Exhibit 99.3
| Protonex Technology Corporation |
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| Consolidated Financial Statements |
| As of September 30, 2014 and 2013 and for the |
The report accompanying these financial statements was issued by
BDO USA, LLP, a Delaware limited liability partnership and the U.S. member of
BDO International Limited, a UK company limited by guarantee.
Protonex Technology Corporation
Consolidated Financial Statements
As of September 30, 2014 and 2013 and for the Years Ended
September 30, 2014, 2013 and 2012
Protonex Technology Corporation
Contents
Independent Auditor’s Report | 3-4 |
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Consolidated Financial Statements: |
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Balance Sheets | 6 |
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Statements of Operations | 7 |
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Statements of Changes in Stockholders’ Equity | 8 |
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Statements of Cash Flows | 9 |
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Notes to Consolidated Financial Statements | 10-24 |
Independent Auditor’s Report
Board of Directors
Protonex Technology Corporation
Boston, Massachusetts
We have audited the accompanying consolidated financial statements of Protonex Technology Corporation and its subsidiary, which comprise the consolidated balance sheets as of September 30, 2014 and 2013, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2014, 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 consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
BDO is the brand name for the BDO network and for each of the BDO Member Firms.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Protonex Technology Corporation and its subsidiary as of September 30, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2014 in accordance with accounting principles generally accepted in the United States of America.
| /s/ BDO USA, LLP |
December 8, 2014 (except with respect to the matter discussed in Note 13, as to which the date is June 29, 2015)
Boston, MA
Consolidated Financial Statements
Protonex Technology Corporation
Consolidated Balance Sheets
September 30, |
| 2014 |
| 2013 |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
| $ | 1,593,483 |
| $ | 959,340 |
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Accounts receivable, no allowance for doubtful accounts at September 30, 2014 and 2013 |
| 2,438,900 |
| 1,637,139 |
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Inventory, net |
| 1,361,654 |
| 1,333,221 |
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Prepaid expenses and other current assets |
| 173,229 |
| 178,129 |
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Total Current Assets |
| 5,567,266 |
| 4,107,829 |
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Property and equipment, net of accumulated depreciation and amortization amortization of $3,653,987 and $3,421,497 at September 30, 2014 and 2013, respectively |
| 401,244 |
| 579,349 |
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Goodwill |
| 7,816,990 |
| 7,816,990 |
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Intangible assets, net of accumulated amortization of $731,550 and $714,954 at September 30, 2014 and 2013, respectively |
| 7,450 |
| 24,046 |
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Other assets |
| 91,198 |
| 127,163 |
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Total Assets |
| $ | 13,884,148 |
| $ | 12,655,377 |
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Liabilities and Stockholders’ Equity |
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Current Liabilities: |
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Accounts payable (includes related party payables of $1,854 and $0 at September 30, 2014 and 2013, respectively) |
| $ | 1,602,143 |
| $ | 1,108,531 |
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Accrued expenses |
| 649,123 |
| 535,194 |
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Deferred revenues |
| 781,328 |
| 302,691 |
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Current maturities of capital lease obligations |
| 22,126 |
| 41,198 |
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Total Current Liabilities |
| 3,054,720 |
| 1,987,614 |
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Capital Lease Obligations, net of current maturities |
| 23,362 |
| 47,115 |
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Deferred Tax Liability |
| 1,528,261 |
| 1,325,137 |
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Long-Term Debt |
| 2,091,484 |
| 1,421,161 |
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Total Liabilities |
| 6,697,827 |
| 4,781,027 |
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Commitments and Contingencies (Note 8) |
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Stockholders’ Equity: |
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Preferred Stock, $0.005 par value; 50,000,000 shares authorized; no shares issued or outstanding |
| — |
| — |
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Common stock, $0.005 par value; 120,000,000 shares authorized; 64,108,788 and 63,995,188 shares issued and outstanding at September 30, 2014 and 2013, respectively |
| 320,544 |
| 319,976 |
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Additional paid-in capital |
| 68,960,329 |
| 68,527,606 |
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Accumulated deficit |
| (62,094,552 | ) | (60,973,232 | ) | ||
Total Stockholders’ Equity |
| 7,186,321 |
| 7,874,350 |
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Total Liabilities and Stockholders’ Equity |
| $ | 13,884,148 |
| $ | 12,655,377 |
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See accompanying notes to consolidated financial statements.
Protonex Technology Corporation
Consolidated Statements of Operations
Years ended September 30, |
| 2014 |
| 2013 |
| 2012 |
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Revenues: |
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Product |
| $ | 7,514,970 |
| $ | 7,820,696 |
| $ | 4,068,005 |
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Contract |
| 6,540,369 |
| 5,158,426 |
| 6,055,027 |
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Contra-revenue |
| (246,714 | ) | — |
| — |
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Total revenues |
| 13,808,625 |
| 12,979,122 |
| 10,123,032 |
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Cost of Revenues: |
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Product |
| 5,075,449 |
| 4,950,592 |
| 2,618,380 |
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Contract |
| 3,212,228 |
| 2,054,545 |
| 2,647,808 |
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Total cost of revenues |
| 8,287,677 |
| 7,005,137 |
| 5,266,188 |
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Gross Profit |
| 5,520,948 |
| 5,973,985 |
| 4,856,844 |
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Operating Expenses: |
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Research and development |
| 3,630,148 |
| 4,909,493 |
| 4,665,540 |
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Sales and marketing |
| 1,183,019 |
| 1,170,501 |
| 1,034,837 |
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General and administrative |
| 1,334,233 |
| 1,298,055 |
| 1,369,897 |
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Total operating expenses |
| 6,147,400 |
| 7,378,049 |
| 7,070,274 |
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Loss From Operations |
| (626,452 | ) | (1,404,064 | ) | (2,213,430 | ) | |||
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Other Income (expense): |
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Interest expense |
| (329,882 | ) | (191,182 | ) | (17,357 | ) | |||
Miscellaneous income, net |
| 38,138 |
| 67,467 |
| 423,859 |
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Total other expense, net |
| (291,744 | ) | (123,715 | ) | 406,502 |
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Loss before provision for income taxes |
| (918,196 | ) | (1,527,779 | ) | (1,806,928 | ) | |||
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Provision for income taxes |
| 203,124 |
| 220,417 |
| 206,267 |
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Net Loss |
| $ | (1,121,320 | ) | $ | (1,748,196 | ) | $ | (2,013,195 | ) |
See accompanying notes to consolidated financial statements.
Protonex Technology Corporation
Consolidated Statements of Changes in Stockholders’ Equity
Years ended September 30, 2014, 2013 and |
| Common Stock |
| Additional |
| Accumulated |
| Total |
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2012 |
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity |
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Balance, September 30, 2011 |
| 63,979,188 |
| $ | 319,896 |
| $ | 67,647,648 |
| $ | (57,211,841 | ) | $ | 10,755,703 |
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Stock-based compensation |
| — |
| — |
| 424,537 |
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| 424,537 |
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Net loss |
| — |
| — |
| — |
| (2,013,195 | ) | (2,013,195 | ) | ||||
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Balance, September 30, 2012 |
| 63,979,188 |
| 319,896 |
| 68,072,185 |
| (59,225,036 | ) | 9,167,045 |
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Stock option exercises |
| 16,000 |
| 80 |
| 3,280 |
| — |
| 3,360 |
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Stock-based compensation |
| — |
| — |
| 278,792 |
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| 278,792 |
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Fair value of warrants |
| — |
| — |
| 173,349 |
| — |
| 173,349 |
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Net loss |
| — |
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| — |
| (1,748,196 | ) | (1,748,196 | ) | ||||
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Balance, September 30, 2013 |
| 63,995,188 |
| 319,976 |
| 68,527,606 |
| (60,973,232 | ) | 7,874,350 |
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Stock option exercises |
| 113,600 |
| 568 |
| 7,952 |
| — |
| 8,520 |
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Stock-based compensation |
| — |
| — |
| 178,057 |
| — |
| 178,057 |
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Fair value of warrants |
| — |
| — |
| 246,714 |
| — |
| 246,714 |
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Net loss |
| — |
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| (1,121,320 | ) | (1,121,320 | ) | ||||
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Balance, September 30, 2014 |
| 64,108,788 |
| $ | 320,544 |
| $ | 68,960,329 |
| $ | (62,094,552 | ) | $ | 7,186,321 |
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See accompanying notes to consolidated financial statements.
Protonex Technology Corporation
Consolidated Statements of Cash Flows
Years ended September 30, |
| 2014 |
| 2013 |
| 2012 |
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Cash Flows From Operating Activities: |
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Net loss |
| $ | (1,121,320 | ) | $ | (1,748,196 | ) | $ | (2,013,195 | ) |
Reconciliation of net loss to net cash provided by (used in operating activities: |
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Depreciation and amortization of property and equipment |
| 232,490 |
| 304,130 |
| 484,919 |
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Amortization of intangible assets |
| 16,596 |
| 71,263 |
| 125,929 |
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Non-cash contra revenue related to the fair value of warrants issued to a customer |
| 246,714 |
| — |
| — |
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Non-cash interest expense |
| 108,404 |
| 94,510 |
| — |
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Deferred tax provision |
| 203,124 |
| 220,000 |
| 206,117 |
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Stock-based compensation |
| 178,057 |
| 278,792 |
| 424,537 |
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Amortization of deferred financing costs |
| 97,884 |
| 27,276 |
| — |
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Changes in operating assets and liabilities: |
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Accounts receivable |
| (801,761 | ) | (185,204 | ) | (54,089 | ) | |||
Inventory, net |
| (28,433 | ) | (98,192 | ) | (532,480 | ) | |||
Prepaid expenses and other current assets |
| 4,900 |
| 8,278 |
| (36,885 | ) | |||
Accounts payable |
| 493,612 |
| (143,094 | ) | 777,952 |
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Accrued expenses |
| 113,929 |
| (154,458 | ) | 219,170 |
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Deferred revenues |
| 478,637 |
| (90,224 | ) | 352,915 |
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Net cash provided by (used in) operating activities |
| 222,833 |
| (1,415,119 | ) | (45,110 | ) | |||
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Cash Flows From Investing Activities: |
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Additions to property and equipment |
| (54,385 | ) | (60,085 | ) | (213,688 | ) | |||
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Net cash used in investing activities |
| (54,385 | ) | (60,085 | ) | (213,688 | ) | |||
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Cash Flows From Financing Activities: |
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Capital lease principal payments |
| (42,825 | ) | (80,599 | ) | (91,533 | ) | |||
Proceeds from long-term debt |
| 500,000 |
| 1,500,000 |
| — |
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Cash paid for deferred financing costs |
| — |
| (127,174 | ) | — |
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Proceeds from stock option exercises |
| 8,520 |
| 3,360 |
| — |
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Net cash provided by financing activities |
| 465,695 |
| 1,295,587 |
| (91,533 | ) | |||
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Net Increase (Decrease) in Cash and Cash Equivalents |
| 634,143 |
| (179,617 | ) | (350,331 | ) | |||
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Cash and Cash Equivalents, Beginning of Year |
| 959,340 |
| 1,138,957 |
| 1,489,288 |
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Cash and Cash Equivalents, End of Year |
| $ | 1,593,483 |
| $ | 959,340 |
| $ | 1,138,957 |
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Supplemental Cash Flow Information: |
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Interest paid |
| $ | 113,255 |
| $ | 59,870 |
| $ | 14,726 |
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Non-cash investing and financing activities: |
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Fair value of warrants issued in connection with long-term debt |
| $ | — |
| $ | 173,349 |
| $ | — |
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Equipment acquired under capital leases |
| $ | — |
| $ | — |
| $ | 162,257 |
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See accompanying notes to consolidated financial statements.
Protonex Technology Corporation
Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation
Organization
Protonex Technology Corporation (the “Company”) was incorporated in October 2000, and performs engineering and development on fuel cell technology under cost sharing, cost-reimbursement (cost-type), fixed price and cost plus contracts. In addition, the Company assembles and sells related products. The Company is headquartered in Southborough, Massachusetts, and its primary market has been government agencies of the United States of America.
These consolidated financial statements have been prepared on a going concern basis. As such, they anticipate the realization of assets and the liquidation of liabilities in the normal course of business. The Company incurred net losses of $1,121,320, $1,748,196 and $2,013,195 for the years ended September 30, 2014, 2013 and 2012, respectively, and has an accumulated deficit of $62,094,552 as of September 30, 2014. The Company has funded these losses principally through equity financings, government contracts and a growth line of credit. Management believes that its government contract business, product sales growth, partnering with others and cash on hand, will be adequate to fund operations for at least twelve months from the date these financial statements were issued.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company 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 financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and judgments on historical experience and on various other factors that are considered reasonable under the circumstances. Actual results could differ materially from these estimates.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Protonex Technology, LLC. All material intercompany transactions and balances have been eliminated in consolidation.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, capital leases, accrued liabilities and long-term debt approximate their fair values due to the short-term nature of these instruments or their market rates of interest.
Protonex Technology Corporation
Notes to Consolidated Financial Statements
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Similarly, all money market accounts are considered cash equivalents.
The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits, and in high quality, short-term, highly liquid investment securities. At September 30, 2014, $1,283,990 of cash equivalents exceed federally insured limits. Of the cash equivalents, $95,195 is maintained in a money-market fund that invests primarily in US Treasury Bills and the remaining balance is in a savings account. The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risk.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. Management provides for probable uncollectible amounts through a charge to operations and a credit to a valuation allowance based on its assessment. Based on experience, the Company does not record a reserve against the receivables from the agencies/groups of the United States Government. As of September 30, 2014 and 2013, 10% and 54%, respectively, of accounts receivable were from various government agencies. Government agencies and customers with government agencies as end user customers account for 93% of total accounts receivable at September 30, 2014.
Inventories and Related Allowance for Obsolete and Excess Inventory
Inventories consist primarily of raw materials and are recorded at the lower of cost or market. Cost is determined on a first-in, first-out basis. Reserves are recorded for slow moving, obsolete, non-sellable or unusable items and were approximately $164,000 and $145,000 at September 30, 2014 and 2013, respectively.
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the straight-line method over their expected useful lives. Construction in progress represents fixed assets not yet placed in service, that at completion are transferred to the appropriate fixed asset category and depreciated on a straight-line basis over estimated useful lives of three - five years or remaining lease terms.
The current useful lives are:
Assets |
| Estimated Useful Lives |
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Furniture, fixtures and equipment |
| 5 years |
Computer hardware and software |
| 3 - 5 years |
Equipment under capital leases |
| 5 years |
Leasehold improvements |
| Lesser of useful life or remaining lease term |
Protonex Technology Corporation
Notes to Consolidated Financial Statements
Goodwill
The Company evaluates the recoverability of goodwill and intangible assets with indefinite useful lives as of the end of each fiscal year, or more frequently if events or changes in circumstances, such as a decline in sales, operations, or cash flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. The Company operates as a single reporting unit. In 2012, the Company adopted Accounting Standards Update (ASU) No. 2011-08, Intangibles—Goodwill and Other (Topic 350), Testing Goodwill for Impairment, that includes the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the two-step impairment test as required in Accounting Standards Codification (ASC) 350, Intangibles - Goodwill and Other. At September 30, 2014, the Company performed a qualitative goodwill impairment analysis. The September 30, 2014 impairment analysis included an assessment of certain qualitative factors including, but not limited to, overall financial performance, and macroeconomic and industry conditions. The Company considered the qualitative factors and weighed the evidence obtained, and determined that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount. Although the Company believes the factors considered in the impairment analysis are reasonable, significant changes in any one of the assumptions used could produce a different result.
Impairment of Long-Lived Tangible and Intangible Assets
The Company examines on a periodic basis the carrying value of its long-lived tangible and intangible assets to determine whether there are any impairment losses. If indicators of impairment were present with respect to long-lived tangible and intangible assets used in operations and undiscounted future cash flows were not expected to be sufficient to recover the assets’ carrying amount, an impairment loss would be charged to expense in the period the impairment is identified based on the fair value of the asset less any costs of disposal. The Company believes no impairment exists as of September 30, 2014.
Revenue Recognition and Deferred Revenues
Revenues from cost sharing, cost-reimbursement (cost-type), fixed price and cost plus contracts with various government groups and agencies are recognized when the related costs are incurred and related services are performed. Contract costs primarily include direct labor, consultants, sub-contractors, materials, and other specific administrative costs related to the project. Deferred revenue represents amounts received in advance of services being performed and or delivery of products. Unbilled accounts receivable represents revenue recognized under the contracts in advance of billings.
Revenues from research and development contracts are recognized proportionally as costs are incurred and compared to the estimated total research and development costs for each contract, whether billed or unbilled. In many cases, the Company is reimbursed only a portion of the costs incurred or to be incurred on the contract. Revenues from government funded research, development and demonstration programs are generally multi-year, cost reimbursement and/or cost-shared type contracts or cooperative agreements. The Company is reimbursed for reasonable and allocable costs up to the reimbursement limits set by the contract agreements.
Protonex Technology Corporation
Notes to Consolidated Financial Statements
Revenues from product sales are recognized upon the delivery of units to customers, provided there is evidence that an arrangement exists, the fee is fixed or determinable, and collectability of the related receivable is probable. If there are acceptance provisions, revenue is recognized upon acceptance. Deferred revenue represents amounts received from customers in advance of shipments.
For the fiscal years ended September 30, 2014, 2013 and 2012, the Company had government and government-sponsored contract revenues of $6,329,386, $4,775,091 and $5,599,071 which represented approximately 97%, 93% and 93%, respectively, of total contract services revenue.
For the fiscal years ended September 30, 2014, 2013 and 2012, the Company had government and government-sponsored product revenues of $7,281,127, $7,207,107 and $3,755,242, respectively, which represented approximately 97%, 92% and 92%, respectively, of total product revenue.
In September 2013, the Company signed a development agreement related to the (Solid Oxide Fuel Cell) SOFC platform that was amended in June 2014, with additional deliverables and funding. The agreement includes the issuance of 1,132,200 warrants to purchase common stock that will be earned as milestone deliverables are met. The warrants will be issued upon customer payment for completion of milestones, and will be recorded as contra revenue based on their fair value on the date they are earned. As of September 30, 2013, no milestones were completed and no shares had vested. As of September 30, 2014, eight milestone payments were received and 841,200 shares had vested. The warrants have an exercise price of $0.01 per share and expire on September 30, 2020. During the year ended September 30, 2014, the Company recognized $246,714 as contra-revenue related to the fair value of the vested shares. (See Note 6).
Cost of Revenues
The Company had four significant suppliers in fiscal 2014, 2013 and 2012, which accounted for 76%, 64% and 66% of total purchases, respectively. Although only a limited number of suppliers have been used, other suppliers are available.
Income Taxes
Deferred income taxes have been recorded to recognize the estimated future tax consequences attributable to the cumulative temporary differences between financial statement and tax bases of assets and liabilities.
Deferred income tax assets and liabilities are computed for those differences that have a future tax consequence using currently enacted laws and rates that apply to periods in which they are expected to affect taxable income. Income tax expense is the current tax payable or refundable for the period plus or minus the net change in deferred tax asset and liability accounts. Valuation allowances are established, if necessary, to reduce a net deferred tax asset to the amount that will more likely than not be realized.
Research and Development Expense
Costs incurred in connection with research and development activities are expensed as incurred. These costs consist of direct and indirect costs associated with specific projects as well as fees paid to various third-party entities that perform certain research on behalf of the Company.
Protonex Technology Corporation
Notes to Consolidated Financial Statements
Warranty Expense
The Company offers basic limited parts and labor warranty on its hardware products. The basic warranty for power manager and cable products is two years from the date of purchase. Fuel cell products have a one year warranty from the date of purchase. The Company provides currently for the estimated costs that may be incurred under its basic limited product warranties at the time the related product revenue is recognized. Factors considered in determining the appropriate accruals for product warranty obligations include: historical and projected warranty claim rates, historical and projected cost-per-claim, and knowledge of specific product failures during development. The Company assesses the adequacy of its pre-existing warranty liabilities and adjust the amounts as necessary based on actual experience and changes in future estimates.
Stock-Based Compensation
The Company has a 2003 and a 2013 stock-based employee compensation plan. The Company follows the fair value recognition provisions of ASC No. 718, Stock Compensation (“ASC 718”). Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the service period.
The following table presents stock-based compensation expenses included in the Company’s Consolidated Statements of Operations:
Years ended September 30, |
| 2014 |
| 2013 |
| 2012 |
| |||
|
|
|
|
|
|
|
| |||
Research and development |
| $ | 63,811 |
| $ | 207,790 |
| $ | 286,906 |
|
Sales and marketing |
| 15,219 |
| 11,238 |
| 9,737 |
| |||
General and administrative |
| 99,027 |
| 59,764 |
| 127,894 |
| |||
|
|
|
|
|
|
|
| |||
Total Stock-Based Compensation Expense |
| $ | 178,057 |
| $ | 278,792 |
| $ | 424,537 |
|
At September 30, 2014, there is approximately $86,000 of unamortized stock-based compensation costs. That cost is expected to be recognized as expense over a weighted-average period of 1.5 years.
ASC 718 requires the benefits of tax deductions in excess of the compensation cost recognized for those options to be classified as financing cash inflows rather than operating cash inflows, on a prospective basis. The Company has fully reserved for any deferred tax benefits due to the uncertainty of future operating results and its ability to utilize the future tax benefit. As such, there is no effect on the Company’s Consolidated Statements of Cash Flows.
Protonex Technology Corporation
Notes to Consolidated Financial Statements
The fair value of each stock option was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
Years ended September 30, |
| 2014 |
| 2013 |
| 2012 |
|
|
|
|
|
|
|
|
|
Expected volatility |
| 79.0% |
| 79.0% |
| 79.0% |
|
Expected dividend yield |
| 0.0% |
| 0.0% |
| 0.0% |
|
Expected risk-free interest rate |
| 0.81% - 1.39% |
| 0.37% - 1.49% |
| .62% - .75% |
|
Expected term of options |
| 4.47 years |
| 4.47 years |
| 4.47 years |
|
Maximum contractual term |
| 10 years |
| 10 years |
| 10 years |
|
Estimated forfeitures |
| 20.0% |
| 21.0% |
| 20.0% |
|
Stock Price
Options issued during fiscal 2014, 2013 and 2012, were valued based on an independent valuation of the Company’s stock price.
Expected Volatility
Due to having minimal publicly traded experience of its stock, the Company utilized an expected volatility based on publicly available information as to the volatility of comparable traded companies in similar industries, development and size.
Expected Dividend Yield
The Company does not intend to pay dividends on its common stock for the foreseeable future and, accordingly, uses a dividend yield of zero in the Black-Scholes pricing model.
Expected Risk-Free Interest Rate
The risk-free interest rates for stock options are based on the US Treasury yield curve in effect at the time of grant for maturities, similar to the expected holding period of the stock options.
Expected Term
The expected term of stock options granted is generally based on historical data and represents the period of time that the stock options granted are expected to be outstanding. The Company has had very limited stock option exercise experience to date, making the Company’s determination of the “expected term” judgmental. Accordingly, the Company has based the expected term on publicly available information for companies in similar industries development and size.
Estimated Forfeitures
The Company has estimated employee stock option forfeitures as required under ASC 718 for two groups of stock options: (a) immediately vested options and (b) all others and is based on the Company’s limited experience. Estimated forfeitures are adjusted to actual forfeiture experience.
Protonex Technology Corporation
Notes to Consolidated Financial Statements
3. Property and Equipment
Property and equipment consists of the following:
September 30, |
| 2014 |
| 2013 |
| ||
|
|
|
|
|
| ||
Furniture, fixtures and equipment |
| $ | 2,401,409 |
| $ | 2,361,248 |
|
Computer hardware and software |
| 748,281 |
| 733,936 |
| ||
Leasehold improvements |
| 905,541 |
| 905,541 |
| ||
Construction in progress |
| — |
| 121 |
| ||
|
|
|
|
|
| ||
|
| 4,055,231 |
| 4,000,846 |
| ||
|
|
|
|
|
| ||
Less - accumulated depreciation and amortization |
| 3,653,987 |
| 3,421,497 |
| ||
|
|
|
|
|
| ||
Property and Equipment, net |
| $ | 401,244 |
| $ | 579,349 |
|
Included in property and equipment at September 30, 2014 is equipment under capital leases with a cost of $307,074 and net book value of $103,609.
Depreciation and amortization expense amounted to $232,490, $304,130 and $484,919 for the years ended September 30, 2014, 2013 and 2012, respectively.
4. Accrued Expenses
Accrued expenses consist of the following:
September 30, |
| 2014 |
| 2013 |
| ||
|
|
|
|
|
| ||
Payroll and related |
| $ | 233,029 |
| $ | 131,944 |
|
Vacation |
| 166,486 |
| 148,267 |
| ||
Legal and accounting |
| 65,210 |
| 85,860 |
| ||
Product warranty |
| 68,909 |
| 49,923 |
| ||
Other expenses |
| 115,489 |
| 119,200 |
| ||
|
|
|
|
|
| ||
Accrued Expenses |
| $ | 649,123 |
| $ | 535,194 |
|
Protonex Technology Corporation
Notes to Consolidated Financial Statements
5. Intangible Assets
The following is a summary of intangible assets:
September 30, 2014 |
| Gross |
| Accumulated |
| Net |
| Useful Life |
| |||
|
|
|
|
|
|
|
|
|
| |||
Core technology |
| $ | 555,000 |
| $ | 555,000 |
| $ | — |
| 6 years |
|
Other intangible assets |
| 184,000 |
| 176,550 |
| 7,450 |
| 5-6 years |
| |||
|
|
|
|
|
|
|
|
|
| |||
Total Intangible Assets |
| $ | 739,000 |
| $ | 731,550 |
| $ | 7,450 |
|
|
|
September 30, 2013 |
| Gross |
| Accumulated |
| Net |
| Useful Life |
| |||
|
|
|
|
|
|
|
|
|
| |||
Core technology |
| $ | 555,000 |
| $ | 555,000 |
| $ | — |
| 6 years |
|
Other intangible assets |
| 184,000 |
| 159,954 |
| 24,046 |
| 5-6 years |
| |||
|
|
|
|
|
|
|
|
|
| |||
Total Intangible Assets |
| $ | 739,000 |
| $ | 714,954 |
| $ | 24,046 |
|
|
|
The Company amortizes intangible assets using the straight-line method over the above estimated useful lives of the respective intangible asset. The Company considers the straight-line method to be appropriate, as it approximates the pattern in which economic benefits are consumed in circumstances where such patterns can be reliably determined. During the years ended September 30, 2014, 2013 and 2012, amortization expense of intangible assets amounted to $16,596, $71,263 and $125,929 and is included in research and development expenses in the accompanying consolidated statements of operations. The remaining amount of $7,450 will be fully amortized in the fiscal year ending September 30, 2015.
6. Stockholders’ Equity
Stock Options
In June 2013, the Company’s shareholders approved the 2013 Stock Incentive Plan, which allows for the granting of incentive stock options (ISOs) and non-qualified stock options, stock appreciation rights, performance shares and restricted stock to employees, officers, Directors, advisors and consultants of the Company. The number of shares of the Company’s common stock that may be issued under the plan is 7,000,000 shares, and as of September 30, 2014, 6,092,000 shares remain available for future grant. To date, the Company has issued ISOs and non-qualified stock options under the 2013 Stock Incentive Plan, and has not issued any stock appreciation rights, performance shares or restricted stock.
In October 2003, the Company’s Board of Directors approved the 2003 Stock Incentive Plan, which allows for the granting of incentive stock options (ISOs) and non-qualified stock options, stock appreciation rights, performance shares and restricted stock to employees, officers, Directors, advisors and consultants of the Company. The 2003 Stock Incentive Plan expired in October 2013. As of September 30, 2014, 0 shares remain available for future grant. The Company has issued
Protonex Technology Corporation
Notes to Consolidated Financial Statements
ISOs and non-qualified stock options under the 2003 Stock Incentive Plan, and has not issued any stock appreciation rights, performance shares or restricted stock.
In July 2009, the Board of Directors approved a provision in all existing and future stock option grants issued to employees and to future grants issued to Non-Executive Directors which provides that in the event of a future change in control of Protonex, the vesting of all outstanding stock options would be accelerated such that 50% of all unvested options would become vested upon the change of control. The acceleration of vesting would not shorten the overall vesting term of the options, but rather would provide that 50% of the options that would otherwise vest periodically over the entire vesting term would vest immediately upon the change in control.
A summary of the status of all of the Company’s stock options for the years ended September 30, 2014, 2013 and 2012 is presented below:
|
| Number |
| Weighted- |
| Weighted |
| |
Outstanding - September 30, 2011 |
| 8,312,089 |
| $ | 0.19 |
| 8.63 |
|
Granted |
| 354,000 |
| 0.26 |
|
|
| |
Forfeited/cancelled |
| (352,943 | ) | 0.18 |
|
|
| |
|
|
|
|
|
|
|
| |
Outstanding - September 30, 2012 |
| 8,313,146 |
| $ | 0.19 |
| 7.61 |
|
Granted |
| 229,000 |
| 0.35 |
|
|
| |
Exercised |
| (16,000 | ) | 0.21 |
|
|
| |
Forfeited/cancelled |
| (252,509 | ) | 0.23 |
|
|
| |
Outstanding - September 30, 2013 |
| 8,273,637 |
| 0.19 |
| 6.67 |
| |
Granted |
| 908,000 |
| 0.30 |
|
|
| |
Exercised |
| (113,600 | ) | 0.08 |
|
|
| |
Forfeited/cancelled |
| (318,446 | ) | 0.19 |
|
|
| |
Outstanding - September 30, 2014 |
| 8,749,591 |
| $ | 0.21 |
| 6.16 |
|
|
|
|
|
|
|
|
| |
Exercisable - September 30, 2014 |
| 8,209,477 |
| $ | 0.20 |
| 5.98 |
|
Exercisable - September 30, 2013 |
| 7,320,757 |
| $ | 0.19 |
| 6.50 |
|
Exercisable - September 30, 2012 |
| 5,314,971 |
| $ | 0.19 |
| 7.15 |
|
|
|
|
|
|
|
|
|
Years ended September 30, |
| 2014 |
| 2013 |
| ||
Weighted average grant date fair value per share of options granted |
| $ | 0.18 |
| $ | 0.21 |
|
In March 2013, the Company issued 560,000 warrants to a lender firm in connection with the signing of the $2.0 million growth loan. The warrants have an exercise price of $0.01 per share and expire on March 8, 2020. (See Note 7).
Protonex Technology Corporation
Notes to Consolidated Financial Statements
In September 2013, the Company signed a development agreement related to the SOFC platform that was amended in June 2014, with additional deliverables and funding. The agreement includes the issuance of 1,132,200 warrants that will be earned as milestone deliverables are met. As of September 30, 2014 and 2013, 841,200 and 0 shares, respectively, had vested. The warrants have an exercise price of $0.01 per share and expire on September 30, 2020. (See Note 2)
7. Long-Term Debt
Growth Loan & Credit Facilities
In March 2013, the Company secured a $2.0 million growth loan with an investment firm that provided for an initial term loan of $1.5 million with an additional $0.5 million available for subsequent use. In September 2014, the Company received the remaining $0.5 million growth loan. The outstanding borrowings of $2.0 million at September 30, 2014 are secured by the Company’s accounts receivable, inventory and intellectual property. The agreement provided for an adjustable interest rate of prime plus 3.25% payable in cash, plus 3.25% interest that is capitalized, compounded and added to the unpaid principal of the term loan. Total capitalized interest of $165,350 was added to the unpaid principal balance as of September 30, 2014. The outstanding principal and capitalized interest is due and payable in March 2016. The Company is required to maintain certain financial covenants under the growth loan. As of September 30, 2014, the Company is in compliance with such covenants.
The Company issued 560,000 warrants to purchase common stock to the lender in connection with the growth loan. The warrants have an exercise price of $0.01 per share and expire on March 8, 2020. The fair value of the warrants was determined to be $173,349 and was recorded as a debt discount and is being amortized as additional interest expense over the term of the loan. Total amortization of the discount during the years ended September 30, 2014 and 2013 was $61,919 and $37,519, respectively.
8. Commitments and Contingencies
Leases
The Company conducts its operations in leased facilities under operating lease agreements and has lease commitments for certain equipment. Total rent and related expenses under these agreements totaled $304,068, $309,609 and $319,298, for the years ended September 30, 2014, 2013 and 2012, respectively.
As of September 30, 2014 and 2013, the Company maintained security deposits totaling $21,384 and $27,265 related to the lease agreements.
Protonex Technology Corporation
Notes to Consolidated Financial Statements
Minimum future payments required under operating and capital leases are as follows:
Years ending September 30, |
| Capital |
| Operating |
| ||
|
|
|
|
|
| ||
2015 |
| $ | 31,500 |
| $ | 256,611 |
|
2016 |
| 30,372 |
| 42,768 |
| ||
2017 |
| 2,532 |
| — |
| ||
|
|
|
|
|
| ||
Total minimum lease payment |
| 64,404 |
| $ | 299,379 |
| |
|
|
|
|
|
| ||
Less amount representing interest |
| 2,996 |
|
|
| ||
Less amount representing maintenance fees |
| 15,920 |
|
|
| ||
|
|
|
|
|
| ||
Present value of minimum lease payments |
| 45,488 |
|
|
| ||
|
|
|
|
|
| ||
Less current portion |
| 22,126 |
|
|
| ||
|
|
|
|
|
| ||
Capital lease obligations, less current portion |
| $ | 23,362 |
|
|
|
License Agreement
During fiscal 2012 the Company entered into a Letter of Intent (“LOI”) agreement related to future royalties on sales of Protonex products. The LOI required certain non-refundable payments pending a definitive agreement. An agreement was not completed and as a result approximately $407,000 of payments received are included in miscellaneous income in fiscal 2012.
Litigation
From time to time, the Company is a party to various legal proceedings incidental to its business. The Company believes that none of the legal proceedings, that are presently pending, if adversely decided against the Company, will have a material adverse effect upon its financial position, results of operations, or liquidity.
Protonex Technology Corporation
Notes to Consolidated Financial Statements
9. Income Taxes
The provision for income taxes consists of the following:
Years ended September 30, |
| 2014 |
| 2013 |
| 2012 |
| |||
|
|
|
|
|
|
|
| |||
Current: |
|
|
|
|
|
|
| |||
State |
| $ | 456 |
| $ | 417 |
| $ | 150 |
|
|
|
|
|
|
|
|
| |||
Deferred: |
|
|
|
|
|
|
| |||
Federal |
| 177,185 |
| 185,898 |
| 177,641 |
| |||
State |
| 25,483 |
| 34,102 |
| 28,476 |
| |||
|
|
|
|
|
|
|
| |||
|
| 202,668 |
| 220,000 |
| 206,117 |
| |||
|
|
|
|
|
|
|
| |||
Total Provision for Income Taxes |
| $ | 203,124 |
| $ | 220,417 |
| $ | 206,267 |
|
A reconciliation of the expected income tax computed using the federal statutory income tax rate to the Company’s effective income tax rate is as follows:
Years ended September 30, |
| 2014 |
| 2013 |
| 2012 |
|
|
|
|
|
|
|
|
|
Federal statutory tax rate |
| (34 | )% | (34 | )% | (34 | )% |
State taxes, net of federal benefit |
| (5 | ) | (4 | ) | (4 | ) |
Research and development tax credits |
| (29 | ) | (23 | ) | (11 | ) |
Non-cash compensation expense |
| 3 |
| 5 |
| 6 |
|
Other differences |
| (11 | ) | (8 | ) | (9 | ) |
Change in valuation allowance |
| 98 |
| 78 |
| 63 |
|
|
|
|
|
|
|
|
|
Effective Tax Rate |
| 22 | % | 14 | % | 11 | % |
The Company has approximately $55,437,000 of net operating loss carryforwards (NOLs) for federal income tax purposes and approximately $13,880,000 of NOLs for state income tax purposes at September 30, 2014. The federal NOLs will begin to expire in the year 2023 if not utilized. The available state NOLs began to expire in 2013. The Company has approximately $2,911,000 of tax credit carryforwards for federal income tax purposes and approximately $1,708,000 of tax credit carryforwards for state income tax purposes at September 30, 2014. The federal tax credits begin to expire in 2020 and the state tax credits begin to expire in 2021. Under the Internal Revenue Code, certain substantial changes in the Company’s ownership may result in an annual limitation on the amount of NOL and tax credit carryforwards, which may be utilized in future years.
Included in the above NOLs is approximately $492,000 resulting from excess tax deductions from stock options exercised during the year ended September 30, 2006. Pursuant to ASC 718, the deferred tax asset relating to excess tax benefit from these exercises was not recognized for financial statement purposes. The asset will be recorded as a credit to additional paid in capital to the extent the Company receives a cash savings in the future.
Protonex Technology Corporation
Notes to Consolidated Financial Statements
Included in the above NOLs is approximately $386,000, $339,000 and $292,000 of excess tax goodwill NOLs carryforwards for the years ended September 30, 2014. 2013 and 2012, respectively. The deferred tax asset relating to the excess tax benefit from the goodwill amortization was not recognized for financial statement purposes. The benefit will be recorded when the Company receives the cash benefit in the future.
The Company’s deferred tax liabilities are created by goodwill as a result of a prior acquisition. In accordance with ASC 350, deferred tax liabilities resulting from the different treatment of goodwill for book and tax purposes cannot offset deferred tax assets in determining the valuation allowance. As a result, a deferred tax provision is required to increase the Company’s valuation allowance. The deferred tax liability as a result of the goodwill associated with the prior acquisition as of September 30, 2014 and 2013 is $1,528,261 and $1,325,137, respectively. For tax purposes, goodwill generated from the acquisition amounted to $8,521,000 and is deductible over a 15-year period.
Due to the uncertainty of future operating results, management believes it to be more likely than not that the gross deferred tax assets will not be realized; therefore, a full valuation allowance against such assets has been recorded at September 30, 2014 and 2013.
The primary temporary differences that give rise to the deferred tax asset and liability are NOL carryforwards, non-deductible reserves and accruals and differences in bases of the tangible and intangible assets. The income tax effects of these temporary differences are as follows:
September 30, |
| 2014 |
| 2013 |
| ||
|
|
|
|
|
| ||
Net operating loss carryforwards |
| $ | 19,264,291 |
| $ | 19,479,264 |
|
Credits |
| 4,037,470 |
| 3,011,413 |
| ||
Stock options |
| 777,806 |
| 745,290 |
| ||
Depreciation and amortization |
| 427,667 |
| 441,558 |
| ||
Other temporary differences |
| 150,264 |
| 228,302 |
| ||
Gross deferred tax asset |
| 24,657,498 |
| 23,905,827 |
| ||
|
|
|
|
|
| ||
Less: valuation allowance |
| 24,657,498 |
| 23,905,827 |
| ||
Net deferred tax assets |
| $ | — |
| $ | — |
|
Deferred tax liabilities: |
|
|
|
|
| ||
Tax goodwill amortization |
| $ | 1,528,261 |
| $ | 1,325,137 |
|
The Company follows the provisions of ASC 740, “Accounting for Uncertainty in Income Taxes”. As of September 30, 2014, the total amount of net unrecognized tax benefit was approximately $673,000 which would be recorded with an offsetting adjustment to the Company’s valuation allowance. There has been no significant change in the unrecognized tax benefit since adoption.
The Company did not recognize any accrued interest and penalties related to unrecognized tax benefits as no amounts would be due as a result of the net tax loss carryforward. The Company’s policy is to record interest and penalties related to unrecognized tax benefits in income tax expense. All tax years remain subject to examination by the taxing authorities for both Federal and state purposes. The primary state jurisdiction is the Commonwealth of Massachusetts.
Protonex Technology Corporation
Notes to Consolidated Financial Statements
10. Employee Retirement Plan
The Company adopted a 401(k) plan effective January 1, 2005. The plan is an employee deferral based pre-tax retirement plan. The Company can elect to make discretionary matching contributions into the plan. To date, the Company has not made a discretionary matching contribution.
11. Related Parties
The Company has a relationship with CBC America Corporation (“CBC”), a shareholder in the Company. CBC also facilitates purchases by the Company of components for fuel cell development from international suppliers. Effective as of July 2008, the Company entered into an agreement with CBC and another party to jointly develop certain products. During the years ended September 30, 2014, 2013 and 2012, the Company had purchases from CBC of $110,212, $33,406 and $50,069, respectively.
12. Fair Value Measurements
The Company follows the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) for fair value measurements of financial assets and financial liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 inputs are unobservable inputs for the asset or liability.
The Level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
As of September 30, 2014 and 2013, the Company’s money market funds of $95,195 and $95,174, respectively, were valued using quoted prices generated by market transactions involving identical assets, or Level 1 assets as defined under ASC 820.
Protonex Technology Corporation
Notes to Consolidated Financial Statements
13. Subsequent Events
The Company evaluated all events or transactions that occurred after September 30, 2014 through December 8, 2014, the date these financial statements were available to be issued. All material subsequent events have been disclosed in the financial statements except as noted below as to which the date is June 29, 2015.
In May 2015, the Company secured a $2.0 million working capital line of credit with a bank. Outstanding borrowings were secured by the Company’s accounts receivable and inventory. The bank has a senior blanket lien on all Company assets, including IP. The agreement provided for an adjustable interest rate of prime plus 2.5% or 1.5%, depending on balance sheet liquidity ratios.
On June 29, 2015, the Company entered into a definitive agreement with Ballard Power Systems, Inc. (Ballard). Pursuant to a merger agreement in which the Company will merge with Ballard, Ballard will acquire all of the securities of the Company, including all outstanding shares of common stock and all outstanding and vested options and warrants to purchase shares of Company common stock. The purchase price (enterprise value) of US $30 million will be paid in shares of Ballard common stock and cash.