Lantronix Inc 8-K/A, filed Mar 27, 2020
Lantronix Inc (LTRX)
About this 8-K/A
Lantronix Inc filed this 8-K/A on March 27, 2020, reporting on events of January 16, 2020.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 16, 2020
Lantronix, Inc.
(Exact Name of Registrant as Specified in Charter)
| Delaware | 1-16027 | 33-0362767 | ||
| (State or other jurisdiction of incorporation) |
(Commission File Number) | (IRS Employer Identification No.) | ||
| 7535 Irvine Center Drive, Suite 100 Irvine, California 92618 | ||||
| (Address of Principal Executive Offices, including zip code) | ||||
| Registrant’s telephone number, including area code: (949) 453-3990 | ||||
| Not Applicable | ||||
| (Former name or former address, if changed since last report) | ||||
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
| Title of each Class | Trading Symbol | Name of each exchange on which registered |
| Common Stock, $0.0001 par value | LTRX | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of Securities Act. ☐
Explanatory Note
In its Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 16, 2020 (the “Initial Report”), Lantronix, Inc. (“Lantronix”) reported that it completed the previously announced acquisition of Intrinsyc Technologies Corporation, a corporation existing under the laws of British Columbia (“Intrinsyc”), on January 16, 2020 (the “Closing Date”). Pursuant to the terms of the Arrangement Agreement, dated as of October 30, 2019 (the “Agreement”), by and between Lantronix and Intrinsyc, on the Closing Date, all of the outstanding common shares of Intrinsyc were acquired by Lantronix (the “Transaction”). Pursuant to the Agreement, Lantronix paid, in the aggregate, approximately $11 million in cash and issued approximately 4.3 million shares of common stock of Lantronix to Intrinsyc shareholders. This Current Report on Form 8-K/A amends the Initial Report to provide the historical financial statements and unaudited pro forma information required by Item 9.01(a) and (b) of Form 8-K. This Current Report on Form 8-K/A should be read in conjunction with the Initial Report.
| Item 9.01 | Financial Statements and Exhibits. |
(a) Financial statements of business acquired.
The audited consolidated financial statements of Intrinsyc and its subsidiaries as of and for the years ended December 31, 2018 and 2017, and the reviewed condensed consolidated financial statements as of and for the nine-months ended September 30, 2019 and 2018, and the notes related thereto, are attached hereto as Exhibits 99.2 and 99.3, respectively, and incorporated herein by reference.
(b) Pro forma financial information.
The unaudited pro forma condensed combined balance sheet as of December 31, 2019, and the pro forma condensed combined statements of operations for the year ended June 30, 2019 and the six-months ended December 31, 2019, and the notes related thereto, that give effect to the acquisition are attached hereto as Exhibit 99.4 and incorporated herein by reference.
(d) Exhibits.
|
Exhibit No. |
Description | |
| 2.1 | Arrangement Agreement dated October 30, 2019, by and between Lantronix and Intrinsyc (Incorporated by reference to Exhibit 2.1 to Lantronix’s Current Report on Form 8-K, filed with the SEC on November 1, 2019) | |
| 23.1 | Consent of Independent Auditors. | |
| 99.1 | Press Release, dated January 16, 2020. + | |
| 99.2 | Audited consolidated financial statements of Intrinsyc as of and for the years ended December 31, 2018 and 2017. | |
| 99.3 | Unaudited condensed consolidated financial statements of Intrinsyc as of September 30, 2019 and for the three and nine months ended September 30, 2019 and 2018. | |
| 99.4 | Unaudited pro forma condensed combined balance sheet as of December 31, 2019 and unaudited pro forma condensed combined statements of operations for the year ended June 30, 2019 and six months ended December 31, 2019. | |
+ Furnished with the Initial Report.
| 2 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| LANTRONIX, INC. | ||
| March 27, 2020 | By: | /s/ Jeremy Whitaker |
| Jeremy Whitaker Chief Financial Officer | ||
| 3 |
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the inclusion of our report dated March 13, 2019, relating to the consolidated financial statements of Intrinsyc Technologies Corporation as of and for the years ended December 31, 2018 and 2017 appearing in this Current Report on Form 8-K/A of Lantronix, Inc.
/s/ Ernst & Young LLP
Vancouver, Canada
March 27, 2020
EXHIBIT 99.2
INDEPENDENT AUDITOR’S REPORT
To the Shareholders of
Intrinsyc Technologies Corporation
We have audited the accompanying consolidated financial statements of Intrinsyc Technologies Corporation, which comprise the consolidated statements of financial position as at December 31, 2018 and 2017, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these financial statements in conformity with International Financial Reporting Standards [“IFRSs”]; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Intrinsyc Technologies Corporation as at December 31, 2018 and 2017, and the consolidated results of its operations and its cash flows for the years then ended in conformity with IFRS.
| Vancouver, Canada | |
| March 13, 2019 | Chartered Professional Accountants |
| 1 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Statements of Financial Position
(Expressed in U.S. Dollars)
| As at | December 31, 2018 | December 31, 2017 (Restated – see Note 3(b)(iii)) | ||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents (note 18) | $ | 3,939,763 | $ | 4,989,154 | ||||
| Short-term investments (note 18) | 2,027,579 | 2,260,089 | ||||||
| Trade and other receivables (notes 4 and 13) | 5,265,076 | 4,799,625 | ||||||
| Loan to customer (note 5) | – | 1,799,250 | ||||||
| Inventory (note 6) | 4,631,387 | 4,257,027 | ||||||
| Prepaid expenses | 313,952 | 159,784 | ||||||
| 16,177,757 | 18,264,929 | |||||||
| Non-Current Assets | ||||||||
| Prepaid expenses | 22,623 | 27,417 | ||||||
| Investment in customer (note 5) | 653,019 | – | ||||||
| Equipment (note 7) | 379,010 | 345,618 | ||||||
| Intangible assets (note 8) | 241,288 | 118,591 | ||||||
| Total assets | $ | 17,473,697 | $ | 18,756,555 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Trade and other payables | $ | 5,492,892 | $ | 5,026,370 | ||||
| Deferred revenue | 313,164 | 694,088 | ||||||
| Total liabilities | 5,806,056 | 5,720,458 | ||||||
| Shareholders' equity | ||||||||
| Share capital (note 10) | 107,367,137 | 108,899,883 | ||||||
| Other capital reserves – share based payments | 10,679,723 | 10,330,897 | ||||||
| Deficit | (106,471,655 | ) | (106,287,119 | ) | ||||
| Translation of operations reserve | 92,436 | 92,436 | ||||||
| Total shareholders' equity | 11,667,641 | 13,036,097 | ||||||
| Total liabilities and shareholders’ equity | $ | 17,473,697 | $ | 18,756,555 | ||||
| Commitments and contingencies (note 12) | |
| See accompanying notes to consolidated financial statements | |
| Approved on behalf of the Board: | |
“George Duguay” |
“Michael Bird” |
| 2 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Statements of Operations
(Expressed in U.S. dollars)
| For the | Year ended December 31, 2018 | Year ended December 31, 2017 (Restated – see Note 3(b)(iii)) | ||||||
| Revenues (note 14) | $ | 25,681,727 | $ | 20,662,169 | ||||
| Cost of sales (note 14) | 16,774,109 | 13,782,498 | ||||||
| 8,907,618 | 6,879,671 | |||||||
| Expenses | ||||||||
| Sales and marketing | 2,508,114 | 2,672,959 | ||||||
| Research and development | 1,510,223 | 1,314,477 | ||||||
| Administration | 2,993,460 | 2,157,054 | ||||||
| Other operating expenses (note 16) | 618,407 | 498,186 | ||||||
| 7,630,204 | 6,642,676 | |||||||
| Operating income | 1,277,414 | 236,995 | ||||||
| Other expenses (earnings) | ||||||||
| Foreign exchange loss (gain) | 368,388 | (177,801 | ) | |||||
| Interest and other expense (income) (note 5) | 1,045,111 | (239,853 | ) | |||||
| 1,413,499 | (417,654 | ) | ||||||
| Income (loss) before income taxes | (136,085 | ) | 654,649 | |||||
| Income tax expense (note 11) | 48,451 | 29,813 | ||||||
| Net income (loss) and comprehensive income (loss) for the year | (184,536 | ) | 624,836 | |||||
| Income (loss) per share (basic) (note 10(f)) | $ | (0.01 | ) | $ | 0.03 | |||
| Income (loss) per share (fully diluted) (note 10(f)) | $ | (0.01 | ) | $ | 0.03 | |||
| Weighted average number of shares outstanding – basic (note 10(f)) | 20,866,490 | 21,118,432 | ||||||
| Weighted average number of shares outstanding – fully diluted (note 10(f)) | 20,866,490 | 21,811,832 | ||||||
See accompanying notes to consolidated financial statements
| 3 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Statements of Changes in Shareholders’ Equity
(Expressed in U.S. Dollars)
Share Capital | Other Capital Reserves – Share Based Payments | Deficit (Restated – See Note 3(b)(iii)) | Translation of Operations Reserve | Total Shareholders’ Equity | ||||||||||||||||
| Balance, January 1, 2018 | $ | 108,899,883 | $ | 10,330,897 | $ | (106,287,119 | ) | $ | 92,436 | $ | 13,036,097 | |||||||||
| Net income (loss) for the year | – | – | (184,536 | ) | – | (184,536 | ) | |||||||||||||
| Issued upon exercise of stock options | 88,196 | – | – | – | 88,196 | |||||||||||||||
| Reclassification upon exercise of stock options | 67,241 | (67,241 | ) | – | – | – | ||||||||||||||
| Shares repurchased and cancelled under Normal Course Issuer Bid | (1,688,183 | ) | – | – | – | (1,688,183 | ) | |||||||||||||
| Share-based compensation | – | 416,067 | – | – | 416,067 | |||||||||||||||
| Balance, December 31, 2018 | $ | 107,367,137 | $ | 10,679,723 | $ | (106,471,655 | ) | $ | 92,436 | $ | 11,667,641 | |||||||||
| Balance, January 1, 2017 | $ | 108,977,225 | $ | 10,050,147 | $ | (106,911,955 | ) | $ | 92,436 | $ | 12,207,853 | |||||||||
| Net income for the year | – | – | 624,836 | – | 624,836 | |||||||||||||||
| Issued upon exercise of stock options | 44,477 | – | – | – | 44,477 | |||||||||||||||
| Reclassification upon exercise of stock options | 36,350 | (36,350 | ) | – | – | – | ||||||||||||||
| Shares repurchased and cancelled under Normal Course Issuer Bid | (158,169 | ) | – | – | – | (158,169 | ) | |||||||||||||
| Share-based compensation | – | 317,100 | – | – | 317,100 | |||||||||||||||
| Balance, December 31, 2017 | $ | 108,899,883 | $ | 10,330,897 | $ | (106,287,119 | ) | $ | 92,436 | $ | 13,036,097 | |||||||||
See accompanying notes to consolidated financial statements
| 4 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Statements of Cash Flows
(Expressed in U.S. Dollars)
| For the | Year ended December 31, 2018 | Year ended December 31, 2017 (Restated – see Note 3(b)(iii)) | ||||||
| Cash provided by (used in): | ||||||||
| Operating Activities | ||||||||
| Net income (loss) for the year | $ | (184,536 | ) | $ | 624,836 | |||
| Adjustments to reconcile net loss to net cash flows: | ||||||||
| Depreciation of equipment (note 7) | 107,618 | 99,862 | ||||||
| Amortization of intangible assets (note 8) | 94,722 | 81,224 | ||||||
| Share-based compensation | 416,067 | 317,100 | ||||||
| Accrued interest on customer loan | (15,134 | ) | (198,000 | ) | ||||
| Revaluation of customer investment | 1,038,365 | – | ||||||
| Revaluation of customer warrants | 123,000 | – | ||||||
| Unrealized foreign exchange | 262,446 | (119,040 | ) | |||||
| 1,842,548 | 805,982 | |||||||
| Working capital adjustments: | ||||||||
| Trade and other receivables | (469,597 | ) | (1,010,268 | ) | ||||
| Inventory | (374,360 | ) | (2,962,725 | ) | ||||
| Prepaid expenses | (149,374 | ) | (26,738 | ) | ||||
| Trade and other payables | 458,219 | 2,795,829 | ||||||
| Deferred revenue | (380,924 | ) | 160,213 | |||||
| (916,036 | ) | (1,043,689 | ) | |||||
| Cash provided by (used in) operating activities | 926,512 | (237,707 | ) | |||||
| Investing Activities | ||||||||
| Redemption (purchase) of short-term investments | 142,385 | 65,267 | ||||||
| Interest on customer loan | – | 56,250 | ||||||
| Purchase of equipment (note 7) | (141,010 | ) | (93,980 | ) | ||||
| Purchase of intangible assets (note 8) | (217,419 | ) | (87,964 | ) | ||||
| Cash used in investing activities | (216,044 | ) | (60,427 | ) | ||||
| Financing Activities | ||||||||
| Issuance of common shares | 88,196 | 44,477 | ||||||
| Repurchase and cancellation of shares (note 10(e)) | (1,688,183 | ) | (158,169 | ) | ||||
| Cash used in financing activities | (1,599,987 | ) | (113,692 | ) | ||||
| Increase (decrease) in cash and cash equivalents | (889,519 | ) | (411,826 | ) | ||||
| Foreign exchange effect on cash and cash equivalents | (159,872 | ) | 19,462 | |||||
| Cash and cash equivalents, beginning of the year | 4,989,154 | 5,381,518 | ||||||
| Cash and cash equivalents, end of the year | $ | 3,939,763 | $ | 4,989,154 | ||||
| Supplementary information | ||||||||
| Interest received | $ | 94,492 | $ | 126,936 | ||||
| Income taxes paid | $ | 43,446 | $ | 19,763 | ||||
See accompanying notes to consolidated financial statements
| 5 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
1. REPORTING ENTITY
Intrinsyc Technologies Corporation (formerly Intrinsyc Software International, Inc.) (“Intrinsyc” or the “Company”) is a public company domiciled in Canada and incorporated on August 31, 1992 under the laws of Alberta and continued under the Company Act (British Columbia) on July 19, 1995. Articles of Continuance were filed under the Canada Business Corporations Act on May 1, 2003 to continue the Company federally and change the name of the Company from Intrinsyc Software, Inc. to Intrinsyc Software International, Inc. Articles of Amendment were filed under the Canada Business Corporations Act on June 17, 2014 to change the name of the Company to Intrinsyc Technologies Corporation. The Company’s principal business office is Suite 300, 885 Dunsmuir Street, Vancouver, British Columbia, V6C 1N5 and its registered office is Suite 1700, 1055 West Hastings Street, Vancouver, British Columbia, V6E 2E9.
The Company is an Internet of Things (“IoT”) product development company, offering hardware development kits, computing modules, proprietary software products, and engineering design and development services. These solutions are focused on the fast growing high-performance IoT product market; including; augmented and virtual reality, drones, robotics, digital signage, automotive, IP cameras, medical systems, wearable technology, and many others. The Company provides value by enabling device makers and technology suppliers to deliver compelling, next generation mobile and embedded wireless devices with faster time to market, higher quality, and differentiating innovation.
The consolidated financial statements of the Company, as at, and for the years ended December 31, 2018 and December 31, 2017 comprise the Company and its subsidiaries (together referred to as the “Company” and individually as “Company entities”).
2. BASIS OF PRESENTATION
Statement of Compliance
These consolidated financial statements of the Company, approved by the Board of Directors on March 13, 2019, have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and their interpretations adopted by the International Accounting Standards Board (“IASB”).
3. Significant ACCOUNTING POLICIES
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.
Principles of Consolidation
Subsidiaries are entities controlled by Intrinsyc. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements.
The accompanying consolidated financial statements include the accounts of Intrinsyc Technologies Corporation and the following subsidiaries:
| 6 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
3. Significant ACCOUNTING POLICIES (continued)
| Company Entity | Active | Country of Incorporation | Ownership Interest 2018 | Ownership Interest 2017 | ||||||||||||
| Intrinsyc Software (USA), Inc. | Yes | U.S. | 100% | 100% | ||||||||||||
| Intrinsyc Technologies Canada (Taiwan) Ltd. | Yes | Canada | 100% | 100% | ||||||||||||
| Intrinsyc Technologies India Private Ltd. | Yes | India | 100% | N/A | ||||||||||||
| Intrinsyc Europe Limited | No | U.K. | 100% | 100% | ||||||||||||
Use of Critical Accounting Judgement and Estimates
The preparation of these consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual outcomes could differ from these estimates. Estimates and assumptions are pervasive throughout the consolidated financial statements and are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised and future periods impacted.
Significant assumptions about the future and other sources of estimation uncertainty that management has made at the statement of financial position date, that could result in a material adjustment to the carrying amounts of assets and liabilities, in the event that actual results differ from assumptions made, relate to, but are not limited to, the following:
[a] The recoverability of trade and other receivables which are included in the consolidated statements of financial position;
[b] The value of the customer investment which is included in the consolidated statements of financial position;
[c] The provision for income taxes which is included in the consolidated statements of operations;
[d] The estimated revenues and related expenses that are recognized during the warranty period of a given project, which is included in the consolidated statements of operations;
[e] The provision for inventory obsolescence which is included in the consolidated statements of operations; and
[f] The estimates used in calculating revenue on fixed fee service engagements which is included in the consolidated statements of operations.
Critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements are as follows:
| 7 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
3. Significant ACCOUNTING POLICIES (continued)
Foreign Currency
Items included in the consolidated financial statements of the Company and each of its subsidiaries are measured using the currency of the primary economic environment in which the individual entity operates (the “functional currency”). The consolidated financial statements are presented in United States dollars (“U.S. dollars”), which is the functional currency of the Company and its subsidiaries.
Transactions in foreign currencies are translated to the respective functional currency of the Company entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rates at the dates of the initial transactions. Foreign currency differences arising on translation are recognized in profit or loss.
Revenues
With the adoption of IFRS 15, revenue from contracts with customers, is recognized when control of the goods or services are transferred to the customer at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. To recognize revenue, a company would apply the following five steps:
| · | Identify the contract(s) with the customer. |
| · | Identify the performance obligations in the contract(s). |
| · | Determine the transaction price. |
| · | Allocate the transaction price. |
| · | Recognize revenue when a performance obligation is satisfied. |
The Company currently has two (2) business segments: Embedded Computing Hardware segment and Services and Software segment (see Note 14 – Segmented Information for description of each segment). The Company does not incur any costs to obtain a contract or costs to fulfil a contract that are eligible for capitalization.
Embedded Computing Hardware Segment
The Company sells embedded computing hardware (which includes both product development kits and production hardware products). Revenue is recognized when control of the hardware is transferred to the customer. This usually occurs when the hardware has been delivered to the customer. The transaction price is documented on the contract or purchase order and agreed to by the customer. Payment is either made before shipment is made or due at the time of shipment, as such a receivable is recognized as the consideration is unconditional (if payment is received after shipment). If payment received before shipment, advance payment is booked to deferred revenue and recognized once control of the hardware is transferred to the customer. Only the passage of time is required before payment is due (usually payment terms of Net 30-45 days).
| 8 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
3. Significant ACCOUNTING POLICIES (continued)
The Company generally provides warranties for general repairs of defects that existed at the time of sale, as required by law, for production hardware products. As such, most warranties are assurance-type warranties under IFRS 15, which the Group accounts for under IAS 37 - Provisions, Contingent Liabilities and Contingent Assets, consistent with its practice prior to the adoption of IFRS 15.
Services and Software Segment
Services
The Company enters into contracts to provide services on the following basis:
| · | Time & Materials - services consist of revenues from software modification, consulting, implementation, training and integration services. These services are set forth separately in the contractual arrangements such that the total price of the customer arrangement is expected to vary depending on the actual time and materials incurred based on the customer’s needs. |
| · | Fixed Price - arrangements to render specific consulting and software modification services which tend to be more complex. |
The Company will continue to recognize service revenue over time, using an input method to measure progress towards complete satisfaction of the service similar to the previous accounting policy, because the customer simultaneously receives and consumes the benefits provided by the Company. The Company uses labour hours expended which it believes is appropriate for the nature of the contract and the pattern of delivery of the performance obligation. The
transaction price is documented on the contract or purchase order and agreed to by the customer. Payment is due at the time a milestone or monthly services are complete and as such a receivable is recognized as the consideration is unconditional and only the passage of time is required before payment is due (usually payment terms of Net 30-60 days).
Software
The Company currently sells software licenses of its legacy software solution, enterprise interoperability software (“EIS”) either on a perpetual basis or on a term-based basis as well as post contract customer support (“PCS”). It currently recognizes revenue from the sale of term-based or perpetual licenses at the time the software when control of the software has been transferred to customer. This usually occurs when the software licenses have been emailed to the customer. The transaction price is documented on the contract or purchase order and agreed to by the customer. Payment is generally due at the time of shipment, as such a receivable is recognized as the consideration is unconditional and only the passage of time is required before payment is due (payment terms are generally Net 30 days). Standalone selling price is observable in transactions without multiple performance obligations.
| 9 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
3. Significant ACCOUNTING POLICIES (continued)
Post Contract Support (“PCS”)
PCS revenue associated with software licenses is recognized rateably over the term of the PCS period, which typically is one year. Any unrecognized revenue is recorded in deferred revenue. PCS revenue includes software license updates that provide customers with rights to unspecified software product upgrades, maintenance releases and patches released during the term of the PCS period. Payment is generally due at the beginning of the contract period. As such, the advance payment is recognized as deferred revenue with revenue begin recognized over the PCS term. Standalone selling price is observable in renewal transactions for PCS renewals and current standalone pricing for initial PCS contracts.
The Company’s multiple-element sales arrangements include arrangements where software licenses and the associated post contract customer support (“PCS”) are sold together. The total transaction price is allocated to each performance obligation on the basis of the relative stand-alone selling price of each distinct good or service with revenue being recognized based on the type of revenue (software license or PCS). Standalone selling price is observable in transactions without multiple performance obligations.
Unbilled Revenue
Unbilled revenue represents the gross unbilled amount expected to be collected from customers for contract work to be performed to date. It is measured at cost plus profit recognized to date less progress billings and recognized losses. Cost includes all expenditures related directly to specific projects.
Deferred Revenue
Deferred revenue represents the gross billed amounts received from customers for contract work to be performed at a later date. In addition, it includes deposits received for goods to be delivered at a later date in addition to maintenance and support contracts which are amortized over a period of one (1) year. It is measured at amounts received from customers less any revenue recognized to date.
Research and Development
Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalized includes the cost of materials, direct labour and overhead costs that are directly attributable to preparing the asset for its intended use. Other development expenditure is recognized in profit or loss as incurred.
Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognized in profit or loss when incurred.
| 10 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
3. Significant ACCOUNTING POLICIES (continued)
Cash and Cash Equivalents
Cash and cash equivalents include short-term deposits, which are all deposits rated R1 (paid within 30 days from payment due date), term deposits, savings investment deposits or guaranteed investment certificate deposits, with a term to maturity of less than three months when acquired and are carried at fair value.
Inventory
Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on the first-in first-out principle, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and selling expenses.
Equipment
Items of equipment are measured at cost less accumulated amortization and accumulated impairment losses.
Cost includes expenditure that is directly attributable to the acquisition of the asset.
Gains and losses on disposal of an item of equipment are determined by comparing the proceeds from disposal with the carrying amount of equipment, and are recognized net in the consolidated statements of operations.
Depreciation is calculated over the depreciable amount, which is the cost of an asset less its residual value. Amortization is recognized in profit or loss over the estimated useful lives of equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset.
The Company rates for amortization are as follows:
| Computers and equipment | 30% declining-balance |
| Furniture and fixtures | 20% declining-balance |
Leasehold improvements are amortized on a straight-line basis over the shorter of the initial lease term or their expected useful lives.
Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
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INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
3. Significant ACCOUNTING POLICIES (continued)
Intangible Assets
Intangible assets, acquired separately, are measured on initial recognition at cost.
Intangible assets with finite useful lives are amortized over their estimated useful lives as follows:
| Computer software | 3 years |
Amortization methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate
Related Party Transactions
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Related parties may be individuals or corporate entities. A transaction is considered to be a related party transaction when there is a transfer of resources, services or obligations between related parties.
Leases
Operating lease payments are recognized as an operating expense in the consolidated statements of operations on a straight-line basis over the lease term.
Share Capital
Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares and share options are recognized as a deduction from equity, net of any tax effects.
When the Company repurchases common shares under its Normal Course Issuer Bid (“NCIB”), the price paid for the common shares that corresponds to the market value of those shares is recognized as a reduction of share capital. From time to time, it may enter into a pre-defined plan with its broker to allow for the repurchase of shares at times when the Company ordinarily would not be active in the market due to its own internal trading blackout periods. Any such plans entered into with Company’s broker will be adopted in accordance with applicable Canadian securities laws. The cost of the pre-defined plan is initially recognized as a current liability and corresponding reduction to share capital. The liability is reduced as the share are repurchased under this pre-defined plan.
| 12 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
3. Significant ACCOUNTING POLICIES (continued)
Share-Based Payment Transactions
The Company grants stock options to directors, officers, employees, service providers and consultants. Each tranche of an award is considered a separate award with its own vesting period and grant date fair value. Fair value of each tranche is measured at the date of grant using the Black-Scholes option pricing model. The grant date fair value of options granted to directors, officers, employees, consultants and service providers is recognized as share-based payment expense, with a corresponding increase in other capital reserves-share based payments, over the period that the individual becomes unconditionally entitled to the options. The amount recognized as an expense is adjusted to reflect the number of share options for which the related service are expected to be met, such that the amount ultimately recognized as an expense is based on the number of share options that do meet the related service at the vesting date.
Restricted Share Units (“RSUs”) are redeemed for common shares issued by the Company or the cash equivalent on the vesting dates established by the Board of Directors. The RSUs generally vest over a three-year period in equal annual installments on the anniversary date of the date of the grant. The Company classifies RSUs as equity instruments as the Company has the ability and intent to settle the awards in common shares. The compensation expense for standard RSUs is calculated based on the fair value of each RSU as determined by the closing value of the Company’s common shares on the business day of the grant date. The Company recognizes compensation expense over the vesting period of the RSU. The Company expects to settle RSUs, upon vesting, through the issuance of new common shares from treasury.
Provisions
A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as a finance cost.
A provision for warranties is recognized when the underlying products or services are sold. The provision is based on historical warranty data and a weighting of all possible outcomes against their associated probabilities.
A provision for restructuring is recognized when the Company has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. No provision is made for future operating losses.
A provision for onerous contracts is recognized when the expected benefits to be derived by the Company from a contract are lower that the unavoidable cost of meeting its obligation under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected cost net cost of continuing with the contract. Before a provision is established, the Company recognizes any impairment loss on the assets associated with the contract.
| 13 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
3. Significant ACCOUNTING POLICIES (continued)
Income Taxes
Income tax expense comprises current and deferred tax. Income tax expense is recognized in profit or loss except to the extent that it relates to items recognized directly in equity or in other comprehensive income.
Current tax is the expected tax payable or receivable on the taxable income or loss for the period, using tax rates enacted or substantively enacted at the reporting date. Deferred tax is recognized with respect to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted at the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity.
Earnings per Share
The Company presents basic and diluted earnings per share (“EPS”) data for its common shares. Basic EPS is calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted EPS is determined by adjusting the profit attributable to common shareholders and the weighted average number of common shares outstanding for the effects of all dilutive potential common shares.
Financial Instruments
Financial assets and liabilities are recognized when the entity becomes a party to the contractual provisions of the instrument. The Company determines the classification of its financial assets and liabilities at initial recognition or when reclassified on the consolidated statements of financial position. Financial assets and liabilities are classified in the following measurement categories: i) amortized cost; ii) fair value through other comprehensive income (“FVTOCI”); or iii) fair value through profit and loss (“FVTPL”). Initially, all financial assets and liabilities are recognized at fair value. Regular-way trades of financial assets and liabilities are recognized on the trade date.
Financial Assets
| · | Cash and cash equivalents are classified as financial assets measured at amortized cost. |
| · | Short-term investments are classified as financial assets measured at amortized cost. |
| · | Trade and other receivables are classified as financial assets measured at amortized cost. |
| · | Investment in customer is classified as a financial asset measured at fair value using implied valuations from financing rounds with any change in value being recognized through the Company’s Statements of Operations. Prior to May 2, 2018, this asset was recorded as Loan to customer which was measured at amortized cost. Warrants are classified as a financial asset measured at fair value using implied valuations from financing rounds with any change being recognized through the Company’s Statements of Operations. |
| 14 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
3. Significant ACCOUNTING POLICIES (continued)
Financial Liabilities
Financial liabilities are recognized initially at fair value and in the case of financial liabilities not subsequently measured at fair value, net of directly attributable transaction costs. Financial liabilities are derecognized when the obligation specified in the contract is discharged, canceled, or expired. Trade and other payables are classified as financial liabilities to be subsequently measured at amortized cost.
Classification
Financial instruments recorded at fair value on the consolidated statements of financial position are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:
| [i] | Level 1 - Unadjusted quoted prices in active markets for identical assets and liabilities; |
| [ii] | Level 2 - Inputs other than quoted prices that are observable for the asset or liability directly or indirectly; and |
| [iii] | Level 3 - Inputs that are not based on observable market data. |
Derecognition
The Company derecognizes a financial asset or liability when its contractual obligations are discharged or cancelled or expire.
Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously.
Impairment
Financial Assets
The Company recognises an allowance for expected credit losses (“ECL”) for all financial assets not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Company expects to receive, discounted at an approximation of the original effective interest rate.
ECLs are recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).
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INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
3. Significant ACCOUNTING POLICIES (continued)
For trade receivables and contract assets, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date.
A financial asset is considered in default when contractual payments are 90 days past due. A financial asset may also be considered to be in default if internal or external information indicates that the Company is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.
Non-Financial Assets
The carrying amounts of the Company’s non-financial assets, other than inventories which is separately assessed, are reviewed each reporting date to determine whether there is any indication of impairment. If such indication exists, the Company estimates the asset’s recoverable amount. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statements of operations.
Segment Reporting
An operating segment is a component of the group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Company’s other components, and for which discrete financial information is available. All operating segment results are regularly reviewed by the Company’s Chief Operating Decision Maker (“CODM”) to make decisions about resources to be allocated to the segment and assess its performance
Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly investments and related income, corporate assets and head office expenses, and income tax assets and liabilities.
New Standards and Interpretations Adopted
The Company applied, for the first time, IFRS 9 - Financial Instruments and IFRS 15 - Revenue from Contracts with Customers that require restatement of previous financial statements. The nature and effect of these changes are disclosed below.
Several other amendments and interpretations apply for the first time in 2018, but do not have an impact on the consolidated financial statements of the Company. The Company has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.
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INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
3. Significant ACCOUNTING POLICIES (continued)
[a] IFRS 9 - Financial Instruments: Classification and Measurement
IFRS 9 - Financial Instruments replaces the current IAS 39 - Financial Instruments Recognition and Measurement. The standard introduces new requirements for classifying and measuring financial assets and liabilities. The Company has applied IFRS 9 retrospectively, with the initial application date of January 1, 2018 and adjusting comparative figures.
[i] Financial Assets
IFRS 9 includes a revised model for classifying financial assets, which results in classification according to a financial instrument’s contractual cash flow characteristics and the business models under which they are held. At initial recognition, financial assets are measured at fair value. Under the IFRS 9 model for classification of financial assets the Company has classified and measured its financial assets as described below:
| · | Cash and cash equivalents are classified as financial assets measured at amortized cost. Previously under IAS 39 these amounts were classified as Held for Trading. |
| · | Short-term investments are classified as financial assets measured at amortized cost. Previously under IAS 39 these amounts were classified as Loans and Receivables. |
| · | Trade and other receivables are classified as financial assets at amortized cost. Previously under IAS 39, Trade and other receivables were classified as Loans and Receivables measured at amortized cost. |
| · | Investment in customer is classified as a financial asset measured at fair value using implied valuations from financing rounds with any change in value being recognized through the Company’s Statements of Operations. Prior to May 2, 2018, this asset was recorded as Loan to customer which was measured at amortized cost. Previously under IAS 39, this amount was classified as Loans and Receivables measured at amortized cost. Warrants associated with this investment are classified as a financial asset measured at fair value using implied valuations from financing rounds with any change in value being recognized through the Consolidated Statements of Operations. |
The adoption of IFRS 9 did not result in a material change in the carrying values of any of the Company’s financial assets on the transition date.
[ii] Financial Liabilities
Financial liabilities are recognized initially at fair value and in the case of financial liabilities not subsequently measured at fair value, net of directly attributable transaction costs. Financial liabilities are derecognized when the obligation specified in the contract is discharged, canceled, or expired. For financial liabilities, IFRS 9 retains most of the IAS 39 requirements. Therefore, the adoption of IFRS 9 did not impact the Company’s accounting policies for financial liabilities. Trade and other payables are classified as financial liabilities to be subsequently measured at amortized cost.
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INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
3. Significant ACCOUNTING POLICIES (continued)
[b] IFRS 15 - Revenue from Contracts with Customers
IFRS 15 - Revenue from Contracts with Customers replaces all existing revenue requirements in IFRS and applies to all revenue arising from contracts with customers. The standard outlines the principles an entity must apply to measure and recognize revenue. The core principle is that an entity will recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to a customer.
The Company adopted IFRS 15 using the full retrospective transition method of adoption. Under the full retrospective transition method, the comparative figures for 2017 in the Company's consolidated financial statements have been restated. The Company applied the practical expedient to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing such costs would have been amortized within one year or less. The Company does not incur any costs to obtain a contract or costs to fulfil a contract that are eligible for capitalization.
The Company provides solutions to its customers referred to as Clients for the development and production of mobile, embedded, and Internet of Things (“IoT”) devices, with a legacy software solution for Java/COM EIS and enters into contracts that include various goods and services promised to the customer.
Revenue is allocated to the respective performance obligations based on relative transaction prices and is recognized as goods or services are delivered to the customer. Revenue is measured as the amount of consideration expected to be received in exchange for the goods transferred or services delivered. Contract modifications are accounted for prospectively or as a cumulative catch-up adjustment depending on the nature of the change. Where the amount of goods and services delivered to the customer corresponds directly to the amount invoiced, the Company recognizes revenue equal to what it has the right to invoice.
The Company makes judgments with respect to determining whether the promised goods and services are considered distinct performance obligations by considering the relationship of such promised goods and services; allocating the transaction price for each distinct performance obligation identified through stand-alone selling price and evaluating when a customer obtains controls of the goods or service promised.
The Company currently has two (2) business segments: Embedded Computing Hardware segment and Services and Software segment.
[i] Embedded Computing Hardware Segment
Prior to the adoption of IFRS 15, revenue from the sale of embedded computing hardware (which includes both product development kits and production hardware products) was recognized upon either the transfer of title or upon shipment of the hardware product to the customer so long as persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured.
| 18 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
3. Significant ACCOUNTING POLICIES (continued)
Under IFRS 15, revenue is recognized when control of the hardware is transferred to the customer. This usually occurs when the hardware has been delivered to the customer. The transaction price is documented on the contract or purchase order and agreed to by the customer. Payment is either made before shipment is made or due at the time of shipment, as such a receivable is recognized as the consideration is unconditional (if payment is received after shipment). If payment received before shipment, advance payment is booked to deferred revenue and recognized once control of the hardware is transferred to the customer. Only the passage of time is required before payment is due (usually payment terms of Net 30-45 days).
The adoption of IFRS 15 did not have an impact on the timing or amount of revenue recognition.
The Company generally provides warranties for general repairs of defects that existed at the time of sale, as required by law, for production hardware products. As such, most warranties are assurance-type warranties under IFRS 15, which the Group accounts for under IAS 37 - Provisions, Contingent Liabilities and Contingent Assets, consistent with its practice prior to the adoption of IFRS 15.
[ii] Services and Software Segment
[1] Services
The Company enters into contracts to provide services on the following basis:
| · | Time & Materials - services consist of revenues from software modification, consulting, implementation, training and integration services. These services are set forth separately in the contractual arrangements such that the total price of the customer arrangement is expected to vary depending on the actual time and materials incurred based on the customer’s needs. | |
| · | Fixed Price - arrangements to render specific consulting and software modification services which tend to be more complex. |
Prior to the adoption of IFRS 15, the Company recognized service revenue from time and material arrangements at the time such services are rendered by the Company so long as persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. The Company recognized service revenue from fixed price arrangements using the percentage of completion method and is calculated based on actual hours incurred compared to the estimated total hours for the services under the arrangement, so long as persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured.
Under IFRS 15, the Company concluded that revenue from services will continue to be recognized over time, using an input method to measure progress towards complete satisfaction of the service similar to the previous accounting policy, because the customer simultaneously receives and consumes the benefits provided by the Company. The Company uses labour hours expended which it believes is appropriate for the nature of the contract and the pattern of delivery of the performance obligation. The transaction price is documented on the contract or purchase order and agreed to by the customer. Payment is due at the time services are rendered and as the consideration is unconditional and only the passage of time is required before payment is due (usually payment terms of Net 30-60 days).
| 19 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
3. Significant ACCOUNTING POLICIES (continued)
The adoption of IFRS 15 did not have an impact on the timing or amount of revenue recognition.
The Company currently sells software licenses of its legacy software solution, EIS either on a perpetual basis or on a term-based basis as well as PCS.
[2] Software
Prior to the adoption of IFRS 15, the Company recognized revenue from the sale of software licenses on perpetual basis upon the transfer of title to the customer, so long as persuasive evidence of an arrangement existed, delivery had occurred, the fee is fixed or determinable, and collectability was reasonably assured. The Company used the residual method to recognize revenue on delivered elements when a license agreement included one or more elements to be delivered at a future date if evidence of the fair value of all undelivered elements existed. If an undelivered element for the arrangement existed under the license arrangement, revenue related to the undelivered element was deferred based on Vendor Specific Objective Evidence (“VSOE”) of the fair value of the undelivered element. If the fair value did not exist for all undelivered elements, all revenue was deferred until sufficient evidence existed or as elements were delivered. For term-base licenses, the Company recognized revenue over the term, which usually was one (1) year. PCS revenue associated with software licenses was recognized ratably over the term of the PCS period, which typically was one year. Any unrecognized revenue is recorded in deferred revenue.
Under IFRS 15, the Company recognizes revenue from the sale of term-based or perpetual licenses at the time when control of the software has been transferred to customer. This usually occurs when the software licenses have been emailed to the customer. The transaction price is documented on the sales invoice and agreed to by the customer. Payment is generally due at the time of shipment, as such a receivable is recognized as the consideration is unconditional and only the passage of time is required before payment is due (payment terms are generally Net 30 days). Standalone selling price is observable in transactions without multiple performance obligations.
For the year ended December 31, 2017, the impact of adopting IFRS 15was a reduction of term-based license revenue of $17,501 as a result of revenue being recognized when control has been transferred once licenses have been emailed to the customer as opposed to revenue being recognized over the term. There was no impact on revenue recognition on the sale of perpetual licenses with the adoption of IFRS 15.
[3] PCS
Prior to the adoption of IFRS 15, the Company recognized PCS revenue associated with software licenses rateably over the term of the PCS period, which typically is one year. Any unrecognized revenue is recorded in deferred revenue. PCS revenue includes software license updates that provide customers with rights to unspecified software product upgrades, maintenance releases and patches released during the term of the PCS period.
| 20 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
3. Significant ACCOUNTING POLICIES (continued)
Under IFRS 15, PCS revenue associated with software licenses is recognized ratably over the term of the PCS period, which typically is one year. Any unrecognized revenue is recorded in deferred revenue. PCS revenue includes software license updates that provide customers with rights to unspecified software product upgrades, maintenance releases and patches released during the term of the PCS period. Payment is generally due at the beginning of the contract period as such a receivable is recognized as the consideration is unconditional and only the passage of time is required before payment is due (payment terms are generally Net 30 days). Standalone selling price is observable in renewal transactions for PCS renewals and current standalone pricing for initial PCS contracts.
The adoption of IFRS 15 did not have an impact on the timing or amount of revenue recognition.
The Company’s multiple-element sales arrangements include arrangements where software licenses and the associated post contract customer support (“PCS”) are sold together. The total transaction price is allocated to each performance obligation on the basis of the relative stand-alone selling price of each distinct good or service with revenue being recognized based on the type of revenue (software license or PCS). Standalone selling price is observable in transactions without multiple performance obligations.
[iii] Impact on Adoption of IFRS 15
The Company has evaluated the impact on the financial statements of IFRS 15 and concluded that there was no material impact to the financial statements (see below).
The impact on amounts recognized in the Company's consolidated statement of operations for the twelve months ended December 31, 2017, is shown below:
Consolidated Statements of Operations | Twelve months ended December 31, 2017– As reported prior to IFRS 15 transition |
Adjustments | Twelve months ended December 31, 2017 – As restated after IFRS 15 transition | |||||||||
| Revenues | $ | 20,679,670 | $ | (17,501 | ) | $ | 20,662,169 | |||||
| Operating income | $ | 254,496 | $ | (17,501 | ) | $ | 236,995 | |||||
| Income before income taxes | $ | 672,150 | $ | (17,501 | ) | $ | 654,649 | |||||
| Net income and comprehensive income for the period | $ | 642,337 | $ | (17,501 | ) | $ | 624,836 | |||||
The cumulative impact on amounts recognized in the Company's consolidated statement of financial position as at December 31, 2017, is shown below:
Consolidated Statements of Financial Position | December 31, 2017– As reported prior to IFRS 15 transition |
Adjustments | December 31, 2017 – As restated after IFRS 15 transition | |||||||||
| Deferred Revenue | $ | 729,505 | $ | (35,417 | ) | $ | 694,088 | |||||
| Deficit | $ | (106,322,536 | ) | $ | (35,417 | ) | $ | (106,287,119 | ) | |||
| 21 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
3. Significant ACCOUNTING POLICIES (continued)
The cumulative impact on amounts recognized in the Company's consolidated statement of changes in shareholders equity as at December 31, 2017, is shown below:
Consolidated Statements of Changes in Shareholders’ Equity | December 31, 2017– As reported prior to IFRS 15 transition |
Adjustments | December 31, 2017 – As restated after IFRS 15 transition | |||||||||
| Deficit – January 1, 2017 | $ | (106,964,873 | ) | $ | 52,918 | $ | (106,911,955 | ) | ||||
| Deficit – December 31, 2017 | $ | (106,322,536 | ) | $ | 35,417 | $ | (106,287,119 | ) | ||||
The impact on amounts recognized in the Company's consolidated statement of cash flows for the twelve months ended December 31, 2017, is shown below:
| Consolidated Statements of Cash Flows | Twelve months ended December 31, 2017– As reported prior to IFRS 15 transition |
Adjustments | Twelve months ended December 31, 2017 – As restated after IFRS 15 transition | |||||||||
| Net income (loss) | $ | 642,337 | $ | (17,501 | ) | $ | 624,836 | |||||
| Deferred revenue | $ | 142,712 | $ | 17,501 | $ | 160,213 | ||||||
There is no material impact to basic and fully diluted earnings per share.
New Standards and Interpretations Not Yet Adopted
Standards issued but not yet effective up to the date of issuance of the Company's consolidated financial statements are listed below. This listing is of standards and interpretations issued, which the Company reasonably expects to be applicable at a future date. The Company is currently assessing the impact of the following standards on the consolidated financial statements and intends to adopt these standards when they become effective.
IFRS 16 - Leases
The standard supersedes the current IAS 17, Leases (IAS 17) standard. IFRS 16 introduces a single accounting model for lessees and for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee will be required to recognize a right-of-use asset, representing its right to use the underlying asset, and a lease liability, representing its obligation to make lease payments. The accounting treatment for lessors will remain largely the same as under IAS 17. The standard is effective for annual periods beginning on or after January 1, 2019.
The Company is assessing the impact of this standard on its consolidated financial statements; however, the Company believes that the result will be an increase to assets and liabilities, as it will be required to record a right-of-use asset and a corresponding lease liability on the Consolidated Statements of Financial Position, as well as a decrease to operating costs, an increase to finance costs (due to accretion of the lease liability) and an increase to depreciation.
| 22 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
4. TRADE AND OTHER RECEIVABLES
December 31, 2018 | December 31, 2017 | |||||||
| Trade and other receivables | $ | 4,980,813 | $ | 4,640,131 | ||||
| Less: Allowance for doubtful accounts | – | (128,197 | ) | |||||
| Unbilled revenue | 284,263 | 287,691 | ||||||
| $ | 5,265,076 | $ | 4,799,625 | |||||
Included in trade and other receivables balance as at December 31, 2017 was an amount of $60,000 which payable by a customer that had not been fully insured with Export Development Canada (“EDC” – see Note 13) by the Company. An allowance for the full amount had been taken and was included in Allowance for Doubtful Accounts as at December 31, 2017. During 2017, Company settled with this customer for $60,000 (less third party collection fees). Payments were to be made in four (4) equal payments on October 10, 2017, October 24, 2017, November 7, 2017 and November 22, 2017. The Company only received one (1) payment during the year ended December 31, 2018 and reduced Trade and Other Receivables and Allowance for Doubtful Accounts by $45,000 as the customer went out of business.
At December 31, 2018, unbilled revenue on open contracts accounted for using the percentage of completion method amounted to $284,263 (December 31, 2017 - $287,691). In addition, the remaining contractual amounts on fixed price contracts were $1,991,051 as at December 31, 2018 (December 31, 2017 - $1,599,799). The Company will recognize this revenue as the contracts are completed, which is expected to occur over the next 8-12 months.
5. INVESTMENT IN CUSTOMER
On October 1, 2014, the Company announced that it invested in Stream TV Networks, Inc. (“Stream TV”), a current customer of Intrinsyc, an amount of $1,500,000 in the form of a subordinated, secured convertible promissory note bearing interest at three percent (3%) per annum with a maturity date of December 31, 2015 (the “Note”). Interest is payable on the earlier of (i) December 31, 2015 or (ii) when converted to Stream TV shares. Stream TV committed to acquire a minimum of $3,000,000 in Intrinsyc products and services over the next twelve months.
The Note was initially convertible into the securities of Stream TV, at the sole option of Stream TV, subject to the execution of an equity financing of a minimum of $15 million by Stream TV (the “Qualified Financing”). The Note was convertible into the class of securities sold in the Qualifying Financing at the share price issued in the Qualifying Financing.
The Company had determined that a reasonable market interest rate for a loan with the features of the Stream TV convertible loan and for pre-commercial entities in the emerging technology sector would be 12%. The Company recognized the difference as a deferred discount.
| 23 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
5. INVESTMENT IN CUSTOMER (continued)
On December 10, 2015, the Company announced that the arrangements were amended to increase the purchase commitment by Stream TV to $4,500,000 in Intrinsyc product, services and royalties to be generated on or before March 31, 2016, which Stream TV met. In addition, the subordinated, secured convertible promissory note was amended to remove the conversion feature and to extend the maturity date from December 31, 2015 to June 30, 2016.
On June 28, 2016, the Company announced that the arrangements were further amended, to increase the purchase commitment to $6,000,000 in Intrinsyc products, services and royalties to be generated on or before December 30, 2016, which Stream TV has met. In addition, the subordinated, secured promissory note, valued at $1.5 million, has been further amended to extend the maturity date from June 30, 2016 to December 30, 2016.
On December 29, 2016, the Company announced that the subordinated, secured promissory note, with a principal amount of $1.5 million, has been further amended to extend the maturity date from December 30, 2016 to March 30, 2017. In consideration for the extension Intrinsyc received 30,000 warrants convertible into Class A common shares in Stream TV. at a strike price of $5 per share, on a 1 for 1 basis for a period of up to 5 years. The warrants may only be exercised if Stream TV becomes subject to a liquidity event defined in the warrant agreement as liquidation, dissolution, or winding up of Stream TV, whether voluntary or involuntary, or an Initial Public Offering (“IPO”) or sale of the Stream TV by either stock or assets that is at least a change of control transaction. To date, none of these warrants have been exercised.
On February 2, 2017, the Company announced that the subordinated, secured promissory note, valued at $1.5 million, has been further amended to extend the maturity date from March 30, 2017 to February 1, 2018. In consideration for the extension Intrinsyc received 120,000 warrants convertible into Class A common shares in Stream TV at a strike price of $5, on a 1 for 1 basis for a period of up to 5 years. The exercise of these warrants is also subject to the same terms as the warrants received December 29, 2016. To date, none of these warrants have been exercised. In addition, Stream TV committed to acquire a minimum of $2,000,000 in Intrinsyc products, services, and royalties to be purchased or generated between February 1, 2017 and February 1, 2018 (which Stream TV has only committed to approximately $700,000).
On February 1, 2018, the Company announced that the subordinated, secured promissory note, valued at $1.5 million, has been further amended to extend the maturity date from February 1, 2018 to April 2, 2018.
On April 2, 2018, the Company announced that the subordinated, secured promissory note, valued at $1.5 million, had been further amended to extend the maturity date from April 2, 2018 to May 2, 2018.
On May 2, 2018, the Company announced that it made a strategic equity investment in Stream TV Networks through the conversion of the subordinated, secured promissory note and interest accrued for a total amount of $1,661,384 into 415,346 common shares (which is less than 1% ownership in Stream TV). The amount was reclassified as Investment in Customer. In addition, the parties also signed an amendment to the Master Services Agreement in which Stream TV agrees to provide a commitment of $1,500,000 in services to be purchased directly or through connected party referrals during the eighteen (18) month period beginning May 1, 2018.
| 24 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
5. INVESTMENT IN CUSTOMER (continued)
The Company has assessed the investment for impairment at the end of reporting period and concluded that no loss event has occurred since the conversion of the Note to an equity investment in Stream TV. However, the Company acknowledges that there is uncertainty regarding the valuation of the equity investment due to the uncertainty inherent to the fact that Stream TV is a pre-commercial entity in an emerging technology sector. The Company has revalued the investment as at December 31, 2018, with the decline in the fair value of $1,038,365 being recorded as Interest and Other Expenses (Income) in the Company’s Statements of Operations for the year ended December 31, 2018. In the event that Stream TV does not raise a minimum of $25 million within the two year period subsequent to the Equity Investment conversion date of May 2, 2018, the Equity Investment will revert back to become a Note Payable to Intrinsyc. In the event that Stream TV raises a minimum of $25 million within the two year period subsequent to the Equity Investment conversion date of May 2, 2018 at a lower valuation than the conversion of the Note into the Equity Investment by Intrinsyc on May 2, 2018 and Stream TV’s two primary debtors also convert their loans into equity at this time, Stream TV will issue additional shares to Intrinsyc based upon lower valuation of the equity valuation completed by Stream TV.
The Company fair valued the Warrants using a modified Black Scholes calculation with the fair value on the date of inception being $30,000 as at December 31, 2018 and $153,000 as at December 31, 2017. The value of the Warrants has been included in the Investment in Customer (formerly Loan to Customer) on the Statement of Financial Position with the decline in the fair value being recorded as Interest and Other Income on the Company’s Statements of Operations for the ended December 31, 2018.
6. INVENTORY
December 31, 2018 | December 31, 2017 | |||||||
| Parts | $ | 1,955,270 | $ | 2,436,372 | ||||
| Finished goods | 2,676,117 | 1,820,655 | ||||||
| $ | 4,631,387 | $ | 4,257,027 | |||||
During the year ended December 31, 2018, the Company charged $12,725,277 (2017: $9,489,634) of inventory related amounts to cost of sales.
7. EQUIPMENT
The following table presents details of movement in the carrying value of equipment by type:
Cost
| Computers and Equipment | Furniture and Fixtures | Leasehold Improvements |
Total | ||||||||||||||
| Balance, January 1, 2017 | $ | 1,865,412 | $ | 887,202 | $ | 911,182 | $ | 3,663,796 | |||||||||
| Additions | 57,969 | 36,011 | – | 93,980 | |||||||||||||
| Balance, December 31, 2017 | $ | 1,923,381 | $ | 923,213 | $ | 911,182 | $ | 3,757,776 | |||||||||
| Additions | 42,597 | 98,413 | – | 141,010 | |||||||||||||
| Balance, December 31, 2018 | $ | 1,965,978 | $ | 1,021,626 | $ | 911,182 | $ | 3,898,786 | |||||||||
| 25 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
7. EQUIPMENT (continued)
Accumulated Depreciation
| Computers and Equipment | Furniture and Fixtures | Leasehold Improvements |
Total | ||||||||||||||
| Balance, January 1, 2017 | $ | (1,750,100 | ) | $ | (804,184 | ) | $ | (758,012 | ) | $ | (3,312,296 | ) | |||||
| Depreciation | (42,828 | ) | (30,776 | ) | (26,258 | ) | (99,862 | ) | |||||||||
| Balance, December 31, 2017 | $ | (1,792,928 | ) | $ | (834,960 | ) | $ | (784,270 | ) | $ | (3,412,158 | ) | |||||
| Depreciation | (46,093 | ) | (35,267 | ) | (26,258 | ) | (107,618 | ) | |||||||||
| Balance, December 31, 2018 | $ | (1,839,021 | ) | $ | (870,227 | ) | $ | (810,528 | ) | $ | (3,519,776 | ) | |||||
Net Book Value
| Computers and Equipment | Furniture and Fixtures | Leasehold Improvements |
Total | ||||||||||||||
| Balance, December 31, 2017 | $ | 130,453 | $ | 88,253 | $ | 126,912 | $ | 345,618 | |||||||||
| Balance, December 31, 2018 | $ | 126,957 | $ | 151,399 | $ | 100,654 | $ | 379,010 | |||||||||
8. INTANGIBLE ASSETS
The following table presents details of movement in the carrying value of the intangible assets which only consists of acquired software technology:
| December 31, 2018 | December 31, 2017 | |||||||
| Beginning Balance | $ | 118,591 | $ | 111,851 | ||||
| Purchases | 217,419 | 87,964 | ||||||
| Amortization | (94,722 | ) | (81,224 | ) | ||||
| Ending Balance | $ | 241,288 | $ | 118,591 | ||||
| 26 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
9. LINE OF CREDIT
On March 6, 2018, the Company entered into a line of credit agreement with its bank for up to CDN$4.4 million. The line bears interest at chartered bank’s prime lending rate +1.11% with no standby charge and does not include any covenants for the Company. Borrowings under this facility must not exceed the aggregate of the following, less Potential Prior-Ranking Claims:
| a) | 75% of Eligible Canadian/US Accounts Receivable; | |
| b) | 90% of Eligible EDC Accounts Receivable; | |
| c) | 65% of Eligible Foreign Accounts Receivable; and | |
| d) | to a maximum of $750,000.00, 50% of the lesser of cost or net realizable value of Unencumbered Inventory. |
As of December 31, 2018, outstanding borrowings were CDN $nil.
10. SHARE CAPITAL
Authorized
Unlimited number of preference shares without par value; and
Unlimited number of common shares without par value.
Issued and outstanding
[a] Preference Shares
There are no preference shares outstanding as at December 31, 2018.
[b] Common Shares
Number of common shares | Amount | |||||||
| Outstanding, January 1, 2017 | 21,101,789 | $ | 108,977,225 | |||||
| Issued upon exercise of stock options | 70,799 | 44,477 | ||||||
| Reclassification upon exercise of stock options | – | 36,350 | ||||||
| Repurchase and cancellation of shares under Normal Course Issuer Bid | (111,600 | ) | (158,169 | ) | ||||
| Outstanding, December 31, 2017 | 21,060,988 | $ | 108,899,883 | |||||
| Issued upon exercise of stock options | 195,088 | 88,196 | ||||||
| Reclassification upon exercise of stock options | – | 67,241 | ||||||
| Repurchase and cancellation of shares under Normal Course Issuer Bid | (969,200 | ) | (1,688,183 | ) | ||||
| Outstanding, December 31, 2018 | 20,286,876 | $ | 107,367,137 | |||||
| 27 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
10. SHARE CAPITAL (continued)
[c] Stock options
The Company has a rolling incentive stock option plan. Under the terms of the Company’s stock option plan, the Board of Directors may grant options to directors, officers, employees, consultants and service providers equal to the lower of: (i) up to 10% of issued and outstanding common shares of the Company from time to time less one share; and, (ii) 3,750,000 common shares. The plan provides for the granting of options at the closing price of the Company’s stock on the day prior to the grant date. Options granted generally vest over three years with the first one-third vesting at the first anniversary date of the grant and the balance vesting in equal amounts at the end of each quarter thereafter. There are no cash settlement alternatives. The Company does not have a past practice of cash settlement for these share options.
The Company determines the term of each option at the time it is granted, with options generally having a five-year term. As of December 31, 2018, the Company was entitled to grant 2,028,686 incentive stock options under the plan of which 1,523,316 have been granted.
A summary of the Company’s share option activity for the year ended December 31, 2018 is as follows:
| Outstanding options | ||||||||
Number of options | Weighted average exercise price (in Canadian dollars) | |||||||
| Outstanding, January 1, 2017 | 1,063,615 | $ | 0.84 | |||||
| Options granted | 432,500 | 2.03 | ||||||
| Options exercised | (70,799 | ) | 0.82 | |||||
| Options forfeited | (108,087 | ) | 1.35 | |||||
| Outstanding, December 31, 2017 | 1,317,229 | $ | 1.22 | |||||
| Options granted | 458,950 | 1.36 | ||||||
| Options exercised | (195,088 | ) | 0.59 | |||||
| Options forfeited | (57,775 | ) | 1.80 | |||||
| Outstanding, December 31, 2018 | 1,523,316 | $ | 1.32 | |||||
The following table summarizes the share options outstanding as at December 31, 2018:
| Options outstanding | Options exercisable | |||||||||||||||||||
Range of exercise price (in Canadian dollars) | # of common shares | Weighted average remaining contractual life | Weighted average exercise price (in Canadian dollars) | # of options exercisable | Weighted average exercise price (in Canadian dollars) | |||||||||||||||
| $ 0.72 - $ 0.88 | 273,694 | 0.51 | $ | 0.80 | 273,694 | $ | 0.80 | |||||||||||||
| $ 0.89 - $ 0.91 | 366,172 | 1.42 | $ | 0.89 | 365,755 | $ | 0.89 | |||||||||||||
| $ 0.92 - $ 1.34 | 390,450 | 4.04 | $ | 1.32 | 81,914 | $ | 1.25 | |||||||||||||
| $ 1.35 - $ 2.29 | 493,000 | 3.64 | $ | 1.93 | 242,860 | $ | 2.03 | |||||||||||||
| 1,523.316 | 2.65 | $ | 1.32 | 964,223 | $ | 1.18 | ||||||||||||||
The weighted average fair value of stock options granted during the year ended December 31, 2018 was CDN $0.72 per share (December 31, 2017 - CAD $1.22).
| 28 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
10. SHARE CAPITAL (continued)
The total stock-based compensation related to stock options for the year ended December 31, 2018 was $268,551. The total stock-based compensation related to stock options for the year ended December 31, 2017 was $210,525.
The fair value of each option granted was estimated on the date of grant using the Black-Scholes Option Pricing Model with the following weighted average assumptions:
Year ended December 31, | Year ended December 31, | |||||||
| 2018 | 2017 | |||||||
| Expected life (in years) | 4.04 | 3.87 | ||||||
| Risk-free interest rate | 1.99% | 1.04% | ||||||
| Volatility | 69.15% | 80.88% | ||||||
| Dividend yield | 0.00% | 0.00% | ||||||
The expected life of the share options is based on historical data and current expectations and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the options is indicative of future trends, which may not necessarily be the actual outcome either.
[d] Restricted Share Units (“RSUs”)
The Company adopted a restricted share unit plan (the “RSU Plan”) which was approved by its shareholders on May 16, 2017. The aggregate maximum number of shares available for issuance from treasury under the RSU Plan shall not exceed 500,000 shares. The 500,000 RSUs are a separate pool from the Company’s incentive stock option plan. The grant-date fair value of the restricted share units equals the fair market value of the corresponding shares at the grant date. The fair value of these equity-settled awards is recognized as compensation expense over the period that related services are rendered with a corresponding increase in equity. The total amount expensed is recognized over the vesting period on a tranche basis, which is the period over which all the specified vesting conditions should be satisfied.
A summary of the Company’s RSU activity for the twelve months ended December 31, 2018 is as follows:
Number of RSUs | ||||
| Outstanding, January 1, 2017 | 219,000 | |||
| RSUs granted | – | |||
| RSUs exercised | – | |||
| RSUs forfeited | – | |||
| Outstanding, December 31, 2017 | 219,000 | |||
| RSUs granted | – | |||
| RSUs exercised | – | |||
| RSUs forfeited | – | |||
| Outstanding, December 31, 2018 | 219,000 | |||
| 29 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
10. SHARE CAPITAL (continued)
There were no RSUs granted during the twelve December 31, 2018 (for the twelve months ended December 31, 2017, 219,000 RSUs were granted). The outstanding RSUs vest over three years as to one third on each anniversary of the grant date. Compensation for the twelve months ended December 31, 2018 was $147,516 ($106,575 for the twelve months ended December 31, 2017). As of December 31, 2018, one third (or 73,000) of the RSUs have vested.
The weighted average fair value of RSUs granted during the year ended December 31, 2017 was CDN $2.04 per share. There were no RSUs granted during the year ended December 31, 2018.
[e] Normal Course Issuer Bid (“NCIB”)
On September 29, 2017, the Company received approval from the TSX regarding the notice filed by the Company to establish a normal course issuer bid (“NCIB”) program to purchase, for cancellation, up to 500,000 common shares or approximately 2.4% of Intrinsyc’s issued and outstanding common shares, as at September 21, 2017. The NCIB program commenced on October 4, 2017 and terminated on October 3, 2018.
On September 27, 2018, the Company received approval from the TSX regarding the notice filed by the Company to extend its normal course issuer bid (“NCIB”) program to purchase, for cancellation, up to 1,793,294 common shares or approximately 8.6% of Intrinsyc’s issued and outstanding common shares, as at September 25, 2018.
The NCIB program extension commenced on October 4, 2018 and will terminate on October 3, 2019, or on such earlier date as the Company may complete its purchases pursuant to a Notice of Intention filed with the TSX.
In connection with the NCIB program, the Company established an automatic repurchase plan (the “Plan”) with its designated broker to allow for purchases of its common shares during certain pre-determined black-out periods, subject to certain parameters as to price and number of shares. Outside of these pre-determined black-out periods, common shares will be repurchased in accordance with management’s discretion, subject to applicable law. Intrinsyc may vary, suspend or terminate the Plan only if it does not have material non-public information and the decision to vary, suspend or terminate the Plan is not taken during a pre-determined blackout period. The Plan constitutes an “automatic plan” for purposes of applicable Canadian securities legislation and has been reviewed by the TSX.
As a result of entering into the Plan, the Company has recorded a corresponding liability. As at December 31, 2018, the liability was up to a maximum of $659,566 (CDN$899,780) as compared to $18,296 (CDN$ 22,952) as at December 31, 2017.
During the year ended December 31, 2018, the Company had purchased and cancelled 969,200 common shares for $1,035,660 (CDN$1,366,593).
| 30 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
10. SHARE CAPITAL (continued)
[f] Income (loss) per share
Year ended December 31, 2018 | Year ended December 31, 2017 | |||||||
| Weighted average number of shares outstanding – basic | 20,866,490 | 21,118,432 | ||||||
| Dilutive effects of exercisable options | – | 693,400 | ||||||
| Weighted average number of shares outstanding – fully diluted | 20,866,490 | 21,811,832 | ||||||
Due to the Company having a net loss for the year ended December 31, 2018, there are no dilutive effects of exercisable options.
11. INCOME TAXES
Income tax expense differs from the amount that would be computed by applying the Canadian federal and provincial statutory income tax rates of 27.00% (December 31, 2017 – 26.00%) to income before income taxes due to the following:
| December 31, 2018 | December 31, 2017 (Restated – see Note 3(b)(iii)) | |||||||
| Net income (loss)before income taxes | $ | (136,085 | ) | $ | 654,649 | |||
| Tax expense at applicable rates | $ | (36,742 | ) | $ | 134,979 | |||
| Change in unrecognized deferred tax assets | (1,034,887 | ) | 960,462 | |||||
| Non-deductible expenses and other differences | 110,715 | 80,677 | ||||||
| Foreign exchange arising on translation to functional currency | 1,008,143 | (811,394 | ) | |||||
| Adjustments in respect of deferred income taxes of prior years | (6,011 | ) | (26,247 | ) | ||||
| Effect of difference between combined Canadian statutory income rate and those rates applicable to foreign subsidiaries | (4,227 | ) | (5,503 | ) | ||||
| Changes in tax rates | – | (325,417 | ) | |||||
| Other items | 11,460 | 22,256 | ||||||
| Income tax expense | $ | 48,451 | $ | 29,813 | ||||
The deferred tax assets have not been recognized in these consolidated financial statements, as management does not consider it more likely than not that those assets will be realized in the carry forward period.
| 31 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
11. INCOME TAXES (continued)
The composition of the Company’s deferred tax assets not recognized are as follows:
| December 31, 2018 | December 31, 2017 | |||||||
| Deferred tax assets in relation to: | ||||||||
| Equipment | $ | 4,184,943 | $ | 4,536,287 | ||||
| Non-capital losses carried forward | 2,487,114 | 3,341,136 | ||||||
| Capital losses carried forward | 834,469 | 912,599 | ||||||
| SR&ED expenditures | 820,434 | 892,177 | ||||||
| Mark-to-market adjustment of financial instruments | 295,055 | – | ||||||
| Other | 110,355 | 85,058 | ||||||
| Deferred tax assets not recognized | $ | 8,732,370 | $ | 9,767,257 | ||||
As at December 31, 2018, the Company has non-capital loss carry forwards for Canadian income tax purposes available to reduce taxable income otherwise payable in future years. These losses expire as follows:
| 2026 | $ | 1,443,000 | ||||
| 2027 | 2,138,000 | |||||
| 2028 | 1,675,000 | |||||
| 2032 | 1,418,000 | |||||
| 2033 | 1,390,000 | |||||
| $ | 8,064,000 | |||||
In addition, The Company has approximately $6.3 million in capital losses that may be carried forward indefinitely to be offset against capital gains for tax purposes.
The Company has approximately $3,039,000 of scientific research and experimental development expenditures (”SR&ED”) that may be carried forward indefinitely to be deducted against future Canadian taxable income. The Company also has federal investment tax credits of approximately $944,000 available to offset future Canadian federal income taxes payable which expire commencing in 2019 until 2025. The benefit of the federal investment tax credits has not been recognized as their realization is not reasonably assured.
| 32 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
11. INCOME TAXES (continued)
As well, the Company has Undepreciated Capital Cost (“UCC”) amounts of approximately $16.0 million dollars which can be carried forward indefinitely. The balance includes approximately $2.4 million which was previously classified as Cumulative Eligible Capital (“CEC”).
The Company has an aggregate potential tax shield pertaining to federal and provincial taxable income in the amount of approximately $27.1 million which is attributable to its non-capital loss carry forward of approximately $8.1 million, approximately $3.0 million due to SR&ED expenditures, UCC of approximately $16.0 million and is exclusive of the Company’s investment tax credits above.
At December 31, 2018, the Company also has loss carry forwards in other jurisdictions as a result of its foreign operations. For UK income tax purposes, there are non-capital loss carry forwards totalling approximately $1,824,000 that may be carried forward indefinitely to reduce taxable income otherwise calculated in future years
12. COMMITMENTS AND CONTINGENCIES
| [a] | Currently, the Company leases its Vancouver, BC facility (of approximately 12,000 square feet of office space) until October 31, 2022. In addition, it leases approximately 400 square feet in Taipei, Taiwan until December 31, 2018. Subsequent to December 31, 2018, the Company entered into a three (3) year lease in Taiwan for an additional office space of approximately 2,400 square feet commencing May 1, 2019. |
The aggregate of minimum lease payments as at December 31, 2018 for subsequent years is as follows:
| 2019 | $ | 373,171 | ||||
| 2020 | 324,790 | |||||
| 2021 | 339,473 | |||||
| 2022 | 282,894 | |||||
| $ | 1,320,328 | |||||
| [b] | The Company warrants that its software and hardware products will operate substantially in conformity with product documentation and that the physical media will be free from defect. The specific terms and conditions of the warranties are generally ninety days. The Company accrues for known warranty issues if a loss is probable and can be reasonably estimated, and accrues for estimated incurred but unidentified warranty issues based on historical activity. To date, the Company has had no material warranty claims. |
| [c] | The Company may be subject to a variety of claims and suits that arise from time to time in the ordinary course of business. Although management currently believes that resolving claims against the Company, individually or in aggregate, will not have a material adverse impact on the Company’s financial position, results of operations, or cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. To date, there are no claims or suits outstanding against the Company. |
| 33 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
13. EXPORT DEVELOPMENT CANADA
On July 31, 2009, the Company entered into an agreement with EDC whereby EDC agreed to provide 90% insurance coverage for the Company’s invoiced sales for a premium of between CDN$0.76 to CDN$1.41 per CDN$100 of monthly invoiced sales (certain customers are excluded from this coverage). The initial policy period was from July 1, 2009 to June 30, 2010 with an automatic yearly renewal unless the policy is terminated by the Company (the policy has been renewed until June 30, 2019). The maximum liability coverage at any one time is CDN$185,000 for domestic sales and CDN$7,000,000 for sales outside of Canada. As of December 31, 2018, 85% of trade receivables were covered by EDC insurance (December 31, 2017 - 74%).
During the year ended December 31, 2018, the Company recorded total premiums of $207,854 (December 31, 2017 - $181,083) (CDN $269,700; December 31, 2017 - CDN $234,281) in sales and marketing.
14. SEGMENTED INFORMATION
Operating segments
The Company currently has the following two operating segments:
| 1. | Embedded Computing Hardware segment includes the sales of the Company’s proprietary computer modules and development kits. The Company offers original equipment manufacturers (“OEMs”) off-the-shelf and customized embedded computing modules; and |
| 2. | Services and Software segment includes turnkey product design and development services, as well as other engineering services and device software, including royalties. As well, it includes revenue generated from software products including: J-Integra® Enterprise Interoperability Software (“EIS”), and RapidRIL Telephony Software, including maintenance and support agreements for these products. These products and services are sold to OEMs, original device manufacturers (“ODMs”), technology providers, and other companies. |
Corporate includes all operating expenses of the Company.
Information regarding the operations of each operating segment is included below. Performance is based on revenue less cost of sales.
A breakdown of revenues and cost of sales for each operating segment for the years ended December 31, 2018 and December 31, 2017 is as follows:
| Year ended December 31, 2018 | Embedded Computing Hardware | Services and Software |
Corporate | Total | ||||||||||||
| Revenue | $ | 16,565,220 | $ | 9,116,507 | $ | – | $ | 25,681,727 | ||||||||
| Cost of sales | 13,059,784 | 3,714,325 | – | 16,774,109 | ||||||||||||
| 3,505,436 | 5,402,182 | – | 8,907,618 | |||||||||||||
| Operating expenses | – | – | 7,630,204 | 7,630,204 | ||||||||||||
| Operating profit (loss) | $ | 3,505,436 | $ | 5,402,182 | ($ | 7,630,204 | ) | $ | 1,277,414 | |||||||
| Year ended December 31, 2017 | Embedded Computing Hardware | Services and Software (Restated – See Note 3(b)(iii)) |
Corporate | Total | ||||||||||||
| Revenue | $ | 12,439,511 | $ | 8,222,658 | $ | – | $ | 20,662,169 | ||||||||
| Cost of sales | 9,633,049 | 4,149,449 | – | 13,782,498 | ||||||||||||
| 2,806,462 | 4,073,209 | – | 6,879,671 | |||||||||||||
| Operating expenses | – | – | 6,642,676 | 6,642,676 | ||||||||||||
| Operating profit (loss) | $ | 2,806,462 | $ | 4,073,209 | ($ | 6,642,676 | ) | $ | 236,995 | |||||||
| 34 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
14. SEGMENTED INFORMATION (continued)
Geographic information
The Company’s equipment is located as follows:
December 31, 2018 | December 31, 2017 | |||||||
| Canada | $ | 359,168 | $ | 323,090 | ||||
| Taiwan | 13,282 | 15,569 | ||||||
| India | 6,560 | – | ||||||
| United States | – | 6,959 | ||||||
| Total | $ | 379,010 | $ | 345,618 | ||||
The Company earned revenues attributed to the following geographic regions based on the location of the customer:
Year ended December 31, 2018 | Year ended December 31, 2017 (Restated – See Note 3(b)(iii)) | |||||||
| United States | $ | 17,293,258 | $ | 13,692,233 | ||||
| Asia Pacific | 4,078,013 | 4,223,751 | ||||||
| Europe | 2,515,114 | 1,847,861 | ||||||
| Canada | 1,775,017 | 886,835 | ||||||
| Other | 20,325 | 11,489 | ||||||
| $ | 25,681,727 | $ | 20,662,169 | |||||
Significant customers
In each respective period, revenues from customers which amounted to 10% of more of the Company’s revenues accounted for the following percentage of the Company’s total revenues and accounts receivable, as indicated below:
% of Revenues for the year ended December 31, 2018 | % of Accounts Receivable at December 31, 2018 | % of Revenues for the year ended December 31, 2017 | % of Accounts Receivable at December 31, 2017 | |||||||||||||||
| Customer 1 | 27% | 38% | 23% | 31% | ||||||||||||||
| Customer 2 | 2% | <1% | 12% | 5% | ||||||||||||||
The above customers for the prior periods are referenced due to their being greater than the Company’s ten percent of total revenue threshold in the respective prior periods. Receivables owing from Customer 1 and 2 are fully covered by EDC insurance in the event of payment default.
| 35 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
15. EXPENSES BY NATURE
Total salaries and wages as well as other personnel related expenses included in Cost of Sales and Expenses for the year ended December 31, 2018 were $8,571,404 compared to $8,152,165 during the year ended December 31, 2017.
16. OTHER OPERATING EXPENSES
Other operating expenses consist of the following:
Year ended December 31, 2018 | Year ended December 31, 2017 | |||||||
| Depreciation of equipment (note 7) | $ | 107,618 | $ | 99,862 | ||||
| Amortization of intangible assets (note 8) | 94,722 | 81,224 | ||||||
| Share-based compensation – options (note 10(c)) | 268,551 | 210,525 | ||||||
| Share-based compensation – RSUs (note 10(d)) | 147,516 | 106,575 | ||||||
| $ | 618,407 | $ | 498,186 | |||||
17. CAPITAL DISCLOSURES
The Company’s objectives for managing capital are:
| · | To safeguard the Company’s ability to continue as a going concern, so that it can provide adequate returns for shareholders and benefits for other stakeholders. |
| · | To maintain a capital base so as to maintain investor, creditor, customer and market confidence. |
The Company considers the items included in equity as capital. The Company manages the capital structure and makes adjustments to it (by either issuing new shares or buying back shares) in the light of changes in economic conditions and the risk characteristics of the underlying assets.
18. FINANCIAL INSTRUMENTS
| [a] | Financial assets and liabilities |
Financial instruments are measured at amortized cost or fair value. Fair value represents the estimated amounts at which financial instruments could be exchanged between knowledgeable and willing parties in an arm’s length transaction. Determining fair value requires management judgment. The following financial instruments are all measured at amortized cost. The fair value of each (with the exception of the investment in customer) approximates its carrying value due to their short-term nature. The fair value of the investment in customer is determined using implied valuations from financing rounds. Therefore, it is treated as a Level 1 financial asset with the fair value equating its carrying value.
| 36 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
18. FINANCIAL INSTRUMENTS (continued)
The carrying values and fair values of financial assets (liabilities) as at December 31, 2018 and December 31, 2017 are summarized as follows:
| December 31, 2018 | December 31, 2017 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
| Financial Assets | ||||||||||||||||
| Cash and cash equivalents | $ | 3,939,763 | $ | 3,939,763 | $ | 4,989,154 | $ | 4,989,154 | ||||||||
| Short-term investments | $ | 2,027,579 | $ | 2,027,579 | $ | 2,260,089 | $ | 2,260,089 | ||||||||
| Trade and other receivables | $ | 5,265,076 | $ | 5,265,076 | $ | 4,799,625 | $ | 4,799,625 | ||||||||
| Loan to customer | $ | – | $ | – | $ | 1,646,250 | $ | 1,646,250 | ||||||||
| Investment in customer | $ | 623,019 | $ | 623,019 | $ | – | $ | – | ||||||||
| Warrants | $ | 30,000 | $ | 30,000 | $ | 153,000 | $ | 153,000 | ||||||||
| Financial Liabilities | ||||||||||||||||
| Other Liabilities | $ | (5,492,892 | ) | $ | (5,492,892 | ) | $ | (5,026,370 | ) | $ | (5,026,370 | ) | ||||
[b] Risk Management
Disclosures relating to exposure to risks, in particular credit risk, liquidity risk, foreign currency risk, and interest rate risk are provided below.
[i] Credit Risk
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company's financial instruments that are exposed to concentrations of credit risk are primarily cash and cash equivalents, short-term investments and trade and other receivables. The Company limits its exposure to credit risk with respect to cash and cash equivalents by investing available cash, from time to time, in short-term deposits with Canadian financial institutions. With respect to trade and other receivables, the Company engages EDC to perform ongoing credit evaluations of Intrinsyc’s customers’ financial condition and requires letters of credit or other guarantees whenever deemed necessary.
Trade and other receivables were aged as follows as at December 31, 2018 and December 31, 2017:
December 31, 2018 | December 31, 2017 | |||||||
| Current | $ | 4,864,701 | $ | 3,913,053 | ||||
| 31-60 days Over 60 days | 173,195 227,180 | 94,977 791,595 | ||||||
| $ | 5,265,076 | $ | 4,799,625 | |||||
| 37 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
18. FINANCIAL INSTRUMENTS (continued)
[ii] Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company's approach to managing liquidity risk is to ensure, as far as possible, that it will always have sufficient liquidity to meet liabilities when due. The contractual maturity of the majority of accounts payable is within one month.
Trade and other payables were aged as follows as at December 31, 2018 and December 31, 2017:
December 31, 2018 | December 31, 2017 | |||||||
| Current | $ | 4,727,300 | $ | 4,322,552 | ||||
| 31-60 days Over 60 days | 755,946 9,646 | 401,523 302,295 | ||||||
| $ | 5,492,892 | $ | 5,026,370 | |||||
[iii] Foreign Currency Risk
Although substantially all of the Company’s revenues are received in U.S. dollars, the Company incurs operating costs primarily attributable to its services business and has outstanding trade and other payables denominated in Canadian dollars and other foreign currencies. Fluctuations in the exchange rates between these currencies could have a material effect on the business, financial condition and results of operations. The Company maintains certain assets, inclusive of a portion of its treasury investments, in Canadian dollars which are translated to its U.S. dollar functional currency resulting in an unrealized foreign exchange gain or loss. With all other variables remaining constant, assuming a 10% weakening of the Canadian dollar versus the U.S. dollar would have had the following impact on net loss as follows in the table below. An assumed 10% strengthening of the Canadian dollar versus the U.S. dollar would have had an equal but opposite effect on the amounts shown below:
Year ended | Year ended | |||||||
| Source of net earnings/loss variability from changes in foreign exchange rates | December 31, 2018 | December 31, 2017 | ||||||
| Statement of Financial Position exposure | $ | (115,106 | ) | $ | (281,179 | ) | ||
| Net Cost of Sales/Operating Expenses (net exposure) | 849,195 | 696,100 | ||||||
| Net exposure | $ | 734,089 | $ | 414,921 | ||||
A 10% change in the New Taiwanese dollar to U.S. dollar exchange rate would have an approximate $8,300 impact on net income for the year ended December 31, 2018 (year ended December 31, 2017 – $13,000).
A 10% change in the rupee to U.S. dollar exchange rate would have no material impact on net income for the year ended December 31, 2018 (year ended December 31, 2017 - $nil).
| 38 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
[iv] Interest Rate Risk
The Company's exposure to interest rate fluctuations is primarily interest earned on its cash and cash equivalents as well as its short-term investments. During the year ended December 31, 2018, the Company earned $106,602 of interest income on its cash and cash equivalents as well as its short-term investments and customer loan. An increase or decrease of 100 basis points in the average interest rate earned during the period
would have adjusted net earnings by approximately $66,000. This analysis assumes that all other variables, in particular foreign currency rates, remain constant.
19. RELATED PARTY TRANSACTIONS
Related parties include key management, the Board of Directors, close family members and enterprises which are controlled by these individuals as well as certain persons performing similar functions.
The remuneration of directors and key management of the Company for the years ended December 31, 2018 and 2017 are as follows:
Year ended December 31, 2018 | Year ended December 31, 2017 | |||||||
| Short-term compensation | $ | 1,117,973 | $ | 1,012,743 | ||||
| Share-based payments | 103,716 | 395,974 | ||||||
| $ | 1,221,689 | $ | 1,408,717 | |||||
Short-term compensation for the year ended December 31, 2018 included the Company’s annual performance corporate bonus totalling an amount of $90,000 which was paid to its management which had been previously accrued for as operating expense during the year ended December 31, 2017. There was no annual performance corporate bonus paid out during the year ended December 31, 2017.
There were no amounts owing to related parties as at December 31, 2018 and December 31, 2017.
The directors and key management were awarded 185,000 options under the Company’s stock option plan during the year ended December 31, 2018. There were no RSUs granted during the year ended December 31, 2018.
The directors and key management were awarded 252,950 options under the Company’s stock option plan during the year ended December 31, 2017 as well as 199,000 RSUs.
| 39 |
INTRINSYC TECHNOLOGIES CORPORATION
Consolidated Financial Statements
(Expressed in U.S. Dollars)
20. EMPLOYEE RETIREMENT SAVINGS CONTRIBUTIONS
Year ended December 31, 2018 | Year ended December 31, 2017 | |||||||
| Benefit costs | $ | 206,213 | $ | 227,715 | ||||
The Company matches employees’ retirement savings contributions to retirement plans as part of the employee benefits plan. Employees have the option of having the funds transferred to their individual retirement savings plans on a semi-monthly basis or on a periodic basis (most employees have the funds transferred on a semi-monthly basis).
| 40 |
EXHIBIT 99.3
INTRINSYC TECHNOLOGIES CORPORATION
Interim Condensed Consolidated Statements of Financial Position
(Unaudited and Expressed in U.S. Dollars)
| As at | September 30, 2019 | December 31, 2018 (Restated – see Note 3) | January 1, 2018 (Restated - see Note 3) | |||||||||
| ASSETS | ||||||||||||
| Current assets | ||||||||||||
| Cash and cash equivalents (note 19) | $ | 2,597,855 | $ | 3,939,763 | $ | 4,989,154 | ||||||
| Short-term investments (note 19) | 983,023 | 2,027,579 | 2,260,089 | |||||||||
| Trade and other receivables (notes 4, 14 and 19(b)(i))) | 4,730,371 | 5,265,076 | 4,799,625 | |||||||||
| Loan to customer (note 5) | – | – | 1,799,250 | |||||||||
| Inventory (note 6) | 5,481,543 | 4,631,387 | 4,257,027 | |||||||||
| Prepaid expenses | 168,936 | 313,952 | 159,784 | |||||||||
| 13,961,728 | 16,177,757 | 18,264,929 | ||||||||||
| Non-Current Assets | ||||||||||||
| Prepaid expenses | 42,406 | 22,623 | 27,417 | |||||||||
| Investment in customer (note 5) | 653,019 | 653,019 | – | |||||||||
| Equipment (note 7) | 429,392 | 407,706 | 362,700 | |||||||||
| Intangible assets (note 8) | 230,813 | 241,288 | 118,591 | |||||||||
| Right-of-use asset (note 9) | 1,062,260 | 966,770 | 1,095,020 | |||||||||
| Total assets | $ | 16,379,618 | $ | 18,469,163 | $ | 19,868,657 | ||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||
| Current liabilities | ||||||||||||
| Trade and other payables (note 19(b)(ii)) | $ | 2,866,601 | $ | 5,415,376 | $ | 4,938,065 | ||||||
| Deferred revenue | 462,184 | 313,164 | 694,088 | |||||||||
| Lease liability – current (note 12) | 170,596 | 87,748 | 81,210 | |||||||||
| 3,499,381 | 5,816,288 | 5,713,363 | ||||||||||
| Non-Current Liabilities | ||||||||||||
| Lease liability (note 12) | 1,140,701 | 1,055,730 | 1,281,554 | |||||||||
| Total liabilities | 4,640,082 | 6,872,018 | 6,994,917 | |||||||||
| Shareholders' equity | ||||||||||||
| Share capital (note 11) | 107,079,745 | 107,367,137 | 108,899,883 | |||||||||
| Other capital reserves – share based payments | 10,882,739 | 10,679,723 | 10,330,897 | |||||||||
| Deficit | (106,315,384 | ) | (106,542,151 | ) | (106,449,476 | ) | ||||||
| Translation of operations reserve | 92,436 | 92,436 | 92,436 | |||||||||
| Total shareholders' equity | 11,739,536 | 11,597,145 | 12,873,740 | |||||||||
| Total liabilities and shareholders’ equity | $ | 16,379,618 | $ | 18,469,163 | $ | 19,868,657 | ||||||
Commitments and contingencies (note 13)
See accompanying notes to the interim condensed consolidated financial statements
Approved on behalf of the Board:
| “George Duguay” | “Michael Bird” |
| Director | Director |
| 1 |
INTRINSYC TECHNOLOGIES CORPORATION
Interim Condensed Consolidated Statements of Operations
(Unaudited and Expressed in U.S. dollars)
| For the | Three Months ended September 30, 2019 | Three Months ended September 30, 2018 (Restated – See Note 3) | Nine Months ended September 30, 2019 | Nine Months ended September 30, 2018 (Restated – See Note 3) | ||||||||||||
| Revenues (note 15) | $ | 6,173,842 | $ | 6,089,417 | $ | 17,786,209 | $ | 18,583,659 | ||||||||
| Cost of sales (note 15) | 4,002,393 | 3,747,429 | 11,779,601 | 12,068,621 | ||||||||||||
| 2,171,449 | 2,341,988 | 6,006,608 | 6,515,038 | |||||||||||||
| Expenses | ||||||||||||||||
| Sales and marketing | 580,950 | 647,674 | 1,792,929 | 1,944,048 | ||||||||||||
| Research and development | 278,793 | 315,125 | 1,036,545 | 1,088,218 | ||||||||||||
| Administration | 837,841 | 825,316 | 2,378,281 | 2,087,713 | ||||||||||||
| Other operating expenses (note 17) | 181,793 | 171,351 | 586,371 | 591,271 | ||||||||||||
| 1,879,377 | 1,959,466 | 5,794,126 | 5,711,250 | |||||||||||||
| Operating income | 292,072 | 382,522 | 212,482 | 803,788 | ||||||||||||
| Other expenses (earnings) | ||||||||||||||||
| Foreign exchange loss (gain) | (138,451 | ) | 86,417 | 38,759 | 240,236 | |||||||||||
| Interest and other expense (income) | 80,349 | (25,443 | ) | (101,117 | ) | (56,797 | ) | |||||||||
| (58,102 | ) | 60,974 | (62,358 | ) | 183,439 | |||||||||||
| Income before income taxes | 350,174 | 321,548 | 274,840 | 620,349 | ||||||||||||
| Income tax expense | 17,788 | 7,502 | 48,062 | 37,748 | ||||||||||||
| Net income and comprehensive income for the period | 332,386 | 314,046 | 226,778 | 582,601 | ||||||||||||
| Income per share (basic) (note 11(f)) | $ | 0.02 | $ | 0.02 | $ | 0.01 | $ | 0.03 | ||||||||
| Income per share (fully diluted) (note 11(f)) | $ | 0.02 | $ | 0.02 | $ | 0.01 | $ | 0.03 | ||||||||
| Weighted average number of shares outstanding – basic (note 11(f)) | 20,026,557 | 20,862,904 | 20,017,926 | 20,931,309 | ||||||||||||
| Weighted average number of shares outstanding – fully diluted (note 11(f)) | 20,240,610 | 21,430,756 | 20,173,549 | 21,439,191 | ||||||||||||
See accompanying notes to the interim condensed consolidated financial statements
| 2 |
INTRINSYC TECHNOLOGIES CORPORATION
Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited and Expressed in U.S. Dollars)
Share Capital | Other Capital Reserves – Share Based Payments | Deficit (Restated – See Note 3) | Translation of Operations Reserve | Total Shareholders’ Equity | ||||||||||||||||
| Balance, January 1, 2019 | $ | 107,367,137 | $ | 10,679,723 | $ | (106,542,151 | ) | $ | 92,436 | $ | 11,597,145 | |||||||||
| Net income for the period | – | – | 226,778 | – | 226,778 | |||||||||||||||
| Issued upon exercise of stock options | 136,394 | – | – | – | 136,394 | |||||||||||||||
| Reclassification upon exercise of stock options | 101,824 | (101,824 | ) | – | – | – | ||||||||||||||
| Issued for RSU settlement | 25,572 | (25,572 | ) | – | – | – | ||||||||||||||
| Shares repurchased and cancelled under Normal Course Issuer Bid | (551,193 | ) | – | – | – | (551,193 | ) | |||||||||||||
| Share-based compensation | – | 221,162 | – | – | 221,162 | |||||||||||||||
| Issue of RSUs for settlement of past performance (note 20) | – | 109,250 | – | – | 109,250 | |||||||||||||||
| Balance, September 30, 2019 | $ | 107,079,734 | $ | 10,882,739 | ($ | 106,315,373 | ) | $ | 92,436 | $ | 11,739,536 | |||||||||
| Balance, January 1, 2018 | $ | 108,899,883 | $ | 10,330,897 | ($ | 106,287,119 | ) | $ | 92,436 | $ | 13,036,097 | |||||||||
| Impact of IFRS 16 | – | – | (162,357 | ) | – | (162,357 | ) | |||||||||||||
| Balance, January 1, 2018 (Restated) | $ | 108,899,883 | $ | 10,330,897 | $ | (106,449,476 | ) | $ | 92,436 | $ | 12,873,740 | |||||||||
| Net income for the period | – | – | 582,601 | – | 582,601 | |||||||||||||||
| Issued upon exercise of stock options | 81,622 | – | – | – | 81,622 | |||||||||||||||
| Reclassification upon exercise of stock options | 62,201 | (62,201 | ) | – | – | – | ||||||||||||||
| Shares repurchased and cancelled under Normal Course Issuer Bid | (497,864 | ) | – | – | – | (497,864 | ) | |||||||||||||
| Share-based compensation | – | 332,830 | – | – | 332,830 | |||||||||||||||
| Balance, September 30, 2018 | $ | 108,545,842 | $ | 10,601,526 | $ | (105,866,875 | ) | $ | 92,436 | $ | 13,372,929 | |||||||||
See accompanying notes to the interim condensed consolidated financial statements
| 3 |
INTRINSYC TECHNOLOGIES CORPORATION
Interim Condensed Consolidated Statements of Cash Flows
(Unaudited and Expressed in U.S. Dollars)
| For the | Three months ended September 30, 2019 | Three months ended September 30, 2018 (Restated – See Note 3) | Nine months ended September 30, 2019 | Nine months ended September 30, 2018 (Restated – See Note 3) | ||||||||||||
| Cash provided by (used in): | ||||||||||||||||
| Operating Activities | ||||||||||||||||
| Net income for the period | $ | 332,386 | $ | 314,046 | $ | 226,778 | $ | 582,601 | ||||||||
| Adjustments to reconcile net loss to net cash flows: | ||||||||||||||||
| Depreciation of equipment (note 7) | 34,610 | 23,853 | 85,946 | 67,116 | ||||||||||||
| Amortization of intangible assets (note 8) | 36,084 | 23,140 | 112,847 | 68,193 | ||||||||||||
| Amortization of right-of-use asset (notes 9) | 59,594 | 41,044 | 166,416 | 123,132 | ||||||||||||
| Share-based compensation | 51,505 | 83,314 | 221,162 | 332,830 | ||||||||||||
| Accrued interest on customer loan | – | – | – | (15,134 | ) | |||||||||||
| Finance charge on lease payments (note 12) | 10,557 | 10,302 | 31,174 | 32,020 | ||||||||||||
| Decommissioning costs (note 9) | – | – | (12,305 | ) | – | |||||||||||
| Unrealized foreign exchange | (134,177 | ) | (46,476 | ) | 52,143 | (139,815 | ) | |||||||||
| 390,559 | 449,223 | 884,161 | 1,050,943 | |||||||||||||
| Working capital adjustments: | ||||||||||||||||
| Trade and other receivables | (1,986,544 | ) | 73,565 | 535,857 | 962,222 | |||||||||||
| Inventory | 1,421,782 | (628,249 | ) | (850,156 | ) | (296,600 | ) | |||||||||
| Prepaid expenses | 27,955 | 10,777 | 125,233 | 69,306 | ||||||||||||
| Trade and other payables | (221,015 | ) | 278,618 | (2,514,390 | ) | (665,822 | ) | |||||||||
| Deferred revenue | 118,663 | (69,507 | ) | 149,020 | (187,273 | ) | ||||||||||
| (639,159 | ) | (334,796 | ) | (2,554,436 | ) | (118,167 | ) | |||||||||
| Cash provided by (used in) operating activities | (248,600 | ) | 114,427 | (1,670,275 | ) | 932,776 | ||||||||||
| Investing Activities | ||||||||||||||||
| Redemption (purchase) of short-term investments | 58,982 | (36,051 | ) | 1,083,941 | 233,882 | |||||||||||
| Purchase of equipment (note 7) | (9,454 | ) | (25,247 | ) | (107,632 | ) | (53,618 | ) | ||||||||
| Purchase of intangible assets (note 8) | (7,846 | ) | – | (102,372 | ) | (86,119 | ) | |||||||||
| Cash provided by (used in) investing activities | 41,682 | (61,298 | ) | 873,937 | 94,145 | |||||||||||
| Financing Activities | ||||||||||||||||
| Issuance of common shares | 1,812 | 70,851 | 136,405 | 81,622 | ||||||||||||
| Repurchase and cancellation of shares (note 11(e)) | – | (102,994 | ) | (551,193 | ) | (497,864 | ) | |||||||||
| Lease payments (note 12) | (63,246 | ) | (41,378 | ) | (155,469 | ) | (126,028 | ) | ||||||||
| Cash used in financing activities | (61,434 | ) | (73,521 | ) | (570,257 | ) | (542,270 | ) | ||||||||
| Increase (decrease) in cash and cash equivalents | (268,352 | ) | (20,392 | ) | (1,366,595 | ) | 484,651 | |||||||||
| Foreign exchange effect on cash and cash equivalents | 71,569 | (11,816 | ) | 24,687 | (60,447 | ) | ||||||||||
| Cash and cash equivalents, beginning of the period | 2,794,638 | 5,445,566 | 3,939,763 | 4,989,154 | ||||||||||||
| Cash and cash equivalents, end of the period | $ | 2,597,855 | $ | 5,413,358 | $ | 2,597,855 | $ | 5,413,358 | ||||||||
| Supplementary information | ||||||||||||||||
| Interest received | $ | 34,790 | $ | 21,778 | $ | 87,806 | $ | 56,053 | ||||||||
| Income taxes paid | $ | 17,886 | $ | 3,484 | $ | 53,090 | $ | 37,505 | ||||||||
See accompanying notes to the interim condensed consolidated financial statements
| 4 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
1. REPORTING ENTITY
Intrinsyc Technologies Corporation (formerly Intrinsyc Software International, Inc.) (“Intrinsyc” or the “Company”) is a public company domiciled in Canada and incorporated on August 31, 1992 under the laws of Alberta and continued under the Company Act (British Columbia) on July 19, 1995. Articles of Continuance were filed under the Canada Business Corporations Act on May 1, 2003 to continue the Company federally and change the name of the Company from Intrinsyc Software, Inc. to Intrinsyc Software International, Inc. Articles of Amendment were filed under the Canada Business Corporations Act on June 17, 2014 to change the name of the Company to Intrinsyc Technologies Corporation. The Company’s principal business office is Suite 300, 885 Dunsmuir Street, Vancouver, British Columbia, V6C 1N5 and its registered office is Suite 1700, 1055 West Hastings Street, Vancouver, British Columbia, V6E 2E9.
The Company is an Internet of Things (“IoT”) product development company, offering hardware development kits, computing modules, proprietary software products, and engineering design and development services. These solutions are focused on the fast growing high-performance IoT product market; including; augmented and virtual reality, drones, robotics, digital signage, automotive, IP cameras, medical systems, wearable technology, and many others. The Company provides value by enabling device makers and technology suppliers to deliver compelling, next generation mobile and embedded wireless devices with faster time to market, higher quality, and differentiating innovation.
The interim condensed consolidated financial statements of the Company, as at, and for the three and nine months ended September 30, 2019 and September 30, 2018 comprise the Company and its subsidiaries (together referred to as the “Company” and individually as “Company entities”).
2. BASIS OF PRESENTATION
Statement of Compliance
These interim condensed consolidated financial statements, which have been approved by the Board of Directors on November 12, 2019, have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting (“IAS 34”). These interim condensed consolidated financial statements have been prepared using the historical cost basis and the same accounting policies as those disclosed in the Company’s annual financial statements as at and for the year ended December 31, 2018 (except for the adoption of new accounting standards effective January 1, 2019 – see below). Accordingly, these interim condensed consolidated financial statements do not include all disclosures required for annual financial statements and should be read in conjunction with the Company’s annual financial statements as at and for the year ended December 31, 2018 (which were prepared in accordance with International Financial Reporting Standards, or “IFRS”).
3. Significant ACCOUNTING POLICIES
New Standards and Interpretations Adopted
The Company applied, for the first time, IFRS 16 - Leases which require restatement of previous financial statements. The nature and effect of these changes are disclosed below. In addition, the Company also adopted IFRIC 23 – Uncertainty over Income Tax Treatments.
IFRS 16 - Leases
The standard supersedes the current IAS 17, Leases (IAS 17) standard. IFRS 16 introduces a single accounting model for lessees and for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee will be required to recognize a right-of-use asset, representing its right to use the underlying asset, and a lease liability, representing its obligation to make lease payments.
| 5 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
3. Significant ACCOUNTING POLICIES (continued)
The Company applied IFRS 16 with a date of initial application of January 1, 2019. As a result, the Company has changed its accounting policy for lease contracts as detailed below.
The Company applied IFRS 16 using the full retrospective approach. Consequently, it has restated the comparative information and a third statement of financial position as at the beginning of the earliest comparative period is presented. As a result of adopting IFRS 16, the Company has recognized a significant increase to both assets and liabilities on the Consolidated Statements of Financial Position, as well as a decrease to operating costs (for the removal of rent expense for leases), an increase to depreciation (due to depreciation of the right-of-use asset), and an increase to finance costs (due to accretion of the lease liability). The details of the changes in accounting policies are disclosed below.
Definition of a Lease
Previously, the Company determined at contract inception whether an arrangement is or contains a lease under IFRIC 4. Under IFRS 16, the Company assesses whether a contract is or contains a lease based on the definition of a lease. Under IFRIC 4, the Company assessed a lease based on the assessment of whether:
| · | fulfilment of the arrangement was dependent on the use of a specific asset or assets; and | |
| · | the arrangement had conveyed a right to use the asset. An arrangement conveyed the right to use the asset if one of the following was met: | |
| · | the purchaser had the ability or right to operate the asset while obtaining or controlling more than an insignificant amount of the output; | |
| · | the purchaser had the ability or right to control physical access to the asset while obtaining or controlling more than an insignificant amount of the output; or | |
| · | facts and circumstances indicated that it was remote that other parties would take more than an insignificant amount of the output, and the price per unit was neither fixed per unit of output nor equal to the current market price per unit of output. |
The Company applied the definition of a lease under IFRS 16 to contracts entered into or changed on or after January 1, 2019.
As a Lessee
As a lessee, the Company previously classified leases as operating or finance leases based on its assessment of whether the lease transferred significantly all of the risks and rewards incidental to ownership of the underlying asset to the Company. Under IFRS 16, the Company recognizes right-of-use assets and lease liabilities for most leases.
The Company decided to apply recognition exemptions to short-term leases of office space India and the storage facility in Vancouver, BC. The Company applied IFRS 16 to leased office space it formerly leased in Boulder, CO (lease expired February 28, 2018), Vancouver BC and the original leased office space in Taiwan (expired December 31, 2017) as at January 1, 2018 (its earliest comparative period) as they met the criteria given that the leases had terms that were greater than twelve (12) months.
The cumulative impact on amounts recognized in the Company's interim condensed consolidated statements of financial position as at January 1, and December 31, 2018, is shown below:
| 6 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
3. Significant ACCOUNTING POLICIES (continued)
Interim Condensed Consolidated Statement of Financial Position | January 1, 2018– As reported prior to IFRS 16 transition |
Adjustments | January 1, 2018– As restated after IFRS 16 transition | |||||||||
| Equipment | $ | 345,618 | $ | 17,082 | $ | 362,700 | ||||||
| Right-of-Use asset | $ | – | $ | 1,095,020 | $ | 1,095,020 | ||||||
| Trade and other payables | $ | 5,026,370 | $ | (88,305 | ) | $ | 4,938,065 | |||||
| Lease liability – current portion | $ | – | $ | 81,210 | $ | 81,210 | ||||||
| Lease liability | $ | – | $ | 1,281,554 | $ | 1,281,554 | ||||||
| Deficit | $ | (106,287,119 | ) | $ | (162,357 | ) | $ | (106,449,476 | ) | |||
Interim Condensed Consolidated Statement of Financial Position | December 31, 2018– As reported prior to IFRS 16 transition |
Adjustments | December 31, 2018–
As restated after IFRS 16 transition | |||||||||
| Equipment | $ | 379,010 | $ | 28,696 | $ | 407,706 | ||||||
| Right-of-Use asset | $ | – | $ | 966,770 | $ | 966,770 | ||||||
| Trade and other payables | $ | 5,492,892 | $ | (77,516 | ) | $ | 5,415,376 | |||||
| Lease liability – current portion | $ | – | $ | 87,748 | $ | 87,748 | ||||||
| Lease liability | $ | – | $ | 1,055,730 | $ | 1,055,730 | ||||||
| Deficit | $ | (106,471,655 | ) | $ | (70,496 | ) | $ | (106,542,151 | ) | |||
The cumulative impact on amounts recognized in the Company's interim condensed consolidated statement of changes in shareholders equity as at January 1, and December 31, 2018, is shown below:
| Interim Condensed Consolidated Statement of Changes in Shareholders’ Equity | As reported prior to IFRS 16 transition |
Adjustments | As restated after IFRS 16 transition | |||||||||
| Deficit – January 1, 2018 | $ | (106,287,119 | ) | $ | (162,357 | ) | $ | (106,449,476 | ) | |||
| Deficit – December 31, 2018 | $ | (106,471,655 | ) | $ | (70,496 | ) | $ | (106,542,151 | ) | |||
The impact on amounts recognized in the Company's interim condensed consolidated statement of operations for the three and nine months ended September 30, 2018, is shown below:
| 7 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
3. Significant ACCOUNTING POLICIES (continued)
Interim Condensed Consolidated Statement of Operations | Three months ended September 30, 2018– As reported prior to IFRS 16 transition |
Adjustments | Three months ended September 30, 2018– As restated after IFRS 16 transition | |||||||||
| Cost of sales | $ | 3,775,411 | $ | (27,982 | ) | $ | 3,747,429 | |||||
| Sales and marketing | $ | 650,237 | $ | (2,563 | ) | $ | 647,674 | |||||
| Research & development | $ | 315,766 | $ | (641 | ) | $ | 315,125 | |||||
| Administration | $ | 834,929 | $ | (9,613 | ) | $ | 825,316 | |||||
| Other operating expenses | $ | 133,209 | $ | 38,142 | $ | 171,351 | ||||||
| Operating income | $ | 379,865 | $ | 2,657 | $ | 382,522 | ||||||
| Foreign exchange loss (gain) | $ | 61,631 | $ | 24,786 | $ | 86,417 | ||||||
| Interest and other expense (income) | $ | (35,745 | ) | $ | 10,302 | $ | (25,443 | ) | ||||
| Income before income taxes | $ | 353,979 | $ | (32,431 | ) | $ | 321,548 | |||||
| Net income and comprehensive income for the period | $ | 346,477 | $ | (32,431 | ) | $ | 314,046 | |||||
Interim Condensed Consolidated Statement of Operations | Nine months ended September 30, 2018– As reported prior to IFRS 16 transition |
Adjustments | Nine months ended September 30, 2018–
As restated after IFRS 16 transition | |||||||||
| Cost of sales | $ | 12,156,493 | $ | (87,872 | ) | $ | 12,068,621 | |||||
| Sales and marketing | $ | 1,952,719 | $ | (8,671 | ) | $ | 1,944,048 | |||||
| Research & development | $ | 1,090,221 | $ | (2,003 | ) | $ | 1,088,218 | |||||
| Administration | $ | 2,113,430 | $ | (25,717 | ) | $ | 2,087,713 | |||||
| Other operating expenses | $ | 476,847 | $ | 114,424 | $ | 591,271 | ||||||
| Operating income | $ | 793,949 | $ | 9,839 | $ | 803,788 | ||||||
| Foreign exchange loss (gain) | $ | 288,899 | $ | (48,663 | ) | $ | 240,236 | |||||
| Interest and other expense (income) | $ | (88,816 | ) | $ | 32,019 | $ | (56,797 | ) | ||||
| Income before income taxes | $ | 593,866 | $ | 26,483 | $ | 620,349 | ||||||
| Net income and comprehensive income for the period | $ | 556,118 | $ | 26,483 | $ | 582,601 | ||||||
There is no impact to basic and fully diluted earnings per share.
The impact on amounts recognized in the Company's interim condensed consolidated statement of cashflows for the three and nine months ended September 30, 2018, is shown below:
| 8 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
3. Significant ACCOUNTING POLICIES (continued)
| Interim Condensed Consolidated Statement of Cash Flows | Three months ended September 30, 2018– As reported prior to IFRS 16 transition |
Adjustments | Three months ended September 30, 2018– As restated after IFRS 16 transition | |||||||||
| Net income for the period | $ | 346,477 | $ | (32,431 | ) | $ | 314,046 | |||||
| Depreciation of equipment | $ | 26,755 | $ | (2,902 | ) | $ | 23,853 | |||||
| Amortization of right-of-use asset | $ | – | $ | 41,044 | $ | 41,044 | ||||||
| Finance charge on lease payments | $ | – | $ | 10,302 | $ | 10,302 | ||||||
| Unrealized foreign exchange | $ | (72,686 | ) | $ | 26,210 | $ | (46,476 | ) | ||||
| Trade and other payables | $ | 279,463 | $ | 845 | $ | 278,618 | ||||||
| Lease payments | $ | – | $ | (41,378 | ) | $ | (41,388 | ) | ||||
| Interim Condensed Consolidated Statement of Cash Flows |
Nine months ended September 30, 2018– As reported prior to IFRS 16 transition |
Adjustments | Nine months ended September 30, 2018– As restated after IFRS 16 transition | |||||||||
| Net income for the period | $ | 556,118 | $ | 26,843 | $ | 582,601 | ||||||
| Depreciation of equipment | $ | 75,824 | $ | (8,708 | ) | $ | 67,116 | |||||
| Amortization of right-of-use asset | $ | – | $ | 123,132 | $ | 123,132 | ||||||
| Finance charge on lease payments | $ | – | $ | 32,020 | $ | 32,020 | ||||||
| Unrealized foreign exchange | $ | (88,434 | ) | $ | (51,381 | ) | $ | (139,815 | ) | |||
| Trade and other payables | $ | (670,304 | ) | $ | 4,482 | $ | (665,822 | ) | ||||
| Lease payments | $ | – | $ | (126,028 | ) | $ | (126,028 | ) | ||||
Prior to adopting IFRS 16, the total minimum operating lease commitments as at December 31, 2018 were $1,320,328. The weighted average discount rate applied to the total lease liabilities recognized on transition was 7.00%. The difference between the total of the minimum lease payments set out in Note 12(a) to the Company’s 2018 Annual Financial Statements and the total lease liabilities recognized on transition was a result of:
| · | the inclusion of lease payments beyond minimum commitments relating to reasonably certain renewal periods or extension options that had not yet been exercised as at December 31, 2018; partially offset by |
| · | the effect of discounting on the minimum lease payments; and |
| · | certain costs to which we are contractually committed under lease contracts but which do not qualify to be accounted for as a lease liability |
Right-of-use assets and lease liabilities
The Company has recorded a right-of-use asset and a lease liability for all existing leases at the lease commencement date, which is January 1, 2018 for the purposes of the Company’s adoption. The lease liability has been initially measured at the present value of all lease payments that remain to be paid at the commencement date. Lease payments included in the measurement of the lease liability only include fixed payments.
| 9 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
3. Significant ACCOUNTING POLICIES (continued)
After transition, the right-of-use asset will initially be measured at cost, consisting of:
| · | the initial amount of the lease liability, adjusted for any lease payments made at or before the commencement date; plus |
| · | any initial direct costs incurred; and |
| · | an estimate of costs to dismantle and remove the underlying asset or restore the site on which it is located; less |
| · | any lease incentives received. |
The right-of-use asset will typically be depreciated on a straight-line basis over the lease term, unless the Company expects to obtain ownership of the leased asset at the end of the lease. The lease term will consist of:
| · | the non-cancellable period of the lease; |
| · | periods covered by options to extend the lease, where we are reasonably certain to exercise the option; and |
| · | periods covered by options to terminate the lease, where we are reasonably certain not to exercise the option. |
IFRIC 23 – Uncertainty over Income Tax Treatments
New standard to clarify the accounting for uncertainties in income taxes. The interpretation provides guidance and clarifies the application of the recognition and measurement criteria in IAS 12 - Income Taxes when there is uncertainty over income tax treatments. The interpretation is effective for annual periods beginning on January 1, 2019, with early adoption permitted. The adoption of this standard did not have an impact on its financial statements.
4. TRADE AND OTHER RECEIVABLES
September 30, 2019 | December 31, 2018 | January 1, 2018 | ||||||||||
| Trade and other receivables | $ | 4,296,842 | $ | 4,980,813 | $ | 4,640,131 | ||||||
| Less: Allowance for doubtful accounts | – | – | (128,197 | ) | ||||||||
| Unbilled revenue | 433,529 | 284,263 | 287,691 | |||||||||
| $ | 4,730,371 | $ | 5,265,076 | $ | 4,799,625 | |||||||
Included in trade and other receivables balance as at January 1, 2018 was an amount of $60,000 which was payable by a customer that had not been fully insured with Export Development Canada (“EDC” – see Note 14) by the Company. An allowance for the full amount had been taken and was included in Allowance for Doubtful Accounts as at January 1, 2018. During 2018, the Company only received one (1) of the agreed upon payments and reduced Trade and Other Receivables and Allowance for Doubtful Accounts by $45,000 as the customer went out of business.
At September 30, 2019, unbilled revenue on open contracts accounted for using the percentage of completion method amounted to $433,529 (December 31, 2018 - $284,263; January 1, 2018 - $287,691). In addition, the remaining contractual amounts on fixed price contracts were $419,724 as at September 30, 2019 (December 31, 2018 - $1,991,051; January 1, 2018 - $1,599,799). The Company will recognize this revenue as the contracts are completed, which is expected to occur over the next 8-12 months.
| 10 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
5. INVESTMENT IN CUSTOMER
On October 1, 2014, the Company announced that it invested in Stream TV Networks, Inc. (“Stream TV”), a current customer of Intrinsyc, an amount of $1,500,000 in the form of a subordinated, secured convertible promissory note bearing interest at three percent (3%) per annum with a maturity date of December 31, 2015 (the “Note”). Interest is payable on the earlier of (i) December 31, 2015 or (ii) when converted to Stream TV shares. Stream TV committed to acquire a minimum of $3,000,000 in Intrinsyc products and services over the next twelve months.
The Note was initially convertible into the securities of Stream TV, at the sole option of Stream TV, subject to the execution of an equity financing of a minimum of $15 million by Stream TV (the “Qualified Financing”). The Note was convertible into the class of securities sold in the Qualifying Financing at the share price issued in the Qualifying Financing.
The Company had determined that a reasonable market interest rate for a loan with the features of the Stream TV convertible loan and for pre-commercial entities in the emerging technology sector would be 12%. The Company recognized the difference as a deferred discount.
On December 10, 2015, the Company announced that the arrangements were amended to increase the purchase commitment by Stream TV to $4,500,000 in Intrinsyc product, services and royalties to be generated on or before March 31, 2016, which Stream TV met. In addition, the subordinated, secured convertible promissory note was amended to remove the conversion feature and to extend the maturity date from December 31, 2015 to June 30, 2016.
On June 28, 2016, the Company announced that the arrangements were further amended, to increase the purchase commitment to $6,000,000 in Intrinsyc products, services and royalties to be generated on or before December 30, 2016, which Stream TV has met. In addition, the subordinated, secured promissory note, valued at $1.5 million, has been further amended to extend the maturity date from June 30, 2016 to December 30, 2016.
On December 29, 2016, the Company announced that the subordinated, secured promissory note, with a principal amount of $1.5 million, has been further amended to extend the maturity date from December 30, 2016 to March 30, 2017. In consideration for the extension Intrinsyc received 30,000 warrants convertible into Class A common shares in Stream TV. at a strike price of $5 per share, on a 1 for 1 basis for a period of up to 5 years. The warrants may only be exercised if Stream TV becomes subject to a liquidity event defined in the warrant agreement as liquidation, dissolution, or winding up of Stream TV, whether voluntary or involuntary, or an Initial Public Offering (“IPO”) or sale of the Stream TV by either stock or assets that is at least a change of control transaction. To date, none of these warrants have been exercised.
On February 2, 2017, the Company announced that the subordinated, secured promissory note, valued at $1.5 million, has been further amended to extend the maturity date from March 30, 2017 to February 1, 2018. In consideration for the extension Intrinsyc received 120,000 warrants convertible into Class A common shares in Stream TV at a strike price of $5, on a 1 for 1 basis for a period of up to 5 years. The exercise of these warrants is also subject to the same terms as the warrants received December 29, 2016. To date, none of these warrants have been exercised. In addition, Stream TV committed to acquire a minimum of $2,000,000 in Intrinsyc products, services, and royalties to be purchased or generated between February 1, 2017 and February 1, 2018 (which Stream TV has only committed to approximately $700,000).
On February 1, 2018, the Company announced that the subordinated, secured promissory note, valued at $1.5 million, has been further amended to extend the maturity date from February 1, 2018 to April 2, 2018.
On April 2, 2018, the Company announced that the subordinated, secured promissory note, valued at $1.5 million, had been further amended to extend the maturity date from April 2, 2018 to May 2, 2018.
| 11 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
5. INVESTMENT IN CUSTOMER (continued)
On May 2, 2018, the Company announced that it made a strategic equity investment in Stream TV Networks through the conversion of the subordinated, secured promissory note and interest accrued for a total amount of $1,661,384 into 415,346 common shares (which is less than 1% ownership in Stream TV). The amount was reclassified as Investment in Customer. In addition, the parties also signed an amendment to the Master Services Agreement in which Stream TV agrees to provide a commitment of $1,500,000 in services to be purchased directly or through connected party referrals during the eighteen (18) month period beginning May 1, 2018. To date, no services have been provided against the $1,500,000 commitment.
The Company revalued the investment as at December 31, 2018, with the decline in the fair value being recorded as Interest and Other Expenses (Income) in the Company’s Statements of Operations for the year ended December 31, 2018. In the event that Stream TV does not raise a minimum of $25 million within the two-year period subsequent to the Equity Investment conversion date of May 2, 2018, the Equity Investment will revert back to become a Note Payable to Intrinsyc. In the event that Stream TV raises a minimum of $25 million within the two year period subsequent to the Equity Investment conversion date of May 2, 2018 at a lower valuation than the conversion of the Note into the Equity Investment by Intrinsyc on May 2, 2018 and Stream TV’s two primary debtors also convert their loans into equity at this time, Stream TV will issue additional shares to Intrinsyc based upon lower valuation of the equity valuation completed by Stream TV.
The Company fair valued the Warrants using a modified Black Scholes calculation with the fair value on the date of inception being $30,000 as at December 31, 2018 and $153,000 as at December 31, 2017. The value of the Warrants was included in the Investment in Customer (formerly Loan to Customer) on the Statement of Financial Position with the decline in the fair value being recorded as Interest and Other Expenses (Income) on the Company’s Statements of Operations for the year ended December 31, 2018.
The Company has assessed the investment for impairment at the end of the current reporting period and concluded that no indicators to warrant a change in the value of the Company’s equity investment as at September 30, 2019 from the prior reporting period. However, the Company acknowledges that there is uncertainty regarding the valuation of the equity investment due to the uncertainty inherent to the fact that Stream TV is a pre-commercial entity in an emerging technology sector. Further, the Company assessed that there was no change in the value of the investment as at September 30, 2019. The Company assessed the value of the Warrants as at September 30, 2019 and determined that the change in value was insignificant resulting in no change in value of the Warrants as at September 30, 2019.
6. INVENTORY
September 30, 2019 | December 31, 2018 | January 1, 2018 | ||||||||||
| Parts | $ | 2,682,788 | $ | 1,955,270 | $ | 2,436,372 | ||||||
| Finished goods | 2,798,755 | 2,676,117 | 1,820,655 | |||||||||
| $ | 5,481,543 | $ | 4,631,387 | $ | 4,257,027 | |||||||
During the three and nine months ended September 30, 2019, the Company charged $3,194,930 and $9,044,589 (three and nine months ended September 30, 2018: $2,773,087 and $9,136,751) of inventory related amounts to cost of sales.
7. EQUIPMENT
The following table presents details of movement in the carrying value of equipment by type:
| 12 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
7. EQUIPMENT (continued)
Cost
| Computers and Equipment | Furniture and Fixtures | Leasehold Improvements |
Total | |||||||||||||
| Balance, January 1, 2018 | $ | 1,923,381 | $ | 923,213 | $ | 911,182 | $ | 3,757,776 | ||||||||
| Additions | 42,597 | 98,413 | – | 141,010 | ||||||||||||
| Balance, December 31, 2018 | $ | 1,965,978 | $ | 1,021,626 | $ | 911,182 | $ | 3,898,786 | ||||||||
| Additions | 16,192 | 9,329 | 82,111 | 107,632 | ||||||||||||
| Balance, September 30, 2019 | $ | 1,982,170 | $ | 1,030,955 | $ | 993,293 | $ | 4,006,418 | ||||||||
Accumulated Depreciation
| Computers and Equipment | Furniture and Fixtures | Leasehold Improvements (Restated – see Note 3) |
Total | |||||||||||||
| Balance, January 1, 2018 | $ | (1,792,928 | ) | $ | (834,960 | ) | $ | (767,188 | ) | $ | (3,395,076 | ) | ||||
| Depreciation | (46,093 | ) | (35,267 | ) | (14,644 | ) | (96,004 | ) | ||||||||
| Balance, December 31, 2018 | $ | (1,839,021 | ) | $ | (870,227 | ) | $ | (781,832 | ) | $ | (3,491,080 | ) | ||||
| Depreciation | (31,402 | ) | (36,347 | ) | (18,197 | ) | (85,946 | ) | ||||||||
| Balance, September 30, 2019 | $ | (1,870,423 | ) | $ | (906,574 | ) | $ | (800,029 | ) | $ | (3,577,026 | ) | ||||
Net Book Value
| Computers and Equipment | Furniture and Fixtures | Leasehold Improvements |
Total | |||||||||||||
| Balance, January 1, 2018 (Restated – see Note 3) | $ | 130,453 | $ | 88,253 | $ | 143,994 | $ | 362,700 | ||||||||
| Balance, December 31, 2018 (Restated – see Note 3) | $ | 126,957 | $ | 151,399 | $ | 129,350 | $ | 407,706 | ||||||||
| Balance, September 30, 2019 | $ | 111,747 | $ | 124,381 | $ | 193,264 | $ | 429,392 | ||||||||
8. INTANGIBLE ASSETS
The following table presents details of movement in the carrying value of the intangible assets which only consists of acquired software technology:
September 30, 2019 | December 31, 2018 | January 1, 2018 | ||||||||||
| Beginning Balance | $ | 241,288 | $ | 118,591 | $ | 111,851 | ||||||
| Purchases | 102,372 | 217,419 | 87,964 | |||||||||
| Amortization | (112,847 | ) | (94,722 | ) | (81,224 | ) | ||||||
| Ending Balance | $ | 230,813 | $ | 241,288 | $ | 118,591 | ||||||
| 13 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
9. RIGHT-OF-USE ASSET
The following table presents details of movement in the carrying value of the right-of-use asset:
September 30, 2019 | December 31, 2018 | January 1, 2018 | ||||||||||
| Beginning Balance | $ | 966,770 | $ | 1,095,020 | $ | 1,223,270 | ||||||
| Additions | 261,906 | – | – | |||||||||
| Amortization | (166,416 | ) | (128,250 | ) | (128,250 | ) | ||||||
| Ending Balance | $ | 1,062,260 | $ | 966,770 | $ | 1,095,020 | ||||||
Included are $12,305 of decommissioning costs which have been capitalized and accrued for. This obligation represents the cost the Company would incur to restore the leased office space in Taiwan to its original condition (see Note 12 – Leases for more information regarding the Taiwan lease that was entered into during 2019).
10. LINE OF CREDIT
On March 6, 2018, the Company entered into a line of credit agreement with its bank for up to CDN$4.4 million (this was increased to CDN$4.7 million during 2019). The line bears interest at chartered bank’s prime lending rate +1.11% with no standby charge and does not include any covenants for the Company. Borrowings under this facility must not exceed the aggregate of the following, less Potential Prior-Ranking Claims:
| a) | 75% of Eligible Canadian/US Accounts Receivable; | |
| b) | 90% of Eligible EDC Accounts Receivable; | |
| c) | 65% of Eligible Foreign Accounts Receivable; and | |
| d) | to a maximum of $750,000.00, 50% of the lesser of cost or net realizable value of Unencumbered Inventory. |
As of September 30, 2019, outstanding borrowings were CDN $nil.
11. SHARE CAPITAL
Authorized
Unlimited number of preference shares without par value; and
Unlimited number of common shares without par value.
Issued and outstanding
| [a] | Preference Shares |
| There are no preference shares outstanding as at September 30, 2019. |
| 14 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
11. SHARE CAPITAL (continued)
| [b] | Common Shares |
Number of common shares |
Amount | |||||||
| Outstanding, January 1, 2018 | 21,060,988 | $ | 108,899,883 | |||||
| Issued upon exercise of stock options | 195,088 | 88,196 | ||||||
| Reclassification upon exercise of stock options | – | 67,241 | ||||||
| Repurchase and cancellation of shares under Normal Course Issuer Bid | (969,200 | ) | (1,688,183 | ) | ||||
| Outstanding, December 31, 2018 | 20,286,876 | $ | 107,367,137 | |||||
| Issued upon exercise of stock options | 226,470 | 136,394 | ||||||
| Reclassification upon exercise of stock options | – | 101,824 | ||||||
| Issued for RSU settlement | 16,667 | 25,572 | ||||||
| Repurchase and cancellation of shares under Normal Course Issuer Bid | (489,800 | ) | (551,193 | ) | ||||
| Outstanding, September 30, 2019 | 20,040,213 | $ | 107,079,734 | |||||
| [c] | Stock options |
| The Company has a rolling incentive stock option plan. Under the terms of the Company’s stock option plan, the Board of Directors may grant options to directors, officers, employees, consultants and service providers equal to the lower of: (i) up to 10% of issued and outstanding common shares of the Company from time to time less one share; and, (ii) 3,750,000 common shares. The plan provides for the granting of options at the closing price of the Company’s stock on the day prior to the grant date. Options granted generally vest over three years with the first one-third vesting at the first anniversary date of the grant and the balance vesting in equal amounts at the end of each quarter thereafter. There are no cash settlement alternatives. The Company does not have a past practice of cash settlement for these share options. | |
| The Company determines the term of each option at the time it is granted, with options generally having a five-year term. As of September 30, 2019, the Company was entitled to grant 2,004,020 incentive stock options under the plan of which 1,311,171 have been granted. | |
| A summary of the Company’s share option activity for the nine months ended September 30, 2019 is as follows: |
| Outstanding options | ||||||||
Number of options |
Weighted average exercise price (in Canadian dollars) | |||||||
| Outstanding, January 1, 2018 | 1,317,229 | $ | 1.22 | |||||
| Options granted | 458,950 | 1.36 | ||||||
| Options exercised | (195,088 | ) | 0.59 | |||||
| Options forfeited | (57,775 | ) | 1.80 | |||||
| Outstanding, December 31, 2018 | 1,523,316 | $ | 1.32 | |||||
| Options granted | 226,500 | 1.48 | ||||||
| Options exercised | (226,470 | ) | 0.81 | |||||
| Options forfeited | (206,550 | ) | 1.31 | |||||
| Expired | (5,625 | ) | 0.80 | |||||
| Outstanding, September 30, 2019 | 1,311,171 | $ | 1.44 | |||||
| 15 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
11. SHARE CAPITAL (continued)
| The following table summarizes the share options outstanding as at September 30, 2019: |
| Options outstanding | Options exercisable | |||||||||||||||||||
Range of exercise price (in Canadian dollars) | # of common shares | Weighted average remaining contractual life | Weighted average exercise price (in Canadian dollars) | # of options exercisable | Weighted average exercise price (in Canadian dollars) | |||||||||||||||
| $ 0.72 - $ 0.91 | 331,837 | 0.68 | $ | 0.89 | 331,837 | $ | 0.89 | |||||||||||||
| $ 0.92 - $ 1.34 | 366,134 | 3.39 | $ | 1.32 | 224,008 | $ | 1.32 | |||||||||||||
| $ 1.35 - $ 2.03 | 269,000 | 4.21 | $ | 1.49 | 60,998 | $ | 1.51 | |||||||||||||
| $ 2.04 - $ 2.29 | 344,200 | 2.68 | $ | 2.05 | 280,963 | $ | 2.06 | |||||||||||||
| 1,311,171 | 2.68 | 1.44 | 897,806 | $ | 1.40 | |||||||||||||||
| There were no stock options granted during the three months ended September 30, 2019. The weighted average fair value of stock options granted during the nine months ended September 30, 2019 was CDN $0.69 per share (three and nine months ended September 30, 2019 – CDN $0.82 and CDN $0.72 per share). | |
| The total stock-based compensation related to stock options for the three and nine months ended September 30, 2019 was $34,291 and $139,244 (three and nine months ended September 30, 2018 - $87,733 and $150,287 respectively). | |
| The fair value of each option granted was estimated on the date of grant using the Black-Scholes Option Pricing Model with the following weighted average assumptions: |
Three months ended September 30, | Three months ended September 30, | Nine months ended September 30, | Nine months ended September 30, | |||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Expected life (in years) | N/A | 4.2 | 3.9 | 4.0 | ||||||||||||
| Risk-free interest rate | N/A | 2.02% | 1.58% | 1.97% | ||||||||||||
| Volatility | N/A | 67.90% | 59.44% | 69.64% | ||||||||||||
| Dividend yield | N/A | 0.00% | 0.00% | 0.00% | ||||||||||||
| The expected life of the share options is based on historical data and current expectations and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the options is indicative of future trends, which may not necessarily be the actual outcome either. | |
| [d] | Restricted Share Units (“RSUs”) |
| The Company adopted a restricted share unit plan (the “RSU Plan”) which was approved by its shareholders on May 16, 2017. The aggregate maximum number of shares available for issuance from treasury under the RSU Plan shall not exceed 500,000 shares. The 500,000 RSUs are a separate pool from the Company’s incentive stock option plan. The grant-date fair value of the restricted share units equals the fair market value of the corresponding shares at the grant date. The fair value of these equity-settled awards is recognized as compensation expense over the period that related services are rendered with a corresponding increase in equity. The total amount expensed is recognized over the vesting period on a tranche basis, which is the period over which all the specified vesting conditions should be satisfied. |
| 16 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
11. SHARE CAPITAL (continued)
| A summary of the Company’s RSU activity for the nine months ended September 30, 2019 is as follows: |
Number of RSUs | ||||
| Outstanding, January 1, 2018 | 219,000 | |||
| RSUs granted | – | |||
| RSUs settled for shares | – | |||
| RSUs forfeited | – | |||
| Outstanding, December 31, 2018 | 219,000 | |||
| RSUs granted | 97,895 | |||
| RSUs settle for shares | (16,667 | ) | ||
| RSUs forfeited | (8,333 | ) | ||
| Outstanding, September 30, 2019 | 291,895 | |||
| The outstanding RSUs vest over three years as to one third on each anniversary of the grant date. Compensation for the three months and nine months ended September 30, 2019 was $22,730 and $87,434 ($23,664 and $122,893 for the three and nine months ended September 30, 2018). As of September 30, 2019, there were 129,333 vested RSUs. | |
| The weighted average fair value of RSUs granted during the three months and nine months ended September 30, 2019 was CDN $1.50 per share. There were no RSUs granted during the three and nine months ended September 30, 2018. | |
| [e] | Normal Course Issuer Bid (“NCIB”) |
| On September 29, 2017, the Company received approval from the TSX regarding the notice filed by the Company to establish a normal course issuer bid (“NCIB”) program to purchase, for cancellation, up to 500,000 common shares or approximately 2.4% of Intrinsyc’s issued and outstanding common shares, as at September 21, 2017. The NCIB program commenced on October 4, 2017 and terminated on October 3, 2018. | |
| On September 27, 2018, the Company received approval from the TSX regarding the notice filed by the Company to extend its normal course issuer bid (“NCIB”) program to purchase, for cancellation, up to 1,793,294 common shares or approximately 8.6% of Intrinsyc’s issued and outstanding common shares, as at September 25, 2018. The NCIB program extension commenced on October 4, 2018 and will terminate on October 3, 2019, or on such earlier date as the Company may complete its purchases pursuant to a Notice of Intention filed with the TSX. As of October 3, 2019, the NCIB program was terminated. | |
| In connection with the NCIB program, the Company established an automatic repurchase plan (the “Plan”) with its designated broker to allow for purchases of its common shares during certain pre-determined black-out periods, subject to certain parameters as to price and number of shares. Outside of these pre-determined black-out periods, common shares will be repurchased in accordance with management’s discretion, subject to applicable law. Intrinsyc may vary, suspend or terminate the Plan only if it does not have material non-public information and the decision to vary, suspend or terminate the Plan is not taken during a pre-determined blackout period. The Plan constitutes an “automatic plan” for purposes of applicable Canadian securities legislation and has been reviewed by the TSX. This Plan was terminated on October 3, 2019, in conjunction with the NCIB program being terminated. | |
| As a result of entering into the Plan, the Company has recorded a corresponding liability. As at September 30, 2019, the liability was up to a maximum of $597,026 (CDN$790,641) as compared to $659,566 (CDN $899,780) as at December 31, 2018 and $18,296 (CDN $22,952) as at January 1, 2018. This liability was reversed subsequent to September 30, 2019 as a result of the Plan being terminated. |
| 17 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
11. SHARE CAPITAL (continued)
| During the three months ended September 30, 2019, no shares were purchased and cancelled by the Company. During the nine months ended September 30, 2019, the Company had purchased and cancelled 489,800 common shares for $554,382 (CDN$ 739,638). |
| [f] | Income per share |
Three months ended September 30, 2019 | Three months ended September 30, 2018 | Nine months ended September 30, 2019 | Nine months ended September 30, 2018 | |||||||||||||
| Weighted average number of shares outstanding – basic | 20,026,557 | 20,862,904 | 20,017,926 | 20,931,309 | ||||||||||||
| Dilutive effects of exercisable options | 214,053 | 567,852 | 155,623 | 507,882 | ||||||||||||
| Weighted average number of shares outstanding – fully diluted | 20,240,610 | 21,430,756 | 20,173,549 | 21,439,191 | ||||||||||||
12. LEASES
Currently, the Company leases its Vancouver, BC facility (of approximately 12,000 square feet of office space) until October 31, 2022. In addition, it leases space of approximately 2,400 square feet until April 30, 2022 in Taipei, Taiwan. The Company also rents office space in Bangalore, India on a month to month basis. Lease payments of the Indian office as well as variable operating costs of the long term leases are expensed (see Note 13 – Commitments and Contingencies). Below is a summary of the activity related to the Company’s lease liabilities
| September 30, 2019 | December 31, 2018 | January 1, 2018 | ||||||||||
| Maturity Analysis – contractual undiscounted cash flows | ||||||||||||
| Less than one year | $ | 251,921 | $ | 167,382 | $ | 174,035 | ||||||
| One to five years | 1,474,261 | 1,434,490 | 1,741,947 | |||||||||
| Total undiscounted lease liabilities | $ | 1,726,182 | $ | 1,601,872 | $ | 1,915,982 | ||||||
| Lease liabilities included in Consolidated Statements of Financial Position | $ | 1,311,297 | $ | 1,143,478 | $ | 1,362,764 | ||||||
| Current | $ | 170,596 | $ | 87,748 | $ | 81,210 | ||||||
| Non-current | $ | 1,140,701 | $ | 1,055,730 | $ | 1,281,554 | ||||||
| 18 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
12. LEASES (continued)
| Amounts Recognized in Statements of Operations | Three months ended September 30, 2019 | Three months ended September 30, 2018 | Nine months ended September 30, 2019 | Nine months ended September 30, 2018 | ||||||||||||
| Finance charge on lease payments | $ | 10,557 | $ | 10,302 | $ | 31,174 | $ | 32,020 | ||||||||
| Variable lease payments expensed | 40,751 | 38,107 | 117,358 | 124,025 | ||||||||||||
| Short-term lease payments expensed | 6,138 | 20,832 | 73,904 | 53,637 | ||||||||||||
| Total amounts recognized in Statements of Operations | $ | 57,446 | $ | 69,241 | $ | 222,436 | $ | 209,682 | ||||||||
Total lease payments made during the three and nine months ended September 30, 2019 were $63,246 and $155,469 (three and nine months ended September 30, 2018 - $41,378 and $126,028).
13. COMMITMENTS AND CONTINGENCIES
| [a] | The aggregate lease payments as at September 30, 2019 for the remainder of 2019 and subsequent years is as follows and only reflects the payments of the variable operating costs of the long-term leases in Vancouver and Taiwan. |
| 2019 | $ | 41,616 | ||
| 2020 | 166,462 | |||
| 2021 | 166,642 | |||
| 2022 | 135,141 | |||
| $ | 509,681 |
| [b] | The Company warrants that its software and hardware products will operate substantially in conformity with product documentation and that the physical media will be free from defect. The specific terms and conditions of the warranties are generally ninety days. The Company accrues for known warranty issues if a loss is probable and can be reasonably estimated, and accrues for estimated incurred but unidentified warranty issues based on historical activity. To date, the Company has had no material warranty claims. |
| [c] | The Company may be subject to a variety of claims and suits that arise from time to time in the ordinary course of business. Although management currently believes that resolving claims against the Company, individually or in aggregate, will not have a material adverse impact on the Company’s financial position, results of operations, or cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. To date, there are no claims or suits outstanding against the Company. |
14. EXPORT DEVELOPMENT CANADA
On July 31, 2009, the Company entered into an agreement with EDC whereby EDC agreed to provide 90% insurance coverage for the Company’s invoiced sales for a premium of between CDN$0.76 to CDN$1.41 per CDN$100 of monthly invoiced sales (certain customers are excluded from this coverage). The initial policy period was from July 1, 2009 to June 30, 2010 with an automatic yearly renewal unless the policy is terminated by the Company (the policy has been renewed until June 30, 2020). The maximum liability coverage at any one time is CDN$185,000 for domestic sales and CDN$7,000,000 for sales outside of Canada. As of September 30, 2019, 81% of trade receivables were covered by EDC insurance (December 31, 2018 - 85% and January 1, 2018 – 74%).
During the three and nine months ended September 30, 2019, the Company recorded total premiums of $51,856(CDN$68,471) and $145,224 (CDN$192,947) in sales and marketing as compared to total premiums of $48,515 (CDN$63,410) and $146,705 (CDN$188,960) for the three and nine months ended September 30, 2018.
| 19 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
15. SEGMENTED INFORMATION
Operating segments
The Company currently has the following two operating segments:
| 1. | Embedded Computing Hardware segment includes the sales of the Company’s proprietary computer modules and development kits. The Company offers original equipment manufacturers (“OEMs”) off-the-shelf and customized embedded computing modules; and |
| 2. | Services and Software segment includes turnkey product design and development services, as well as other engineering services and device software, including royalties. As well, it includes revenue generated from software products including: J-Integra® Enterprise Interoperability Software (“EIS”), and RapidRIL Telephony Software, including maintenance and support agreements for these products. These products and services are sold to OEMs, original device manufacturers (“ODMs”), technology providers, and other companies. |
Corporate includes all operating expenses of the Company.
Information regarding the operations of each operating segment is included below. Performance is based on revenue less cost of sales.
A breakdown of revenues and cost of sales for each operating segment for the three and nine months ended September 30, 2019 and September 30, 2018 is as follows:
| Three months ended September 30, 2019 | Embedded Computing Hardware | Services and Software |
Corporate | Total | ||||||||||||
| Revenue | $ | 4,428,812 | $ | 1,745,030 | $ | – | $ | 6,173,842 | ||||||||
| Cost of sales | 3,258,345 | 744,048 | – | 4,002,393 | ||||||||||||
| 1,170,467 | 1,000,982 | – | 2,171,449 | |||||||||||||
| Operating expenses | – | – | 1,879,377 | 1,879,377 | ||||||||||||
| Operating profit (loss) | $ | 1,170,467 | $ | 1,000,982 | $ | (1,879,377 | ) | $ | 292,072 | |||||||
| Nine months ended September 30, 2019 | Embedded Computing Hardware | Services and Software |
Corporate | Total | ||||||||||||
| Revenue | $ | 12,025,844 | $ | 5,760,365 | $ | – | $ | 17,786,209 | ||||||||
| Cost of sales | 9,229,799 | 2,549,802 | – | 11,779,601 | ||||||||||||
| 2,796,045 | 3,210,563 | – | 6,006,608 | |||||||||||||
| Operating expenses | – | – | 5,794,136 | 5,794,136 | ||||||||||||
| Operating profit (loss) | $ | 2,796,045 | $ | 3,210,563 | $ | (5,794,136 | ) | $ | 212,472 | |||||||
| 20 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
15. SEGMENTED INFORMATION (continued)
| Three months ended September 30, 2018 (Restated – see Note 3) | Embedded Computing Hardware | Services and Software |
Corporate | Total | ||||||||||||
| Revenue | $ | 3,621,884 | $ | 2,467,533 | $ | – | $ | 6,089,417 | ||||||||
| Cost of sales | 2,810,453 | 936,976 | – | 3,747,429 | ||||||||||||
| 811,431 | 1,530,557 | – | 2,341,988 | |||||||||||||
| Operating expenses | – | – | 1,959,466 | 1,959,466 | ||||||||||||
| Operating income (loss) | $ | 811,431 | $ | 1,530,557 | $ | (1,959,466 | ) | $ | 382,522 | |||||||
| Nine months ended September 30, 2018 (Restated – see Note 3) | Embedded Computing Hardware | Services and Software |
Corporate | Total | ||||||||||||
| Revenue | $ | 11,941,655 | $ | 6,642,004 | $ | – | $ | 18,583,659 | ||||||||
| Cost of sales | 9,349,294 | 2,719,327 | – | 12,068,621 | ||||||||||||
| 2,592,361 | 2,392,120 | – | 6,515,038 | |||||||||||||
| Operating expenses | – | – | 5,711,250 | 5,711,250 | ||||||||||||
| Operating income (loss) | $ | 2,592,361 | $ | 2,392,120 | $ | (5,711,250 | ) | $ | 803,788 | |||||||
Geographic information
The Company’s equipment is located as follows:
September 30, 2019 | December 31, 2018 (Restated – see Note 3) | January 1, 2018 (Restated – see Note 3) | ||||||||||
| Canada | $ | 337,540 | $ | 387,864 | $ | 340,173 | ||||||
| Taiwan | 86,967 | 13,282 | 15,569 | |||||||||
| India | 4,885 | 6,560 | – | |||||||||
| United States | – | – | 6,959 | |||||||||
| Total | $ | 429,392 | $ | 407,706 | $ | 362,700 | ||||||
The Company earned revenues attributed to the following geographic regions based on the location of the customer:
Three Months ended September 30, 2019 | Three Months ended September 30, 2018 | Nine Months ended September 30, 2019 | Nine Months ended September 30, 2018 | |||||||||||||
| United States | $ | 3,443,647 | $ | 3,919,730 | $ | 11,120,976 | $ | 12,476,336 | ||||||||
| Asia Pacific | 1,594,017 | 1,039,556 | 3,506,058 | 3,164,624 | ||||||||||||
| Canada | 713,256 | 487,018 | 1,675,590 | 1,491,917 | ||||||||||||
| Europe | 420,566 | 625,274 | 1,479,603 | 1,432,076 | ||||||||||||
| Other | 2,356 | 17,839 | 3,982 | 18,706 | ||||||||||||
| $ | 6,173,842 | $ | 6,089,417 | $ | 17,786,209 | $ | 18,583,659 | |||||||||
| 21 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
15. SEGMENTED INFORMATION (continued)
Significant customers
In each respective period, revenues from customers which amounted to 10% of more of the Company’s revenues accounted for the following percentage of the Company’s total revenues and accounts receivable, as indicated below:
| % Revenues for the Three Months ended September 30, 2019 | % Revenues for the Nine Months ended September 30, 2019 |
% of Accounts Receivable at September 30, 2019 | % Revenues for the Three Months ended September 30, 2018 |
% Revenues for the Nine Months ended September 30, 2018 | % of Accounts Receivable at September 30, 2018 | |||||||||||||||||||
| Customer 1 | 15% | 31% | 15% | 15% | 25% | 18% | ||||||||||||||||||
Receivables owing from Customer 1 are fully covered by EDC insurance in the event of payment default.
16. EXPENSES BY NATURE
Total salaries and wages as well as other personnel related expenses included in Cost of Sales and Expenses for the three and nine months ended September 30, 2019 were $1,896,365 and $6,174,496 compared to $2,102,836 and $6,113,909 during the three and nine months ended September 30, 2018.
17. OTHER OPERATING EXPENSES
Other operating expenses consist of the following:
| Three months ended September 30, 2019 | Three months ended September 30, 2018 (Restated – see Note 3) | Nine months ended September 30, 2019 | Nine months ended September 30, 2018 (Restated – see Note 3) | |||||||||||||
| Depreciation of equipment (note 7) | $ | 34,610 | $ | 23,853 | $ | 85,946 | $ | 67,116 | ||||||||
| Amortization of intangible assets (note 8) | 36,084 | 23,140 | 112,847 | 68,193 | ||||||||||||
| Amortization of right-of-use asset (note 9) | 59,594 | 41,044 | 166,416 | 123,132 | ||||||||||||
| Share-based compensation – options (note 10(c)) | 34,291 | 59,650 | 139,244 | 209,937 | ||||||||||||
| Share-based compensation – RSUs (note 10(d)) | 17,214 | 23,664 | 81,918 | 122,893 | ||||||||||||
| $ | 181,793 | $ | 171,351 | $ | 586,371 | $ | 591,271 | |||||||||
| 22 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
18. CAPITAL DISCLOSURES
The Company’s objectives for managing capital are:
| · | To safeguard the Company’s ability to continue as a going concern, so that it can provide adequate returns for shareholders and benefits for other stakeholders. |
| · | To maintain a capital base so as to maintain investor, creditor, customer and market confidence. |
The Company considers the items included in equity as capital. The Company manages the capital structure and makes adjustments to it (by either issuing new shares or buying back shares) in the light of changes in economic conditions and the risk characteristics of the underlying assets.
19. FINANCIAL INSTRUMENTS
[a] Financial assets and liabilities
Financial instruments are measured at amortized cost or fair value. Fair value represents the estimated amounts at which financial instruments could be exchanged between knowledgeable and willing parties in an arm’s length transaction. Determining fair value requires management judgment. The following financial instruments are all measured at amortized cost. The fair value of each (with the exception of the investment in customer) approximates its carrying value due to their short-term nature. The fair value of the investment in customer is determined using implied valuations from financing rounds. Therefore, it is treated as a Level 1 financial asset with the fair value equating its carrying value.
The carrying values and fair values of financial assets (liabilities) are summarized as follows:
September 30, 2019 | December 31, 2018 (Restated) | January 1, 2018 (Restated) | ||||||||||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||
| Financial Assets | ||||||||||||||||||||||||
| Cash and cash equivalents | $ | 2,597,855 | $ | 2,597,855 | $ | 3,939,763 | $ | 3,939,763 | $ | 4,989,154 | $ | 4,989,154 | ||||||||||||
| Short-term investments | $ | 983,023 | $ | 983,023 | $ | 2,027,579 | $ | 2,027,579 | $ | 2,260,089 | $ | 2,260,089 | ||||||||||||
| Trade and other receivables | $ | 4,730,371 | $ | 4,730,371 | $ | 5,265,076 | $ | 5,265,076 | $ | 4,799,625 | $ | 4,799,625 | ||||||||||||
| Loan to customer | $ | – | $ | – | $ | – | $ | – | $ | 1,646,250 | $ | 1,646,250 | ||||||||||||
| Investment in customer | $ | 623,019 | $ | 623,019 | $ | 623,019 | $ | 623,019 | $ | – | $ | – | ||||||||||||
| Warrants | $ | 30,000 | $ | 30,000 | $ | 30,000 | $ | 30,000 | $ | 153,000 | $ | 153,000 | ||||||||||||
| Financial Liabilities | ||||||||||||||||||||||||
| Trade and other payables | $ | (2,866,601 | ) | $ | (2,866,601 | ) | $ | (5,415,376 | ) | $ | (5,415,376 | ) | $ | (4,938,065 | ) | $ | (4,938,065 | ) | ||||||
| Lease liability – current | $ | (170,596 | ) | $ | (170,596 | ) | $ | (87,748 | ) | $ | (87,748 | ) | $ | (81,210 | ) | $ | (81,210, | ) | ||||||
| Lease liability | $ | (1,140,701 | ) | $ | (1,140,701 | ) | $ | (1,055,730 | ) | $ | (1,055,730 | ) | $ | (1,281,554 | ) | $ | (1,281,554 | ) | ||||||
| 23 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
19. FINANCIAL INSTRUMENTS (continued)
| [b] | Risk Management |
Disclosures relating to exposure to risks, in particular credit risk, liquidity risk, foreign currency risk, and interest rate risk are provided below.
| [i] | Credit Risk |
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company's financial instruments that are exposed to concentrations of credit risk are primarily cash and cash equivalents, short-term investments and trade and other receivables. The Company limits its exposure to credit risk with respect to cash and cash equivalents by investing available cash, from time to time, in short-term deposits with Canadian financial institutions. With respect to trade and other receivables, the Company engages EDC to perform ongoing credit evaluations of Intrinsyc’s customers’ financial condition and requires letters of credit or other guarantees whenever deemed necessary.
Trade and other receivables were aged as follows:
September 30, 2019 | December 31, 2018 | January 1, 2018 | ||||||||||
| Current | $ | 4,344,465 | $ | 4,864,701 | $ | 3,913,053 | ||||||
| 31-60 days Over 60 days | 97,160 288,746 | 173,195 227,180 | 94,977 791,595 | |||||||||
| $ | 4,730,371 | $ | 5,265,076 | $ | 4,799,625 | |||||||
| [ii] | Liquidity Risk |
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company's approach to managing liquidity risk is to ensure, as far as possible, that it will always have sufficient liquidity to meet liabilities when due. The contractual maturity of the majority of accounts payable is within one month.
Trade and other payables were aged as follows:
September 30, 2019 | December 31, 2018 (Restated – see Note 3) | January 1, 2018 (Restated – see Note 3) | ||||||||||
| Current | $ | 2,582,041 | $ | 4,649,784 | $ | 4,234,247 | ||||||
| 31-60 days Over 60 days | 262,777 21,783 | 755,946 9,646 | 401,523 302,295 | |||||||||
| $ | 2,866,601 | $ | 5,415,376 | $ | 4,938,065 | |||||||
| 24 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
19. FINANCIAL INSTRUMENTS (continued)
| [iii] | Foreign Currency Risk |
Although substantially all of the Company’s revenues are received in U.S. dollars, the Company incurs operating costs primarily attributable to its services business and has outstanding trade and other payables denominated in Canadian dollars and other foreign currencies. Fluctuations in the exchange rates between these currencies could have a material effect on the business, financial condition and results of operations. The Company maintains certain assets, inclusive of a portion of its treasury investments, in Canadian dollars which are translated to its U.S. dollar functional currency resulting in an unrealized foreign exchange gain or loss. With all other variables remaining constant, assuming a 10% weakening of the Canadian dollar versus the U.S. dollar would have had the following impact on net loss as follows in the table below. An assumed 10% strengthening of the Canadian dollar versus the U.S. dollar would have had an equal but opposite effect on the amounts shown below:
Source of net earnings/loss variability from changes in foreign exchange rates | Three Months ended September 30, 2019 | Three Months ended September 30, 2018 (Restated – see Note 3) | Nine Months ended September 30, 2019 | Nine Months ended September 30, 2018 (Restated – see Note 3) | ||||||||||||
| Statement of Financial Position exposure | $ | (29,414 | ) | $ | (227,328 | ) | $ | (29,414 | ) | $ | (227,328 | ) | ||||
| Net Cost of Sales/Operating Expenses (net exposure) | 182,082 | 213,709 | 563,460 | 616,751 | ||||||||||||
| Net exposure | $ | 152,668 | $ | (13,619 | ) | $ | 534,046 | $ | 389,423 | |||||||
A 10% change in the New Taiwanese dollar to U.S. dollar exchange rate would have an approximate $7,700 impact on net income for the three and nine months ended September 30, 2019 (three and nine months ended September 30, 2018 – $8,300).
A 10% change in the rupee to U.S. dollar exchange rate would have no material impact on net income for the three and nine months ended September 30, 2019 (three and nine months ended September 30, 2018 - $nil).
| [iv] | Interest Rate Risk |
The Company's exposure to interest rate fluctuations is primarily interest earned on its cash and cash equivalents as well as its short-term investments. During the three months ended September 30, 2019, the Company earned $13,710 of interest income on its cash and cash equivalents as well as its short-term investments. An increase or decrease of 100 basis points in the average interest rate earned during the period would have adjusted net earnings by approximately $37,000. This analysis assumes that all other variables, in particular foreign currency rates, remain constant.
20. RELATED PARTY TRANSACTIONS
Related parties include key management, the Board of Directors, close family members and enterprises which are controlled by these individuals as well as certain persons performing similar functions.
The remuneration of directors and key management of the Company for the three months and nine months ended September 30, 2019 and 2018 are as follows:
| 25 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
20. RELATED PARTY TRANSACTIONS (continued)
Three months ended September 30, 2019 |
Three months ended September 30, 2018 | Nine months ended September 30, 2019 | Nine months ended September 30, 2018 | |||||||||||||
| Short-term compensation | $ | 281,281 | $ | 252,982 | $ | 1,205,970 | $ | 861,672 | ||||||||
| Share-based payments | $ | – | $ | – | $ | 191,341 | $ | 103,716 | ||||||||
| $ | 281,281 | $ | 252,982 | $ | 1,397,311 | $ | 965,388 | |||||||||
Short-term compensation for the nine months ended September 30, 2019 included the Company’s annual performance corporate bonus totalling an amount of $437,000 to its management, of which 75% was paid in cash with the remaining 25% being paid out through the granting of 97,895 RSUs. The amount of $437,000 had been previously accrued for as operating expense during the year ended December 31, 2018.
Short-term compensation for the nine months ended September 30, 2018 included the Company’s annual performance corporate bonus totalling an amount of $90,000 which was paid in cash to its management during the three months ended March 31, 2018 which had been previously accrued for as operating expense during the year ended December 31, 2017.
There were no amounts owing to related parties as at September 30, 2019, December 31, 2018 and January 1, 2018.
There were no options or RSUs awarded during the three months ended September 30, 2019 and 2018.
The directors and key management were awarded 157,000 options under the Company’s stock option plan during the nine months ended September 30, 2019.
The directors and key management were awarded 185,000 stock options under the Company’s stock option plan during the nine months ended September 30, 2018. There were no RSUs granted during the nine months ended September 30, 2018.
21. EMPLOYEE RETIREMENT SAVINGS CONTRIBUTIONS
Three months ended September 30, 2019 | Three months ended September 30, 2018 | Nine months ended September 30, 2019 | Nine months ended September 30, 2018 | |||||||||||||
| Benefit costs | $ | 38,884 | $ | 45,644 | $ | 148,870 | $ | 149,295 | ||||||||
The Company matches employees’ retirement savings contributions to retirement plans as part of the employee benefits plan. Employees have the option of having the funds transferred to their individual retirement savings plans on a semi-monthly basis or on a periodic basis (most employees have the funds transferred on a semi-monthly basis).
22. SUBSEQUENT EVENT
On October 31, 2019, the Company announced it had entered into an agreement (the “Arrangement Agreement”) with Lantronix, Inc. (NASDAQ: LTRX) (“Lantronix”), a global provider of secure data access and management solutions for IoT assets, pursuant to which Lantronix will acquire 100% of Intrinsyc’s issued and outstanding common shares in a cash and share transaction valued at approximately US$27 million (collectively, the “Transaction”). Under the terms of the Transaction, Intrinsyc shareholders (“Intrinsyc Shareholders”) will receive US$0.55 in cash plus 0.2135 of a Lantronix share for every common share of Intrinsyc (a “Common Share”) held (collectively, the “Consideration”). Based on the Lantronix closing price of US$3.38 on October 30, 2019 and an exchange rate of 0.75868, the Consideration is equal to Cdn$1.68 per Common Share.
| 26 |
INTRINSYC TECHNOLOGIES CORPORATION
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited and Expressed in U.S. Dollars)
22. SUBSEQUENT EVENT (continued)
The Transaction will continue to provide Intrinsyc Shareholders with direct exposure to the growth potential in IoT markets as Intrinsyc Shareholders will own approximately 16% of the stock of Lantronix post-Transaction.
The Transaction will be carried out pursuant to the Arrangement Agreement under a court-approved statutory plan of arrangement (the “Arrangement”) governed by the Canada Business Corporations Act. Under the Arrangement Agreement, Lantronix will acquire all of the issued and outstanding Common Shares of Intrinsyc.
Intrinsyc Shareholders will receive a management information circular for a special meeting to be held to approve the Transaction, which will include further details about the Transaction, Lantronix and the combined company.
The Transaction is subject to the approval of: (i) 662/3% of the votes cast by the holders of Intrinsyc’s common shares present in person or represented by proxy, and (ii) if applicable, a simple majority of the votes cast by the holders of Common Shares after excluding any votes that are required to be excluded under Canadian Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions, all at a special meeting of the Intrinsyc Shareholders expected to be held in December 2019. In addition, the Transaction is subject to receipt of all shareholder, court, certain third-party and stock exchange approvals.
| 27 |
Exhibit 99.4
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information is based upon the historical financial statements of Lantronix, Inc. (“Lantronix”), after giving effect to the acquisition of (i) Intrinsyc Technologies Corporation (“Intrinsyc”), which was closed on January 16, 2020, and (ii) Maestro Wireless Solutions Limited, a Hong Kong private company limited by shares, Fargo Telecom Asia Limited, a Hong Kong private company limited by shares, and Maestro & FALCOM Holdings Limited, a British Virgin Islands company (collectively “Maestro”), which closed on July 5, 2019. The unaudited pro forma condensed combined financial information also gives effect to the transactions undertaken to finance the acquisition of Intrinsyc.
The unaudited pro forma condensed combined balance sheet as of December 31, 2019, combines the historical balance sheets of Lantronix and Intrinsyc, giving effect to the acquisition of Intrinsyc as if it had been completed on December 31, 2019. Since the Maestro acquisition occurred on July 5, 2019, Lantronix’s historical balance sheet includes the effects of that acquisition and no pro forma adjustment was necessary to present the unaudited pro forma condensed combined balance sheet.
The unaudited pro forma condensed combined statement of operations for the year ended June 30, 2019 gives effect to the acquisition of Intrinsyc, the financing transactions, and the acquisition of Maestro, as if they had each occurred on July 1, 2018, by combining Lantronix’s consolidated statement of operations for the twelve months ended June 30, 2019, with Intrinsyc’s unaudited consolidated statements of operations for the twelve months ended September 30, 2019 and Maestro’s unaudited consolidated statements of operations for the twelve months ended June 30, 2019. Intrinsyc and Maestro have December 31, 2018 fiscal year ends, which differ from Lantronix’s fiscal year end. Accordingly, for purposes of the unaudited pro forma condensed combined statement of operations, the historical amounts combine Intrinsyc’s and Maestro’s historical statements of operations for the twelve months ended September 30, 2019 and June 30, 2019, respectively.
The unaudited pro forma condensed combined statement of operations for the six months ended December 31, 2019 gives effect to the acquisition of Intrinsyc and the financing transactions, as if they had each occurred on July 1, 2018, by combining Lantronix’s consolidated statement of operations for the six months ended December 31, 2019, with Intrinsyc’s unaudited consolidated statements of operations for the six months ended September 30, 2019. The Lantronix consolidated statement of operations for the six months ended December 31, 2019 substantially includes the full impact of the Maestro operations as the acquisition of Maestro closed on July 5, 2019.
The following unaudited pro forma condensed combined financial information and related notes present the historical financial information of Lantronix, Intrinsyc and Maestro adjusted to give pro forma effect to events that are (1) directly attributable to the acquisitions, (2) factually supportable, and (3) with respect to the unaudited pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results. These unaudited pro forma condensed combined financial statements should be read in conjunction with the historical consolidated financial statements and related notes contained in the annual, quarterly and other reports filed by Lantronix with the Securities and Exchange Commission.
The pro forma information presented is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the acquisitions had been completed on the dates indicated, nor is it indicative of future operating results or financial position. The pro forma adjustments represent Lantronix’s management’s best estimate and are based upon currently available information and certain assumptions that Lantronix believes are reasonable under the circumstances. The final valuation may materially change the allocation of the purchase consideration, which could materially affect the fair values assigned to the assets and liabilities and could result in a material change to the unaudited pro forma condensed combined financial information. Refer to footnote 1 to the unaudited pro forma condensed combined financial information for more information on the basis of preparation.
| 1 |
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 2019
(In thousands)
| Intrinsyc | IFRS to | Intrinsyc | ||||||||||||||||||||||
| Lantronix | IFRS | U.S. GAAP | U.S. GAAP | Pro Forma | Pro Forma | |||||||||||||||||||
| Historical | Historical | Adjustments | Historical | Adjustments | Combined | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Current Assets: | ||||||||||||||||||||||||
| Cash and cash equivalents | $ | 9,347 | $ | 4,682 | $ | – | $ | 4,682 | $ | (5,519 | ) | 4(m) | $ | 5,238 | ||||||||||
| (3,272 | ) | 4(n) | ||||||||||||||||||||||
| Restricted cash | 6,000 | – | – | – | (6,000 | ) | 4(m) | – | ||||||||||||||||
| Short-term investments | – | – | – | – | – | – | ||||||||||||||||||
| Accounts receivable, net | 9,379 | 6,794 | – | 6,794 | – | 16,173 | ||||||||||||||||||
| Inventories, net | 11,024 | 5,757 | – | 5,757 | 91 | 4(e) | 16,872 | |||||||||||||||||
| Contract manufacturers' receivable | 373 | – | – | – | – | 373 | ||||||||||||||||||
| Prepaid expenses and other current assets | 1,307 | 158 | – | 158 | – | 1,465 | ||||||||||||||||||
| Total current assets | 37,430 | 17,391 | – | 17,391 | (14,700 | ) | 40,121 | |||||||||||||||||
| Property and equipment, net | 1,412 | 596 | (90 | ) | 2(g) | 506 | 1,918 | |||||||||||||||||
| Goodwill | 12,458 | – | – | – | 1,226 | 4(h) | 13,684 | |||||||||||||||||
| Purchased intangible assets, net | 1,615 | – | – | – | 12,877 | 4(f) | 14,492 | |||||||||||||||||
| Other assets | 2,040 | 1,708 | – | 1,708 | 430 | 4(d) | 4,178 | |||||||||||||||||
| Total assets | $ | 54,955 | $ | 19,695 | $ | (90 | ) | $ | 19,605 | $ | (167 | ) | $ | 74,393 | ||||||||||
| Liabilities and stockholders' equity | ||||||||||||||||||||||||
| Current Liabilities: | ||||||||||||||||||||||||
| Accounts payable and other | $ | 7,313 | $ | 5,244 | $ | – | $ | 5,244 | $ | – | $ | 12,557 | ||||||||||||
| Other current liabilities | 5,337 | 926 | – | 926 | (206 | ) | 4(g) | 6,057 | ||||||||||||||||
| Long-term debt due within one year | 1,472 | – | – | – | – | 1,472 | ||||||||||||||||||
| Total current liabilities | 14,122 | 6,170 | – | 6,170 | (206 | ) | 20,086 | |||||||||||||||||
| Long-term debt | 4,418 | – | – | – | – | 4,418 | ||||||||||||||||||
| Non-current liabilities | 1,137 | 1,174 | – | 1,174 | – | 2,311 | ||||||||||||||||||
| Total liabilities | 19,677 | 7,344 | – | 7,344 | (206 | ) | 26,815 | |||||||||||||||||
| Stockholders' equity: | ||||||||||||||||||||||||
| Common stock | 2 | 107,672 | – | 107,672 | (107,672 | ) | 4(o) | 2 | ||||||||||||||||
| Additional paid-in capital | 228,107 | 10,946 | 7 | 2(c) | 10,953 | (10,953 | ) | 4(o) | 243,679 | |||||||||||||||
| 15,572 | 4(p) | |||||||||||||||||||||||
| Accumulated deficit | (193,202 | ) | (106,359 | ) | 2,068 | (104,291 | ) | 104,291 | 4(o) | (196,474 | ) | |||||||||||||
| (3,272 | ) | 4(n) | ||||||||||||||||||||||
| Accumulated other comprehensive income | 371 | 92 | (2,165 | ) | 2(a) | (2,073 | ) | 2,073 | 4(o) | 371 | ||||||||||||||
| Total stockholders' equity | 35,278 | 12,351 | (90 | ) | 12,261 | 39 | 47,578 | |||||||||||||||||
| Total liabilities and stockholders' equity | $ | 54,955 | $ | 19,695 | $ | (90 | ) | $ | 19,605 | $ | (167 | ) | $ | 74,393 | ||||||||||
See accompanying notes.
| 2 |
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2019
(In thousands, except per share data)
| Maestro | Intrinsyc | IFRS to | Intrinsyc | Intrinsyc | Total | |||||||||||||||||||||||||||
| Lantronix | Maestro | Pro Forma | IFRS | U.S. GAAP | U.S. GAAP | Pro Forma | Pro Forma | |||||||||||||||||||||||||
| Historical | Historical | Adjustments | Historical | Adjustments | Historical | Adjustments | Combined | |||||||||||||||||||||||||
| Net revenue | $ | 46,890 | $ | 10,583 | $ | – | $ | 24,884 | $ | – | $ | 24,884 | $ | – | $ | 82,357 | ||||||||||||||||
| Cost of revenue | 20,617 | 6,024 | – | 16,397 | 170 | 2(b) | 16,832 | 105 | 4(d) | 43,578 | ||||||||||||||||||||||
| 91 | 2(c) | |||||||||||||||||||||||||||||||
| 174 | 2(d) | |||||||||||||||||||||||||||||||
| Gross profit | 26,273 | 4,559 | – | 8,487 | (435 | ) | 8,052 | (105 | ) | 38,779 | ||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||
| Selling, general and administrative | 15,851 | 4,275 | – | 5,606 | 75 | 2(b) | 6,041 | (218 | ) | 4(i) | 26,001 | |||||||||||||||||||||
| 275 | 2(c) | 52 | 4(d) | |||||||||||||||||||||||||||||
| 85 | 2(d) | |||||||||||||||||||||||||||||||
| Research and development | 9,079 | 1,067 | – | 1,457 | 3 | 2(b) | 1,475 | 22 | 4(d) | 11,643 | ||||||||||||||||||||||
| 9 | 2(c) | |||||||||||||||||||||||||||||||
| 6 | 2(d) | |||||||||||||||||||||||||||||||
| Other operating expenses | – | – | – | 769 | (208 | ) | 2(b) | – | – | – | ||||||||||||||||||||||
| (304 | ) | 2(c) | ||||||||||||||||||||||||||||||
| (257 | ) | 2(d) | ||||||||||||||||||||||||||||||
| Restructuring, severance and related charges | 1,146 | 93 | – | – | – | – | – | 1,239 | ||||||||||||||||||||||||
| Acquisition-related costs | 410 | – | (410 | ) | 4(i) | – | – | – | – | – | ||||||||||||||||||||||
| Amortization of purchased intangibles assets | – | 34 | 599 | 4(r) | – | – | – | 3,236 | 4(f) | 3,835 | ||||||||||||||||||||||
| (34 | ) | 4(j) | ||||||||||||||||||||||||||||||
| Impairment of long-lived asset | 275 | – | – | – | – | – | – | 275 | ||||||||||||||||||||||||
| Total operating expenses | 26,761 | 5,469 | 155 | 7,832 | (316 | ) | 7,516 | 3,092 | 42,993 | |||||||||||||||||||||||
| Income (loss) from operations | (488 | ) | (910 | ) | (155 | ) | 655 | (119 | ) | 536 | (3,197 | ) | (4,214 | ) | ||||||||||||||||||
| Interest and other income (expense), net | 221 | 23 | (102 | ) | 4(s) | (1,043 | ) | 2(f) | 41 | 2(b) | (1,120 | ) | (445 | ) | 4(k) | (1,423 | ) | |||||||||||||||
| (118 | ) | 2(e) | ||||||||||||||||||||||||||||||
| Foreign exchange gain (loss) | – | – | – | (118 | ) | 118 | 2(e) | – | – | – | ||||||||||||||||||||||
| Loss before income taxes | (267 | ) | (887 | ) | (257 | ) | (506 | ) | (78 | ) | (584 | ) | (3,642 | ) | (5,637 | ) | ||||||||||||||||
| Provision for income taxes | 141 | 10 | – | 4(l) | 59 | – | 59 | – | 4(l) | 210 | ||||||||||||||||||||||
| Net loss and comprehensive loss | $ | (408 | ) | $ | (897 | ) | $ | (257 | ) | $ | (565 | ) | $ | (78 | ) | $ | (643 | ) | $ | (3,642 | ) | $ | (5,847 | ) | ||||||||
| Net loss per share - basic and diluted | $ | (0.02 | ) | $ | (0.23 | ) | ||||||||||||||||||||||||||
| Weighted-average common shares - basic and diluted | 21,580 | 4,278 | 4(q) | 25,858 | ||||||||||||||||||||||||||||
See accompanying notes.
| 3 |
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2019
(In thousands, except per share data)
| Intrinsyc | IFRS to | Intrinsyc | ||||||||||||||||||||||
| Lantronix | IFRS | U.S. GAAP | U.S. GAAP | Pro Forma | Pro Forma | |||||||||||||||||||
| Historical | Historical | Adjustments | Historical | Adjustments | Combined | |||||||||||||||||||
| Net revenue | $ | 25,969 | $ | 11,652 | $ | – | $ | 11,652 | $ | – | $ | 37,621 | ||||||||||||
| Cost of revenue | 12,997 | 7,616 | 97 | 2(b) | 7,847 | 53 | 4(d) | 20,897 | ||||||||||||||||
| 46 | 2(c) | |||||||||||||||||||||||
| 88 | 2(d) | |||||||||||||||||||||||
| Gross profit | 12,972 | 4,036 | (231 | ) | 3,805 | (53 | ) | 16,724 | ||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Selling, general and administrative | 9,344 | 2,783 | 43 | 2(b) | 3,015 | (195 | ) | 4(i) | 12,190 | |||||||||||||||
| 143 | 2(c) | 26 | 4(d) | |||||||||||||||||||||
| 46 | 2(d) | |||||||||||||||||||||||
| Research and development | 4,957 | 610 | 2 | 2(b) | 620 | 11 | 4(d) | 5,588 | ||||||||||||||||
| 5 | 2(c) | |||||||||||||||||||||||
| 3 | 2(d) | |||||||||||||||||||||||
| Other operating expenses | – | 399 | (120 | ) | 2(b) | – | – | – | ||||||||||||||||
| (145 | ) | 2(c) | ||||||||||||||||||||||
| (134 | ) | 2(d) | ||||||||||||||||||||||
| Restructuring, severance and related charges | 1,103 | – | – | – | – | 1,103 | ||||||||||||||||||
| Acquisition-related costs | 996 | – | – | – | (996 | ) | 4(i) | – | ||||||||||||||||
| Amortization of purchased intangibles assets | 295 | – | – | – | 1,129 | 4(f) | 1,424 | |||||||||||||||||
| Total operating expenses | 16,695 | 3,792 | (157 | ) | 3,635 | (25 | ) | 20,305 | ||||||||||||||||
| Income (loss) from operations | (3,723 | ) | 244 | (74 | ) | 170 | (28 | ) | (3,581 | ) | ||||||||||||||
| Interest and other income (expense), net | (13 | ) | 159 | 22 | 2(b) | 210 | (234 | ) | 4(k) | (37 | ) | |||||||||||||
| 29 | 2(e) | |||||||||||||||||||||||
| Foreign exchange gain (loss) | – | 29 | (29 | ) | 2(e) | – | – | – | ||||||||||||||||
| Income (loss) before income taxes | (3,736 | ) | 432 | (52 | ) | 380 | (262 | ) | (3,618 | ) | ||||||||||||||
| Provision for income taxes | 85 | 34 | – | 34 | – | 4(l) | 119 | |||||||||||||||||
| Net income (loss) and comprehensive income (loss) | $ | (3,821 | ) | $ | 398 | $ | (52 | ) | $ | 346 | $ | (262 | ) | $ | (3,737 | ) | ||||||||
| Net (loss) per share - basic and diluted | $ | (0.17 | ) | $ | (0.14 | ) | ||||||||||||||||||
| Weighted-average common shares - basic and diluted | 23,029 | 4,278 | 4(q) | 27,307 | ||||||||||||||||||||
See accompanying notes.
| 4 |
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
| 1. | Basis of Presentation |
The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, with Lantronix being the accounting acquirer, and uses the fair value concepts defined in ASC Topic 820, Fair Value Measurement, and was based on the historical consolidated financial statements of Lantronix, Intrinsyc and Maestro.
Under ASC Topic 805, all the assets acquired and liabilities assumed in a business combination are recognized at their assumed acquisition-date fair value, while acquisition-related costs and restructuring costs associated with the business combination are expensed as incurred. The excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill.
The allocation of the purchase consideration depends upon certain estimates and assumptions, all of which are preliminary. The allocation of the purchase consideration has been made for the purpose of developing the unaudited pro forma condensed combined financial information. Fair value of Intrinsyc’s and Maestro’s identifiable intangible assets and the estimated amortization periods are based primarily on preliminary information and assumptions likely will change, as Lantronix completes a valuation of Intrinsyc’s and Maestro’s identifiable assets.
A final determination of fair values of assets acquired and liabilities assumed could differ materially from the preliminary allocation of purchase consideration. This final valuation will be based on the actual net tangible and intangible assets of the business acquired existing as of the assumed closing date. The final valuation may materially change the allocation of purchase consideration, which could materially affect the fair values assigned to the assets and liabilities and could result in a material change to the unaudited pro forma condensed combined financial information.
The pro forma adjustments represent Lantronix management’s best estimate and are based upon currently available information and certain assumptions that Lantronix believes are reasonable under the circumstances. Lantronix is not aware of any material transactions between Lantronix and Intrinsyc during the periods presented; hence adjustments have not been reflected in the unaudited pro forma condensed combined financial information for any such transaction.
After consummation of the combination with Intrinsyc, Lantronix is performing a comprehensive review of Intrinsyc’s accounting policies. As a result of the review, Lantronix may identify differences between the accounting policies of the two companies which, when conformed, could have a material impact on the combined financial statements. Based on its initial analysis, Lantronix is not aware of any differences that would have a material impact on the combined financial statements.
| 2. | GAAP Adjustments to Intrinsyc’s Financial Statements |
The financial information of Intrinsyc has been prepared and presented in accordance with International Financial Reporting Standards (as promulgated by the International Accounting Standards Board) ("IFRS"). Certain differences exist between IFRS and accounting principles generally accepted in the United States (“U.S. GAAP”), which might be material to the financial information incorporated by reference into this proxy statement.
| 5 |
The principal differences between U.S. GAAP and IFRS which might be material in the preparation of Intrinsyc's consolidated financial statements are described below. The following summary does not include all differences that exist between IFRS and U.S. GAAP and is not intended to provide a comprehensive listing of all such differences specifically related to Lantronix, Intrinsyc or the industry in which Lantronix and Intrinsyc operate.
The differences described below reflect only those differences in accounting policies in force at the time of the preparation of the historical financial information of Intrinsyc. There has been no attempt to identify future differences between IFRS and U.S. GAAP as the result of prescribed changes in accounting standards, transactions or events that may occur in the future.
IFRS differs in certain material respects from U.S. GAAP. The following material adjustments have been made to reflect Intrinsyc's historical consolidated statements of earnings and consolidated balance sheet on a U.S. GAAP basis for purposes of unaudited pro forma financial information. In addition, the material adjustments have been made to align Intrinsyc’s historical significant accounting policies under IFRS to Lantronix's significant accounting policies under U.S. GAAP. The financial information illustrates the impact of estimated adjustments made to Intrinsyc’s financial statements prepared in accordance with IFRS, in order to present them on a basis consistent with Lantronix’s accounting presentation and policies under U.S. GAAP. These adjustments reflect Lantronix’s best estimates based upon the information currently available to Lantronix’s and could be subject to change once more detailed information is obtained.
The IFRS to U.S. GAAP adjustments are summarized as follows:
| (a) | IFRS 1 — First-time Adoption of International Financial Reporting Standards ("IFRS 1") |
Intrinsyc adopted IFRS in accordance with IFRS 1 with a transition date of January 1, 2010 and its consolidated financial statements were prepared in accordance with IFRS standards and interpretations effective as of December 31, 2011. In accordance with IFRS 1, Intrinsyc recognized $2.1 million in cumulative translation difference from translation in opening retained earnings at January 1, 2010 which is being reversed in transition to U.S. GAAP.
| (b) | IFRS 16 – Lease |
The overall accounting for leases under U.S. GAAP (ASC 842) and IFRS (IFRS 16) is similar. Both require lessees to recognize right-of-use assets and lease liabilities on their balance sheets, unless certain recognition exemptions are elected. For operating leases (under ASC 842), the lessee must present both components together (amortization of right of use asset and interest expense) as a lease expense within income from continuing operations, consistent with the presentation of other operating expenses. Lease expense should be classified within cost of sales; selling, general, and administrative expense; or another expense line item depending on the nature of the lease. Intrinsyc has adjusted the amortization and interest expense pertaining to the right of use asset under IFRS to cost of revenue and the functional operating expense line item.
(c) Share-Based Compensation Expense
The U.S. GAAP guidance for share-based payments, ASC 718, Compensation — Stock Compensation, and ASC 505-50, Equity — Equity-Based Payments to Non-Employees (before the adoption of accounting standards update (“ASU”) 2018-07, Improvements to Non-employee Share-Based Payment Accounting, discussed further below), is largely converged with the guidance in IFRS 2, Share-Based Payment (including the amendments that were effective 1 January 2018). Both require a fair value-based approach for accounting for share-based payment arrangements whereby an entity (1) acquires goods or services in exchange for issuing share options or other equity instruments (collectively referred to as “shares” in this guide), or (2) incurs liabilities that are based, at least in part, on the price of its shares or that may require settlement in its shares.
| 6 |
One difference between U.S. GAAP and IFRS is the calculation of share-based compensation. Under U.S. GAAP, compensation costs can be recognized on a straight-line basis for a graded vesting share-based payment award that vests based solely on the provision of service. Unlike U.S. GAAP, IFRS does not provide the option to measure and expense a graded vesting award (i.e., an option award that vests in tranches over a number of years) as a single award. As well, under U.S. GAAP, share based compensation is presented on the statement of operations with the relevant operating line items unlike IFRS, which presents the expense grouped with other expenses under Other Operating Expenses.
As such, Intrinsyc has quantified the amount of share-based compensation under U.S. GAAP and adjusted the IFRS balance accordingly as well as reclassify the adjusted share-based compensation under U.S. GAAP by presenting share-based compensation in the functional expense line item from the prior presentation as Other Operating Expenses.
(d) Represents the reclassification of depreciation expense from Other Operating Expenses to the functional expense line item in order to conform with Lantronix’s Statement of Operations presentation, as well as an adjustment resulting from the application of straight-line depreciation used by Lantronix compared to a declining balance method used by Intrinsyc.
(e) Represents the reclassification of Foreign Exchange Gain (Loss) to Interest and Other Income (Expense), Net, in order to conform with Lantronix’s Statement of Operations presentation.
(f) Interest and Other Income (Expense), Net, includes an impairment loss of $1.1 million related to the revaluation of an equity investment by Intrinsyc in December 2018.
(g) Represents the application of straight-line depreciation used by Lantronix compared to a declining balance method used by Intrinsyc.
| 3. |
Financing Transactions |
On January 16, 2020, Lantronix entered into an agreement to acquire all of the outstanding common shares of Intrinsyc. Intrinsyc shareholders will receive consideration per share consisting of (i) $0.55 in cash, and (ii) 0.2135 shares of Lantronix common stock. The estimated total consideration paid was approximately $27.1 million, based on the Lantronix common stock price on the close date. Lantronix financed approximately $6 million of the total $11.5 million of cash consideration required for the acquisition.
On November 12, 2019, Lantronix entered into a Second Amended and Restated Loan and Security Agreement (“Amended Agreement”) with Silicon Valley Bank (“SVB”), which amended, restated and superseded the Loan Agreement in its entirety. Pursuant to the Amended Agreement, SVB has agreed to make available to Lantronix a senior secured term loan of up to $6 million (“Term Loan Facility”). The proceeds of the Term Loan Facility were drawn in full at closing and were used to fund the acquisition of Intrinsyc. The Term Loan Facility is repayable over a 48 month period commencing January 1, 2020. The interest rate on the Term Loan Facility floats at a rate per annum equal to the greater of 1.00 percent above the prime rate and 6.00 percent. Each increase of 0.125 in the prime rate will result in incremental annual interest expense of approximately $6,000.
| 4. | Pro Forma Adjustments Related to the Acquisition |
The total estimated consideration as shown in the table below is allocated to Intrinsyc tangible and intangible assets and liabilities based on their preliminary estimated fair values as of the acquisition date (amounts in thousands, except per share data):
| Consideration: | ||||
| Intrinsyc shares purchased on January 16, 2020 | 20,040 | (a) | ||
| Exchange ratio | 0.2135 | |||
| Total Lantronix shares issued to Intrinsyc shareholders | 4,278 | |||
| Lantronix share price on January 16, 2020 | $ | 3.64 | ||
| Total value of Lantronix shares issued to Intrinsyc shareholders | $ | 15,572 | (b) | |
| Cash consideration paid at $0.55 per Intrinsyc share | 11,022 | |||
| Total consideration paid to Intrinsyc shareholders | $ | 26,594 | ||
| Cash settlement of vested employee equity awards | 497 | (c) | ||
| Total purchase consideration | $ | 27,091 | ||
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| Preliminary allocation of consideration: | ||||
| Book value of Intrinsyc net assets as of the pro forma acquisition date | $ | 12,261 | ||
| Adjustments to historical net book value: | ||||
| Below market lease | 430 | (d) | ||
| Inventories | 91 | (e) | ||
| Identifiable intangible assets | 12,877 | (f) | ||
| Deferred revenue | 206 | (g) | ||
| Adjusted book value of Intrinsyc net assets as of the pro forma acquisition date | $ | 25,865 | ||
| Adjustment to goodwill | $ | 1,226 | (h) |
| (a) | Represents Intrynsic common shares outstanding as of January 16, 2020. |
| (b) | The stock portion of the purchase consideration was estimated using a price of $3.64 for each share of Lantronix common stock based on Lantronix’s share price on January 16, 2020. |
| (c) | Represents cash consideration for the holders of Intrinsyc vested stock options and vested restricted stock units. |
| (d) | Represents fair value adjustment for below market value lease of $430,000 as well as an allocation of the related additional amortization of $90,000 for the six months ended December 31, 2019 allocated to the respective functions; costs of goods sold of $53,000, selling, general and administrative of $26,000, and research and development of $11,000 and $179,000 for the year ended June 30, 2019 allocated to the respective functions; costs of goods sold of $105,000, selling, general and administrative of $52,000, and research and development of $22,000. |
| (e) | Amount represents the adjustment to state inventories acquired as of the pro forma acquisition date at estimated fair value, less cost to sell. After the acquisition, the step-up in inventory fair value will increase cost of sales as the inventory is sold. This increase is not reflected in the pro forma condensed combined statements of operations because it does not have a continuing impact. |
| (f) | The preliminary fair value and allocation of identifiable intangible assets and below market leases and their estimated useful lives are as follows (dollar amounts in thousands): |
| Amortization Expense Based on the Preliminary Allocation of Identifiable Intangible Assets | ||||||||||||||||||||||||
| Preliminary Estimated Asset Fair Value | Weighted Average Useful Life (Years) | Six Months Ended December 31, 2019 | Year Ended June 30, 2019 | Annual Effect of a 10% Increase to the Preliminary Allocation | Annual Effect of a 10% Decrease to the Weighted Average Useful Life | |||||||||||||||||||
| Developed technology | $ | 2,367 | 5.0 | $ | 237 | $ | 473 | $ | 47 | $ | 53 | |||||||||||||
| Customer relationship | 9,140 | 6.0 | 762 | 1,523 | 152 | 170 | ||||||||||||||||||
| Order backlog | 750 | 1.2 | 130 | 620 | 62 | 69 | ||||||||||||||||||
| Non-compete agreements | 380 | 1.0 | – | 380 | 38 | – | ||||||||||||||||||
| Trademarks and trade names | 240 | 1.0 | – | 240 | 24 | – | ||||||||||||||||||
| $ | 12,877 | $ | 1,129 | $ | 3,236 | $ | 323 | $ | 361 | |||||||||||||||
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Amortization related to the fair value of the finite-lived identifiable intangible assets has been reflected as pro forma adjustments to the unaudited pro forma condensed combined statements of operations. Lantronix made preliminary assumptions with respect to the fair value of Intrinsyc’s finite-lived identifiable intangible assets and the estimated amortization periods. These assumptions likely will change as Lantronix completes, with the assistance of a third-party appraiser, a valuation of Intrinsyc’s identifiable intangible assets.
The amortization period for each finite-lived intangible asset is estimated based on analyses of the expected cash flows generated by each respective intangible asset. Complete analyses may take additional time to complete after the closing of the acquisition. Lantronix does not, on the date hereof, have sufficient information as to the amount, timing and risk of cash flows of all these intangible assets. Some of the more significant assumptions inherent in the development of intangible asset values and the amortization period estimates, from the perspective of a market participant, include: the amount and timing of projected future cash flows (including revenue, cost of sales, research and development costs, sales and marketing expenses, and working capital/contributory asset charges), effect from Intrinsyc’s existing royalty and other arrangements, the discount rate selected to measure the risks inherent in the future cash flows, and the assessment of the asset’s life cycle and the competitive trends impacting the asset, as well as other factors.
An increase or decrease of 10% of the preliminary estimated fair value of finite-lived identifiable intangible assets, or approximately $1.3 million, is reasonably possible. A fair value increase or decrease of this magnitude would also result in corresponding increase or decrease to goodwill.
| (g) | Amount represents the adjustment to state deferred revenue at its estimated fair value. |
| (h) | Goodwill is calculated as the difference between the assumed acquisition date fair value of the consideration to be paid and the estimated values assigned to the assets acquired and liabilities assumed. Goodwill is not amortized and instead will be tested for impairment at least annually and whenever events or circumstances occur that may indicate a possible impairment. The factors that contributed to a purchase consideration resulting in the recognition of goodwill include Lantronix’s belief the merger will create a more diverse company with additional technologies that will enable the combined company to expand its product offerings and Lantronix’s belief that the combined company is committed to improving cost structures and combined efforts after the merger should result in a realization of cost savings and an improvement in overall efficiencies. |
| (i) | Amounts on the unaudited pro forma condensed combined statement of operations represent pro forma adjustments to reverse acquisition-related costs included in the historical financial statements of Lantronix and Intrinsyc, which are not expected to have a continuing impact on the combined results. Acquisition-related costs consist primarily of consulting, due diligence, and legal fees paid in connection with the acquisitions of Intrinsyc and Maestro. |
| (j) | Amount represents the elimination of amortization expense recorded in Maestro's historical statement of operations. |
| (k) | Amount represents the net increase to interest expense resulting from interest on the new Term Loan Facility to finance the acquisition of Intrinsyc, the amortization of related debt issuance costs, and foregone interest income calculated based upon the purchase consideration at an estimated interest rate of 1.9% earned on Lantronix’s cash and cash equivalents. |
| (l) | Due to valuation allowances on Lantronix’s net deferred tax assets, the unaudited pro forma condensed combined statement of operations does not reflect a statutory rate income tax adjustment for pro forma purposes. |
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| (m) | Amount reflects total estimated cash consideration used in the acquisition of Intrinsyc. |
| (n) | Amount represents the payment of the estimated transaction costs for the acquisition of Intrinsyc. |
| (o) | Amount represents the elimination of the historical equity of Intrinsyc. |
| (p) | Amount represents the issuance of Lantronix common shares at an estimated value of $15.6 million to finance the acquisition of Intrinsyc. |
| (q) | Amount represents the increase in the weighted average shares in connection with the issuance of approximately 4,278,000 Lantronix common shares to finance the acquisition of Intrinsyc. |
| (r) | The preliminary fair value and allocation of identifiable intangible assets of Maestro and their estimated useful lives are as follows (dollar amounts in thousands): |
Amortization Expense for the Year Ended June 30, 2019 | ||||||||||||||||||||
| Preliminary Estimated Asset Fair Value | Weighted Average Useful Life (Years) | Based on the Preliminary Allocation of Identifiable Intangible Assets | Effect of a 10% Increase to the Preliminary Allocation | Effect of a 10% Decrease to the Weighted Average Useful Life | ||||||||||||||||
| Developed technology | $ | 1,530 | 5 | $ | 284 | $ | 28 | $ | 32 | |||||||||||
| Customer relationship | 100 | 2 | 50 | 5 | 6 | |||||||||||||||
| Order backlog | 110 | 1 | 110 | 11 | – | |||||||||||||||
| Trade name | 140 | 1 | 140 | 14 | – | |||||||||||||||
| Non-compete agreements | 30 | 2 | 15 | 2 | 2 | |||||||||||||||
| $ | 1,910 | $ | 599 | $ | 60 | $ | 68 | |||||||||||||
| (s) | Amount represents the foregone interest income calculated based upon the purchase consideration for Maestro at an estimated interest rate of 1.9% earned on Lantronix’s cash and cash equivalents. |
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