASU 2014‑09 by one year. Application of the new revenue standard for public business entities is permitted for fiscal and interim reporting periods beginning after December 15, 2016 and required for fiscal and interim reporting periods beginning after December 15, 2017. EGI is currently evaluating the potential impact of the pending adoption of ASU 2014‑09 and 2015-14 on its consolidated financial statements.

In July 2015, FASB issued Accounting Standards Update No. 2015‑11, Simplifying the Measurement of Inventory: Topic 330 (ASU 2015‑11). Topic 330 currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. ASU 2015‑11 requires that inventory measured using either first‑in, first‑out (FIFO) or average cost method be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Adoption of ASU 2015‑11 for public business entities is required for fiscal reporting periods beginning after December 15, 2016, including interim reporting periods within those fiscal years. EGI does not expect adoption of ASU 2015‑11 to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). This update requires that lessees recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASU 2016-02 also will require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include both qualitative and quantitative information. The effective date for ASU 2016-02 for public business entities is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 with earlier adoption permitted. EGI is still evaluating the impact of ASU 2016-02 on its financial position and results of operations

Note 3 ‑ Inventories

Inventories consist of the following:

Note 4 ‑ Property and equipment

Property and equipment consist of the following:

Note 5 ‑ Other intangible assets

Other intangible assets subject to amortization consist of the following:

Amortization expense for the years ended December 31, 2014 and 2013 was $14,000. Estimated annual amortization expense for intangible assets approximates $14,000 for each of the next five years.

Note 6 - Recourse debt on factoring agreement

On September 24, 2015, EGI entered into a factoring agreement for up to $1 million of qualifying receivables, with recourse to the lender. EGI will receive 98.05% of the face value of such customer invoices and will pay interest of 4% per year on invoice balances that exceed 90 days from the invoice date. Under the agreement, EGI provided a security interest in accounts receivable, inventory and, property and equipment of EGI. Factoring fees and, if applicable, any interest expense, are reported as interest expense in the Consolidated Statements of Operations. The lender may terminate the factoring agreement at any time. As of December 31, 2015, EGI reported $216,000 in borrowings outstanding under the agreement and has $784,000 in availability.

Note 7 ‑ Note payable

EGI had an equipment loan with a bank, collateralized by assets of the Company. The loan with the bank included a tangible net worth requirement of not less than $1.75 million (measured quarterly) and a minimum debt service coverage ratio of 1.30 : 1.00 (measured on a rolling four quarter basis). The note payable matured and was paid in accordance with its terms in 2015 and was outstanding as follows:

Note 8 ‑ Commitments and contingencies

Operating lease commitments. EGI has entered into operating leases for office and warehouse space. Total rent expense under these leases amounted to $529,000 and $560,000 for the years ended December 31, 2015 and 2014, respectively. The aggregate minimum future lease payments under all of these operating leases are as follows:

Litigation or contingencies. From time to time, EGI is subject to various legal proceedings that arise in the ordinary course of business, none of which are currently material to the Company's business.

Grant revenue. Under the terms and conditions of the grants with the U.S. government, the granting agency may elect to audit the grant expenses reported by EGI. An adjustment as a result of an audit, if any, could result in a liability to EGI.

Note 9 ‑ Income taxes

The income tax provision (benefit) is comprised of the following for the years ended December 31:

The provision (benefit) for income taxes for the years ended December 31, 2015 and 2014 differs from the amount obtained by applying the US Federal statutory income tax rate to pretax income due to the following:

The components of deferred tax assets at December 31 are as follows:

EGI's federal and Oregon research credit carry forwards as of December 31, 2015 are approximately $754,000 and $254,000 respectively. The federal research credit carry forwards expire in varying amounts through 2035. The Oregon carry forwards expire in varying amounts through 2020. EGI's federal and Oregon net operating loss carry forwards as of December 31, 2015 are approximately $9,500,000 and $8,300,000. The federal net operating loss carry forward expires in varying amounts in 2033 through 2035. The Oregon net operating loss carry forwards expire in varying amounts in 2027 through 2030. Realization of the benefit of tax losses is dependent on generating sufficient taxable income prior to expiration of the credit carry forwards.

Note 10 ‑ Product warranty reserve

Changes in EGI's product warranty liability are as follows:

Note 11 ‑ 401 (k) savings plan

EGI has adopted a 401 (k) savings plan for all eligible employees. All employees are eligible to participate in the plan after reaching age 18 and completing six months of service. Employees may defer compensation up to the limits prescribed by the Internal Revenue Code. The plan provides a discretionary employer matching contribution and a discretionary employer profit sharing contribution. Effective January 1, 2013, EGI amended the plan to include safe harbor provisions. EGI makes safe harbor matching contributions of 100% of the first 3% of elective employee deferrals and 50% for the 4th and 5th percent of elective deferrals. Safe harbor contributions and earnings are 100% vested. The value of profit sharing contributions and earnings vest 20% per year over five years. EGI's matching contributions to the plan were $150,000 and $162,000 in 2015 and 2014, respectively. There were no employer discretionary profit sharing contributions made in 2015 or 2014.

Note 12 - Equity incentive plan

Description of the Plan

EGI's 2013 Equity Incentive Plan (the Plan), which is stockholder‑approved, permits the grant of stock options, restricted stock and stock appreciation rights (SARS) to its employees for up to 1,711,415 shares of common stock. Option awards are generally granted with an exercise price equal to the market price of EGI's stock at the date of grant; those option awards generally vest based on three years of continuous service and have 10‑year contractual terms. No grants of restricted stock or SARS have been made under the plan. As of December 31, 2015, 728,915 shares were available for issuance under the Plan.

EGI's common stock is listed and trades on AIM, a small company exchange operated by the London Stock Exchange. All trades on AIM are transacted in British Pounds Sterling (GBP). Accordingly, EGI has granted all of its stock options with an exercise price denominated in GBP.

Stock Option Activity

A summary of the changes in stock options outstanding under EGI's Plan for the two years Ended December 31, 2015 is presented below:

Valuation Information

The fair value of each option award is estimated on the date of grant using the Black‑Scholes option valuation model that uses the assumptions noted as follows.

Dividend Yield

EGI has not made any dividend payments nor does it have plans to pay dividends in the foreseeable future. An increase in the dividend will decrease compensation expense.

Expected Price Volatility

Expected price volatility is a measure of the amount by which the price of a security has fluctuated or is expected to fluctuate. EGI has experienced a limited volume of trading activity and has not been publicly traded for a period that is commensurate with the expected term of the stock grants. To determine the expected volatility, EGI utilized peer company data to supplement its own trading activity. An increase in the expected price volatility will increase compensation expense.

Risk-Free Interest Rate

For the risk-free interest rate, EGI uses the U.S. Treasury rate for the week of the grant having a term approximating the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.

Expected Term

Expected term is the period of time over which the options granted are expected to remain outstanding. EGI utilizes the simplified method in determining the expected term of options. The simplified method is an average of the vesting period and the term of the option. The simplified method is used due to the fact that we do not have adequate history of option activity to provide a reasonable basis to estimate option lives. Options granted have a term of ten years. An increase in the expected term life will increase compensation expense.

Forfeitures

EGI expects limited forfeitures over the remaining grant vesting periods. Stock-based compensation expense is adjusted as forfeitures occur during the vesting period. An increase in the forfeiture rate would decrease compensation expense.

The fair value of stock options granted in 2015 and 2014 were determined using the weighted-average assumptions below:

The weighted‑average grant‑date fair value of options granted during 2015 was $0.44 and for options granted in 2014 was $0.94.

The fair value of each option is amortized into compensation expense on a straight-line basis over the vesting period (the requisite service period). As of December 31, 2015, there was total unrecognized compensation cost of $232,000 related to unvested stock options granted under the Plan to be recognized over a weighted average period of approximately 1.8 years.

Note 13 ‑ Concentrations

Significant customer: During 2015, one customer accounted for approximately 11.8% of revenue. No customers accounted for more than 10% of revenue in 2014.

Grant and contract revenue: Grant and contract revenue principally consists of Small Business Innovation Research (SBIR) grants sponsored by the U.S. Department of Health and Human Services.

A substantial number of the materials EGI uses in manufacturing its products are available from multiple sources and in sufficient supply; however, certain suppliers and contract manufacturers have been qualified to EGI standards. In the short-term any disruption or termination of these arrangements could adversely affect our operating results pending the qualification of replacement suppliers.

Note 14 ‑ Segment information: Geographic Revenue Distribution

EGI operates in a single operating segment that includes the sales of neuroimaging/neuro‑monitoring equipment and evaluative software to research and clinical organizations. Substantially all long‑lived assets are located in the U.S.

The following table reflects revenue and percent of total revenues based on the geographic location of the customer:

Note 15- Preliminary Results Announcement

The figures for the year ended 31 December 2015 and 2014 have been extracted from the full accounts for that year on which the Independent Registered Public Accounting Firm has issued an unqualified audit opinion. This announcement was approved by the Board of Directors on 29 March 2015 and authorized for issue on 30 March 2016.

Directors

Don Tucker, Chairman & Chief Executive Officer

Ann Bunnenberg, President & Chief Operating Officer

Christine Soden, Non-executive director, Company Secretary

John Brown, Non-executive director

Ray Englander, Non-executive director

Broker & Nominated Adviser

Peel Hunt LLP

Moor House, 120 London Wall

London EC2Y 5ET

Registrars

Capita Registrars (Guernsey) Limited

Mont Crevelt House

Bulwer Avenue, St Sampson

Guernsey GY2 4LH

Independent Public Accounting Firm

Registered Office

National Registered Agents Inc

160 Greentree Drive, Suite 101

Dover, Kent, DE 19904 USA

Special Note Regarding Forward Looking Statements

This preliminary results announcement contains "forward looking statements" that involve substantial risks and uncertainties. The forward looking statements are contained principally in the sections entitled "Operating Highlights," "Financial Highlights," "Operating Review," and "Directors' Report." In some cases, you can identify forward looking statements by the following words: "may," "will," "could," "would," "should," "expect," "intend," "plan," "anticipate," "believe," "estimate," "predict," "project," "potential," "continue," "ongoing" or the negative of these terms or other comparable terminology, although not all forward looking statements contain these words. These statements relate to future events or our future financial performance or condition and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievement to differ materially from those expressed or implied by these forward looking statements. These forward looking statements include, but are not limited to, statements about:

• our expectations regarding the sales and marketing of our products and product candidates;

• the timing and likelihood of FDA approvals and regulatory actions on our product candidates and product marketing activities;

• our expectations for market acceptance of our dEEG solutions in the therapeutic market;

• our ability to retain the continued service of our key professional and to identify, hire and retain additional qualified professionals;

• the potential for adverse application of health and safety and other laws and regulations on our operations;

• our ability to establish and maintain intellectual property on our products and our ability to successfully defend these in cases of infringement;

• the implementation of our business strategies;

• the potential for exposure to product liability claims;

• the potential for our marketed products to be withdrawn due to recalls, patient adverse events or deaths;

• our financial performance expectations;

• our ability to compete in the development and marketing of our products and product candidates with other competitors in the industry;

• difficulties or delays in the development, production, manufacturing and marketing of new or existing products, including difficulties or delays associated with obtaining requisite regulatory approvals or clearances associated with those activities;

• changes in laws and regulations or in the interpretation or application of laws or regulations, as well as possible failures to comply with applicable laws or regulations as a result of possible misinterpretations or misapplications;

• actions of regulatory bodies and other government authorities, including the FDA and foreign counterparts, that could delay, limit or suspend product development, manufacturing or sales or result in recalls, seizures, consent decrees, injunctions and monetary sanctions;

• the results, consequences, effects or timing of any commercial disputes, patent infringement claims or other legal proceedings or any government investigations;

• interruption in our ability to manufacture our products or an inability to obtain key components or raw materials or increased costs in such key components or raw materials;

• uncertainties in our industry due to government healthcare reform; and

• competitive pressures in the markets in which we operate.

You should read this document completely and with the understanding that our actual results may differ materially from what we expect as expressed or implied by our forward looking statements. In light of the significant risks and uncertainties to which our forward looking statements are subject, you should not place undue reliance on or regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all. These forward looking statements represent our estimates and assumptions only as of the date of this Annual Report. Except as required by law, we undertake no obligation to update or revise publicly any forward looking statements, whether as a result of new information, future events or otherwise after the date of this Annual Report.