Exhibit 99.2
AND SUBSIDIARIES
Consolidated Financial Statements
March 31, 2021 (Unaudited)
INTRINSIX CORP. AND SUBSIDIARIES
Contents
| March 31, 2021 (Unaudited) |
Pages
| Consolidated Financial Statements (Unaudited): | |
| | |
| Consolidated Balance Sheet (Unaudited) | 1 |
| | |
| Consolidated Statement of Income (Unaudited) | 2 |
| | |
| Consolidated Statement of Cash Flows (Unaudited) | 3 |
| | |
| Notes to Consolidated Financial Statements (Unaudited) | 4 - 14 |
INTRINSIX CORP. AND SUBSIDIARIES |
| |
Consolidated Balance Sheet |
March 31, 2021 (Unaudited) |
| | | Unaudited | |
Assets | | 2021 | |
| | | | | |
Current Assets: | | | | |
Cash and cash equivalents | | $ | 3,740,968 | |
Accounts receivable, net of allowance for doubtful accounts of approximately $288,000 at March 31, 2021 | | | 3,807,852 | |
Unbilled accounts receivable | | | 370,954 | |
Equity securities | | | 415,439 | |
Current portion of prepaid tool maintenance | | | 1,342,528 | |
Prepaid expenses and other current assets | | | 220,850 | |
Total current assets | | | 9,898,591 | |
| | | | | |
Accounts Receivable, net of current portion | | | 9,800 | |
| | | | | |
Convertible Notes Receivable | | | 498,845 | |
| | | | | |
Deferred Income Taxes, net | | | 154,000 | |
| | | | | |
Property and Equipment, net | | | 113,545 | |
| | | | | |
Prepaid Tool Maintenance, net of current portion | | | 274,655 | |
| | | | | |
Deposits | | | 40,905 | |
| | | | | |
Total assets | | $ | 10,990,341 | |
| | | | | |
Liabilities and Stockholders' Equity | | | | |
| | | | | |
Current Liabilities: | | | | |
Accounts payable | | $ | 428,671 | |
Deferred revenue | | | 1,041,437 | |
Accrued compensation and benefits | | | 711,133 | |
Other accrued expenses | | | 253,868 | |
Current portion of accrued tool maintenance | | | 1,990,383 | |
Income tax payable | | | 346,474 | |
Total current liabilities | | | 4,771,966 | |
| | | | | |
Paycheck Protection Program Loan | | | 1,406,250 | |
| | | | | |
Accrued Tool Maintenance, net of current portion | | | 116,667 | |
| | | | | |
Total liabilities | | | 6,294,883 | |
| | | | | |
Stockholders' Equity: | | | | |
Common stock, no par value; 70,000,000 shares authorized; 26,034,336 shares issued and outstanding at March 31, 2021 | | | 2,472,439 | |
Treasury stock | | | - | |
Due from stockholders | | | (82,364 | ) |
Additional paid-in capital | | | 70,047 | |
Retained earnings | | | 2,235,336 | |
Total stockholders’ equity | | | 4,695,458 | |
| | | | | |
Total liabilities and stockholders' equity | | $ | 10,990,341 | |
The accompanying notes are in integral part of these consolidated statements.
INTRINSIX CORP. AND SUBSIDIARIES |
| |
Consolidated Statement of Income |
For the Three Months Ended March 31, 2021 (Unaudited) |
| | | Unaudited | |
| | | 2021 | |
| | | | | |
Revenues | | $ | 5,812,212 | |
| | | | | |
Cost of Revenues | | | 4,019,813 | |
| | | | | |
Gross profit | | | 1,792,399 | |
| | | | | |
Operating Expenses: | | | | |
Research and development | | | 346,073 | |
Selling, general and administrative | | | 988,360 | |
| | | | | |
Total operating expenses | | | 1,334,433 | |
| | | | | |
Income from operations | | | 457,966 | |
| | | | | |
Other Income: | | | | |
Unrealized gains on equity securities | | | 138,116 | |
Interest income | | | 6,306 | |
| | | | | |
Total other income | | | 144,422 | |
| | | | | |
Income before provision for income taxes | | | 602,388 | |
| | | | | |
Provision for Income Taxes | | | (119,881 | ) |
| | | | | |
Net income | | $ | 482,507 | |
The accompanying notes are in integral part of these consolidated statements.
INTRINSIX CORP. AND SUBSIDIARIES |
| |
Consolidated Statement of Cash Flows |
For the Three Months Ended March 31, 2021 (Unaudited) |
| | | Unaudited | |
| | | 2021 | |
Cash Flows from Operating Activities: | | | | |
Net income | | $ | 482,507 | |
| | | | | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation | | | 12,063 | |
Provision for bad debt | | | 67,373 | |
Stock-based compensation | | | 1,910 | |
Deferred income taxes | | | (10,000 | ) |
Unrealized gain on equity securities | | | (138,116 | ) |
Accrued interest on notes receivable due from stockholders | | | (201 | ) |
Changes in operating assets and liabilities: | | | | |
Accounts receivable | | | (1,148,687 | ) |
Unbilled accounts receivable | | | 86,528 | |
Prepaid expenses and other assets | | | (9,858 | ) |
Income tax payable | | | 129,880 | |
Accounts payable | | | 228,179 | |
Prepaid tool maintenance | | | 1,559,039 | |
Deferred revenue | | | 9,216 | |
Accrued tool maintenance | | | (1,002,522 | ) |
Accrued compensation and benefits and other accrued expenses | | | 34,488 | |
Net cash provided by operating activities | | | 301,799 | |
| | | | | |
Cash Flows from Investing Activities: | | | | |
Issuance of convertible note receivable | | | (8,947 | ) |
Purchase of equity securities | | | (175,000 | ) |
Purchase of property and equipment | | | (37,522 | ) |
Net cash used in investing activities | | | (221,469 | ) |
| | | | | |
Net Change in Cash and Cash Equivalents | | | 80,330 | |
| | | | | |
Cash and Cash Equivalents: | | | | |
Beginning of period | | | 3,660,638 | |
| | | | | |
End of period | | $ | 3,740,968 | |
| | | | | |
Supplemental Cash Flow Information: | | | | |
Cash paid for interest | | $ | - | |
| | | | | |
Cash paid for income taxes | | $ | 139,256 | |
| | | | | |
Supplemental Disclosure of Non-Cash Investing Transaction: | | | | |
Conversion of convertible notes receivable to equity securities | | $ | 102,323 | |
The accompanying notes are in integral part of these consolidated statements.
INTRINSIX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| March 31, 2021 (Unaudited) |
Intrinsix Corp. and Subsidiaries (collectively, the Company), incorporated in 1985, are providers of advanced electronic design services to systems of original equipment manufacturers and semiconductor companies. The Company designs semiconductor devices, as well as the accompanying system-level hardware and software that comprise advanced electronic products.
On May 9, 2021, the Company entered into an agreement and plan of merger in which the Company is to be acquired through a merger with an initial purchase price of $33,000,000. The purchase price is subject to various adjustments for working capital as set forth in the agreement. The acquisition does not include certain assets and liabilities related to certain investments, convertible notes and equity securities which will be divested before closing of the transaction. On May 9, 2021, the merger agreement was fully executed.
2. | SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting standards and principles (U.S. GAAP) established by the Financial Accounting Standards Board (FASB). References to U.S. GAAP in these notes are to the FASB Accounting Standards Codification (ASC).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Intrinsix Corp. and its wholly-owned subsidiaries, Intrinsix Federal Systems Corp. and Intrinsix Silicon Solutions Corp. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company’s revenue contains a single performance obligation, revenue is recognized over time as the services are rendered, provided that no significant obligations remain and collection of the receivable is considered probable. For time-and-materials contracts, the performance obligation is satisfied, and revenue is recognized over time as the services are performed. Generally, contracts call for billings on a time-and-materials basis; however, in instances when a fixed-fee contract is signed, revenue is recognized over time, based on an input method of labor costs expended, relative to total expected labor costs to complete the contract.
None of the fixed-fee contracts entered into by the Company require retainage or holdbacks of any portion of the agreed-upon fee. In the event that costs to complete a given contract would exceed the related revenues, a loss would be recognized for those excess costs when such a loss is determined to have occurred.
INTRINSIX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| March 31, 2021 (Unaudited) |
2. | SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Revenue Recognition (Continued)
Contract Balances
The timing of revenue recognition, billings and cash collections, results in unbilled receivables (contract assets), customer advances and deposits and deferred revenue (contract liabilities) on the accompanying consolidated balance sheet. Amounts are billed as work progresses in accordance with agreed-upon contractual terms. Generally, the Company is able to receive certain billings in advance or deposits from customers before revenue is recognized, resulting in contract liabilities; these amounts are recorded as deferred revenue. The Company records billings that occur subsequent to revenue recognition as a contract asset that is presented as unbilled receivables.
The contract balances were as follows at March 31, 2021:
Unbilled accounts receivable | | $ | 370,954 | |
Deferred revenue | | $ | 1,041,437 | |
Cost of Revenues
Cost of revenues consists primarily of personnel and material costs related to the provision of services.
Cost to Obtain Contracts
The Company incurs commission fees as a result of obtaining contracts. As a practical expedient, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in selling, general and administrative expenses in the accompanying consolidated statement of income.
Research and Development Expenses
Research and development costs associated with the development of proprietary products and design methodologies are expensed as incurred. The Company has developed proprietary software tools for use by its consultants. The Company incurred $346,073 of research and development costs for the three months ended March 31, 2021.
Cash and Cash Equivalents
For the purpose of the consolidated statement of cash flows, management considers all highly liquid investments with an initial maturity of three months or less to be cash equivalents.
INTRINSIX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| March 31, 2021 (Unaudited) |
2. | SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Property and Equipment and Depreciation
Property and equipment consist of leasehold improvements, computer equipment, software costs, and furniture and fixtures, and are stated at cost, net of accumulated depreciation and amortization.
Renewals and betterments are capitalized, while repairs and maintenance are expensed as they are incurred. Depreciation is computed using the straight-line method over the following estimated useful lives:
Computer equipment and software (in years) | | | 3 | |
Furniture and fixtures (in years) | | 7 | - | 10 |
Leasehold improvements are depreciated using the straight-line method over the lesser of the estimated life of the improvement or the remaining life of the lease.
Prepaid and Accrued Expenses – Tool Maintenance
The Company purchases large quantities of Electronic Design Automation tools (tools) in advance of its projects. These tools are used to perform design services and internal research and development. The Company charges customers for the tools at a premium. When purchased, the tools are recorded as both a prepaid asset and accrued expense, as the Company has both a future benefit of the tools and future expense and cash obligation. The accrued tools are reduced as the Company receives invoices for the installment. Long-term accrued expenses represent payment commitments to tool vendors in excess of one year. Long-term prepaid tool maintenance represents tools the Company expects to use for future contracts in excess of one year. The accrued and prepaid tools are presented gross on the accompanying consolidated balance sheet as they did not meet the criteria for offsetting in accordance with ASC 210-20, Balance Sheet – Offsetting, as there are no contractual rights that exist for offsetting.
The total costs of the tools are allocated across the Company’s contracts once deployed to a customer and amortized on a straight-line basis over the life of the contracts. Any billings in excess of revenue recognized are recorded to deferred revenue.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of such assets may not be recoverable. If an indication of impairment is present, the Company compares the estimated undiscounted future cash flows to be generated by the asset to its carrying amount. Recoverability measurement and estimation of undiscounted cash flows are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If the undiscounted future cash flows are less than the carrying amount of the asset group, the Company records an impairment loss equal to the excess of the asset group’s carrying amount over its fair value. The fair value is determined based on valuation techniques, such as a comparison to fair values of similar assets or using a discounted cash flow analysis. There were no impairments recognized during the three months ended March 31, 2021.
INTRINSIX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| March 31, 2021 (Unaudited) |
2. | SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Stock-Based Compensation
The Company’s stock option plan allows for the grant of time-based stock options for a fixed number of shares of common stock to its employees, directors, and non-employee contractors, with an exercise price greater than or equal to the fair market value of its common stock at the date of the grant. The Company’s stock-based compensation arrangements vest either immediately or over periods of up to four years.
The Company also grants performance based stock options for a fixed number of shares of common stock to its directors and senior management, with an exercise price greater than or equal to the fair market value of its common stock at the date of the grant. These stock-based compensation arrangements vest based upon the occurrence of a specific milestone as outlined in the respective agreements.
Stock-based compensation to employees is measured at the grant date based upon the fair value of the award and is recognized as an expense over the employee’s requisite service period (generally, the vesting period of the grant).
The Company estimates the fair value of stock options using a Black-Scholes valuation model. Key inputs used to estimate the fair value of stock options include the estimated fair value of the underlying stock, the exercise price of the award, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate, and the Company’s expected annual dividend yield. The Company believes that the valuation technique and approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of its stock options granted. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.
Income Taxes
The Company accounts for income taxes according to the liability method. The differences between the consolidated financial statement amounts and the tax bases of assets and liabilities are determined annually. Deferred tax assets and liabilities are computed for those differences that will result in taxable or deductible amounts in future periods using currently enacted tax laws and rates that apply to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary, to reduce deferred tax assets to the amount that will more-likely-than-not be realized. Income tax expense is the tax payable or refundable for the current period, plus or minus the change, during the period in deferred income tax assets and liabilities.
The Company accounts for uncertainty in income taxes in accordance with ASC Topic 740, Income Taxes. This standard clarifies the accounting for uncertainty in tax positions and prescribes a recognition threshold and measurement attribute for the consolidated financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. Management of the Company has determined that there are no uncertain tax positions which qualify for either recognition or disclosure in the accompanying consolidated financial statements at March 31, 2021. The Company’s income tax returns are subject to examination by the appropriate taxing jurisdictions.
INTRINSIX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| March 31, 2021 (Unaudited) |
2. | SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Accounts Receivable
Accounts receivable is recorded at the invoiced amount and is non-interest bearing. The Company generally grants uncollateralized credit terms to its customers and maintains an allowance for doubtful accounts to reserve for potentially uncollectible receivables. Allowances are based on management’s judgment, which considers historical experience and specific knowledge of accounts where collectability may not be probable.
The Company makes provisions based on historical bad debt experience, a specific review of all significant outstanding invoices, and an assessment of general economic conditions. If the financial condition of a customer deteriorates, resulting in an impairment of its ability to make payments, additional allowances may be required. The allowance for doubtful accounts is $288,000 at March 31, 2021. A portion of accounts receivable is presented as long-term based on negotiated payment terms.
Investment in Non-Marketable Securities
The Company has a 40% ownership interest in Owl Autonomous Imaging, Inc. (OWL) and accounts for the investment under the equity method. Under the equity method, the Company records its proportionate share of the net income and net loss of OWL. At December 31, 2020, the carrying value of the Company’s 40% investment in OWL is zero as OWL has had losses since inception. The Company provided additional financing through Convertible Notes Receivable during 2020 and 2019.
Convertible Notes Receivable
Convertible notes receivable are stated at cost, less an allowance for amounts that may be uncollectable, based on the payors ability to meet their obligation. The balance at March 31, 2021, relates to principal and interest on notes receivable from OWL. The notes accrue interest at an annual rate of 7% and mature on July 31, 2021. The notes are convertible at a discount upon the occurrence of a future qualified financing as defined in the agreement. The amount due from OWL, including principal and accrued interest, totaled $498,845 as of March 31, 2021.
Investment in Equity Securities
In 2020, the Company entered into a convertible note receivable with a customer. The note accrued interest at 4% and matured at the earlier of twenty-four months or the customer’s next financing closing, at which the outstanding note receivable balance, including principal and accrued interest, will be automatically converted into common shares of the customer. In March 2021, the customer completed its Initial Public Offering on the NASDAQ stock exchange. As a result, the full balance outstanding was converted into common stock of the customer in the amount 39,989 shares. In March 2021, the Company purchased additional shares of the customer’s common stock.
Equity securities consist of the Company’s interest in securities held for investment purposes. These investments are carried at fair value. Realized gains and losses on equity securities are recorded in net income. Unrealized gains and losses on investments in equity securities are recorded in net income for the three months ended March 31, 2021.
INTRINSIX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| March 31, 2021 (Unaudited) |
2. | SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Fair Value Measurements
The Company follows the accounting and disclosure standards pertaining to ASC Topic, Fair Value Measurements, for qualifying assets and liabilities. Fair value is defined as the price that the Company would receive upon selling an asset or pay to settle a liability in an orderly transaction between market participants.
The Company uses a framework for measuring fair value that includes a hierarchy that categorizes and prioritizes the sources used to measure and disclose fair value. This hierarchy is broken down into three levels based on inputs that market participants would use in valuing the financial instruments based on market data obtained from sources independent of the Company. Inputs refer broadly to the assumptions that market participants would use in pricing the financial instrument, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the financial instrument developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset developed based on the best information available.
The three-tier hierarchy of inputs is summarized in three broad levels as follows:
Level 1 - Inputs that reflect unadjusted quoted prices in active markets for identical assets at the measurement date.
Level 2 - Inputs other than quoted prices that are observable for the asset either directly or indirectly, including inputs in markets that are not considered to be active.
Level 3 - Inputs that are unobservable and which require significant judgment or estimation.
An asset or liability's level within the framework is based upon the lowest level of any input that is significant to the fair value measurement (see Note 4).
Subsequent Events
Subsequent events were evaluated through May 27, 2021, which is the date the consolidated unaudited financial statements were available to be issued. See Notes 1, 7 and 8 for a subsequent event which met the criteria for disclosure to the consolidated financial statements.
Property and equipment consist of the following at March 31, 2021:
Computer equipment and software | | $ | 168,793 | |
Leasehold improvements | | | 17,795 | |
Furniture and fixtures | | | 1,147 | |
| | | | 187,735 | |
Less - accumulated depreciation | | | 74,190 | |
| | | $ | 113,545 | |
Depreciation expense for the three months ended March 31, 2021, was $12,063.
INTRINSIX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| March 31, 2021 (Unaudited) |
The fair value and amortized cost of the Company’s equity securities at March 31, 2021, are as follows:
| | | Amortized Cost | | | Fair Value | |
Equity Securities: | | | | | | | | |
Stock | | $ | 277,323 | | | $ | 415,439 | |
Unrealized gains and losses for the three months ended March 31, 2021, are reported within net income. Unrealized gains on equity securities for the three months ended March 31, 2021, was $138,116. All stock is valued using level 1 inputs.
Equity securities are not insured and are subject to on-going market fluctuations.
The table below sets forth the Company’s assets measured at fair value by level within the fair value hierarchy. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Description | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Stock | | $ | 415,439 | | | $ | - | | | $ | - | | | $ | 415,439 | |
The components of the income tax (benefit) expense for the three months ended March 31, 2021, are as follows:
Current: | | | | |
Federal | | $ | 92,572 | |
State | | | 37,309 | |
| | | | 129,881 | |
| | | | | |
Deferred: | | | | |
Federal | | | (3,000 | ) |
State | | | 41,000 | |
Change in valuation allowance | | | (48,000 | ) |
Total deferred | | | (10,000 | ) |
| | | | | |
Total provision for income taxes | | $ | 119,881 | |
The Company’s deferred tax assets and liabilities consist of the following at March 31, 2021:
Accrued expenses and other | | $ | 185,000 | |
Federal and state research credits | | | 114,000 | |
Depreciation | | | (31,000 | ) |
| | | | | |
Total | | | 268,000 | |
| | | | | |
Valuation allowance | | | (114,000 | ) |
| | | | | |
Net deferred tax assets | | $ | 154,000 | |
INTRINSIX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| March 31, 2021 (Unaudited) |
5. | INCOME TAXES (Continued) |
Utilization of the research credits may be subject to a substantial annual limitation or due to ownership change limitations that could occur in the future. Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. The deferred tax valuation allowance decreased by $48,000 for the three months ended March 31, 2021, as a result of actual or planned usage of tax assets.
6. | CONCENTRATION OF CREDIT RISK |
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, and accounts receivable. The Company maintains cash deposits with financial institutions that at times exceed applicable insurance limits. The Company reduces this risk by maintaining such deposits with high-quality financial institutions that management believes are creditworthy. With respect to accounts receivable, credit risk is mitigated by the Company’s ongoing credit evaluation of its customers’ financial condition.
Two customers accounted for approximately 66% of the Company’s revenues for the three months ended March 31, 2021. Two customers accounted for approximately 65% of the Company’s accounts receivable as of March 31, 2021.
The Company has a line of credit agreement with a bank with borrowings not-to-exceed $1,000,000, as amended in December 2019. Balances outstanding under the note bear interest at 3.75% as of March 31, 2021, and expires on October 31, 2021. As of March 31, 2021, no amounts were outstanding under this agreement. Subsequent to the quarter end, the Company terminated the line of credit with the bank.
8. | PAYCHECK PROTECTION PROGRAM LOAN |
The Company applied for and was awarded a forgivable loan of $1,406,250 from the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act) through a bank. The funds were used to pay certain payroll costs, including benefits, as well as rent and utilities during the covered period as defined in the CARES Act. A portion of these funds may be forgiven, as defined in the agreement, at the end of the covered period and the remainder of the funds will be due over a two-year period with interest at 1%. Any repayment will be deferred until the Small Business Administration notifies the lender of the amount of the loan that will be forgiven, provided that the Company submits the application for forgiveness within ten months after the completion of the covered period. The balance of the note, if not forgiven, plus interest, will be due in equal monthly payments through the maturity date as defined by the bank. There are no covenants with which to comply, and the note is not secured by any collateral as of March 31, 2021. There was no accrued interest on the note payable as of March 31, 2021, as it would be immaterial to the overall consolidated financial statements.
Subsequent to the period-end, in April 2021, the Company applied for and was awarded full forgiveness of the loan, including the principal balance and accrued interest. The balance of the loan has been classified as a long-term liability in the accompanying consolidated balance sheet as of March 31, 2021.
INTRINSIX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| March 31, 2021 (Unaudited) |
Common Stock
The holders of common stock are entitled to one vote for each share of common stock held and entitled to dividends, when and if declared by the Board.
10. | STOCK-BASED COMPENSATION |
The Company has a stock plan (the “Plan”) that provides for the issuance of options to purchase shares of common stock to employees and non-employees. The Plan provides for the issuance of up to 5,000,000 shares of common stock as of March 31, 2020. The exercise price of the options is established by the Board and cannot be less than the estimated fair value of the common shares as of the grant date. The options vest over service periods ranging from two to four years and have a term not-to-exceed ten years. As of March 31, 2021, there were 1,914,815 shares available for future issuance under the Plan.
The weighted-average assumptions used in valuing the stock options granted during the three months ended March 31, 2021, using the Black-Scholes option-pricing model and a discussion of the Company’s assumptions, are as follows:
| | | Time Based | | | Performance Based | |
Risk-free interest rate | | | 0.81 | % | | | 0.81 | % |
Expected life of options (in years) | | | 6.25 | | | | 3.75 | |
Dividend yield | | | - | % | | | - | % |
Expected volatility | | | 39 | % | | | 39 | % |
As there is not a public market for the Company’s common stock, the Company has determined the volatility for options granted based on a study of reported data for a guideline group of companies that issued options with substantially similar terms. The risk-free interest rate is based on a zero-coupon United States Treasury instrument with terms consistent with the expected life of the stock options. The Company has not paid, and does not anticipate paying, cash dividends on shares of common stock; therefore, the expected dividend yield is assumed to be zero. Forfeitures are accounted for when they occur.
The Company utilizes the simplified method for estimating the expected term, which is the period of time that the options granted are expected to remain outstanding.
In determining the exercise prices for options granted, the Board has considered the fair value of the common stock as of the measurement date. The fair value of the common stock has been determined by the Board after considering a broad range of factors, including the results of various valuation techniques, the illiquid nature of an investment in the Company’s common stock, the Company’s historical financial performance and financial position, the Company’s future prospects, and transactions of comparable companies.
INTRINSIX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| March 31, 2021 (Unaudited) |
10. | STOCK-BASED COMPENSATION (Continued) |
A summary of options issued under the Plan is below:
| | | Options | | | Weighted- Average Exercise Price | | | Weighted- Average Remaining Contractual Life (in Years) | |
Outstanding, December 31, 2020 | | | 2,871,272 | | | | 0.11 | | | | 6.86 | |
| | | | | | | | | | | | | |
Granted | | | 104,000 | | | | 0.14 | | | | | |
Exercised | | | - | | | | - | | | | | |
Forfeited | | - | | | | - | | | | | |
| | | | | | | | | | | | |
Outstanding, March 31, 2021 | | | 2,975,272 | | | | 0.12 | | | | 6.57 | |
| | | | | | | | | | | | | |
Exercisable at March 31, 2021 | | | 1,512,147 | | | | 0.12 | | | | 6.57 | |
| | | | | | | | | | | | | |
Vested and expected to vest at March 31, 2021 | | | 2,975,272 | | | | 0.12 | | | | 6.57 | |
The Company recorded stock-based compensation expense of $1,910 for the three months ended March 31, 2021, which is included in selling, general and administrative expense in the accompanying consolidated statement of income. As of March 31, 2021, there was approximately $59,949 of total unrecognized compensation cost related to non-vested share-based compensation arrangements. This cost is expected to be recognized over a weighted-average period of 1.93 years.
During 2021, the Company issued 100,000 performance based options with a conditional vesting upon the closing of a sale transaction. In total there are 1,300,000 performance based options outstanding at March 31, 2021, with a performance condition related the sale. The accounting for the performance based options will be recorded in the period the transaction occurs.
11. | RETIREMENT SAVINGS PLAN |
The Company participates in a retirement savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) covering all employees. Under the provisions of the Plan, employees may contribute 1% to 100% of their compensation within certain limitations. The Company may make matching contributions equal to a discretionary percentage as determined by the Company, annually. Participants are immediately vested in their contributions plus actual earnings thereon. Vesting in the Company’s contribution portion of their accounts is based on years of continuous service. A participant is 100% vested after two years of credited service. During the three months ended March 31, 2021, the Company did not contribute to the Plan.
The Company leases its headquarters in Massachusetts under a non-cancelable operating lease that expires in 2022. This lease generally provides for renewal options and escalation increases, and the Company recognizes rent expense under such arrangements on a straight-line basis.
INTRINSIX CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| March 31, 2021 (Unaudited) |
12. | OPERATING LEASE (Continued) |
Future minimum payments under the lease agreement are as follows for the calendar years ended December 31:
2021 | | $ | 247,067 | |
2022 | | | 110,451 | |
| | | | | |
Total | | $ | 357,518 | |
Total rent expense was $80,340 for the three months ended March 31, 2021.
The Company provides financings for employees to purchase stock or exercise stock options. In accordance with ASC 718-10, Stock Compensation, these loans are considered non-recourse as they are structured in a way that the loans are collateralized only by the stock purchased and accrue interest at a rate of 3% per annum. In accordance with the topic, these loans are classified as additional paid-in capital. Total outstanding loans collateralized by stock totaled $82,364 at March 31, 2021, and are included in additional paid-in capital in the accompanying consolidated statement of changes in stockholders’ equity and consolidated balance sheet.
The Company provided OWL convertible notes (see Note 2) for startup and operating costs. The notes accrue interest at 7% per annum and mature in July 2021. At maturity, the notes have a convertible feature in which the outstanding principal balance and any accrued but unpaid interest will be converted into shares of financing securities. The amount due from OWL, including principal and accrued interest, totaled $498,845 as of March 31, 2021.
The Company also has trade receivables due from OWL. There was $46,389 outstanding from OWL as of March 31, 2021, which is included in accounts receivable in the accompanying consolidated balance sheet. The Company recognized revenue from OWL of $50,710 for the three months ended March 31, 2021.
The Company entered into a convertible note receivable with a customer in 2020 which converted into equity in March 2021 (see Note 2). The Company now holds common stock in this customer at March 31, 2021. Trade receivables outstanding from this customer were $88,500 at March 31, 2021. Revenue recognized from this customer totaled $194,932 for the three months ended March 31, 2021.
In March 2020, the COVID-19 pandemic emerged in the United States triggering widespread government mandated and voluntary business closures, which in turn led to substantial interruptions in financial markets, employment and the economy as a whole. Though the potential financial effects cannot be reasonably estimated at this time, these circumstances may have adverse effects on the Company, its operations and future financial statements.
Management of the Company is monitoring these events closely to assess the financial impact of the situation and determine appropriate courses of action. As of the date of this report, the Company is unable to accurately predict how COVID-19 will affect the results of its operations because the disease’s severity and the duration of the outbreak are uncertain.
