NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 – BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements
of ENGlobal Corporation (which may be referred to as
“ENGlobal,” the “Company,”
“we,” “us,” or “our”) were
prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”)
for interim financial information and the rules and regulations of
the Securities and Exchange Commission. Accordingly, these
condensed financial statements do not include all of the
information or note disclosures normally included in annual
financial statements prepared in accordance with U.S. GAAP. These
condensed financial statements should be read in conjunction with
the audited financial statements for the year ended December 26,
2020, included in the Company’s 2020 Annual Report on Form
10-K filed with the Securities and Exchange
Commission.
The
condensed financial statements included herein are unaudited for
the three month periods ended March 27, 2021 and March 28, 2020,
and in the case of the condensed balance sheet as of December 26,
2020 have been derived from the audited financial statements of the
Company. These financial statements reflect all adjustments
(consisting of normal recurring adjustments), which are, in the
opinion of management, necessary to fairly present the results for
the periods presented.
The
Company has assessed subsequent events through the date of filing
of these condensed financial statements with the Securities and
Exchange Commission and believes that the disclosures made herein
are adequate to make the information presented herein not
misleading.
We had
no items of other comprehensive income in any period presented;
therefore, no other components of comprehensive income are
presented.
Each of
our quarters is comprised of 13 weeks.
NOTE 2 – ACCOUNTING STANDARDS
Revenue
Recognition – Our
revenue is comprised of engineering, procurement and construction
management services and sales of fabricated systems and integrated
control systems that we design and assemble. The majority of our
services are provided under time-and-material contracts. Some
time-and-material contracts may have limits. Revenue is not
recognized over these limits until authorization by the client has
been received.
A
majority of sales of fabrication and assembled systems are under
fixed-price contracts. We account for a contract when it has
approval and commitment from both parties, the rights of the
parties are identified, payment terms are identified, the contract
has commercial substance and collectability of consideration is
probable.
We
generally recognize revenue over time as we perform because of
continuous transfer of control to the customer. Our customer
typically controls the work in process as evidenced either by
contractual termination clauses or by our rights to payment for
work performed to date plus a reasonable profit to deliver products
or services that do not have an alternative use to the Company. The
selection of the method to measure progress towards completion
requires judgment and is based on the nature of the products or
service to be provided, which measures the ratio of costs incurred
to date to the total estimated costs at completion of the
performance obligation. We generally use the cost-to-cost method on
the labor portion of a project for revenue recognition to measure
progress of our contracts because it best depicts the transfer of
control to the customer which occurs as we consume the materials on
the contracts. Therefore, revenues and estimated profits are
recorded proportionally as labor costs are incurred.
Under
the typical payment terms of our fixed-price contracts, the
customer pays us progress payments. These progress payments are
based on quantifiable measures of performance or on the achievement
of specified events or milestones. The customer may retain a small
portion of the contract price until completion of the contract.
Revenue recognized in excess of billings is recorded as a contract
asset on the balance sheet. Amounts billed and due from our
customers are classified as receivables on the balance sheet. The
portion of the payments retained by the customer until final
contract settlement is not considered a significant financing
component because the intent is to protect the customer should we
fail to adequately complete some or all of our obligations under
the contract. For some contracts we may receive advance payments
from the customer. We record a liability for these advance payments
in contract liabilities on the balance sheet. The advance payment
typically is not considered a significant financing component
because it is used to meet working capital demand that can be
higher in the early stages of a contract and to protect us from the
other party failing to adequately complete some or all of its
obligations under the contract.
To
determine proper revenue recognition for contracts, we evaluate
whether two or more contracts should be combined and accounted for
as one single performance obligation or whether a single contract
should be accounted for as more than one performance obligation.
This evaluation requires significant judgment and the decision to
combine a group of contracts or separate a single contract into
multiple performance obligations could change the amount of revenue
and profit recorded in a given period. For most of our contracts,
we provide a significant service of integrating a complex set of
tasks and components into a single project. Hence, the entire
contract is accounted for as one performance obligation. Less
commonly, we may provide distinct goods or services within a
contract in which case we separate the contract into more than one
performance obligation. If a contract is separated into more than
one performance obligation, we allocate the total transaction price
to each performance obligation in an amount based on the estimated
relative standalone selling price of the promised goods or services
underlying each performance obligation and use the expected cost
plus margin approach to estimate the standalone selling price of
each performance obligation. Due to the nature of the work required
to be performed on many of our performance obligations, the
estimation of total revenue and cost at completion is complex,
subject to variables and requires significant judgment. We estimate
variable consideration at the most likely amount to which we expect
to be entitled. We include estimated amounts in the transaction
price to the extent it is probable that a significant reversal of
cumulative revenue recognized will not occur when the uncertainty
associated with the variable consideration is resolved. Our
estimates of variable consideration and determination of whether to
include estimated amounts in the transaction price are based
largely on an assessment of our anticipated performance and all
information (historical, current and forecasted) that is reasonably
available to us.
Contracts
are often modified to account for changes in contract
specifications and requirements. We consider contract modifications
to exist when the modification either creates new or changes the
existing enforceable rights and obligations. Most of our contract
modifications are for goods or services that are not distinct from
the existing contract due to the significant integration service
provided in the context of the contract and are accounted for as if
they were part of that existing contract. The effect of a contract
modification on the transaction price and our measure of progress
for the performance obligation to which it relates, is recognized
as an adjustment to revenue (either as an increase or a reduction
of revenue) on a cumulative catch-up basis.
We
have a standard, monthly process in which management reviews the
progress and execution of our performance obligations. As part of
this process, management reviews information including, but not
limited to, any outstanding key contract matters, progress towards
completion and the related program schedule, identified risks and
opportunities and the related changes in estimates of revenues and
costs. The risks and opportunities include management’s
judgment about the ability and cost to achieve the schedule,
technical requirements, and other contractual requirements.
Management must make assumptions and estimates regarding labor
productivity and availability, the complexity of the work to be
performed, the availability of materials, the length of time to
complete the performance obligation, execution by our
subcontractors, the availability and timing of funding from our
customer and overhead cost rates, among other
variables.
Based
on this analysis, any adjustments to revenue, operating costs and
the related impact to operating income are recognized as necessary
in the period they become known. These adjustments may result from
positive performance and may result in an increase in operating
income during the performance of individual performance obligations
if we determine we will be successful in mitigating risks
surrounding the technical, schedule and cost aspects of those
performance obligations or realizing related opportunities. When
estimates of total costs to be incurred exceed total estimates to
be earned, a provision for the entire loss on the performance
obligation is recognized in the period the loss becomes known.
Likewise, these adjustments may result in a decrease in operating
income if we determine we will not be successful in mitigating
these risks or realizing related opportunities. Changes in
estimates of net revenue, operating costs and the related impact to
operating income are recognized monthly on a cumulative catch-up
basis, which recognizes in the current period the cumulative effect
of the changes on current and prior periods based on a performance
obligation’s percentage of completion. A significant change
in one or more of these estimates could affect the profitability of
one or more of our performance obligations.
NOTE 3 – REVENUE RECOGNITION
Our
revenue by contract type was as follows (dollars in
thousands):
|
For the Three
Months Ended
|
|
|
|
Fixed-price
revenue
|
$8,265
|
$7,900
|
Time-and-material
revenue
|
4,184
|
11,360
|
Total
Revenue
|
$12,449
|
$19,260
|
NOTE 4 – CONTRACT ASSETS AND CONTRACT
LIABILITIES
Our
contract assets consist of unbilled amounts typically resulting
from sales under long-term contracts when the cost-to-cost method
of revenue recognition is utilized and revenue recognized exceeds
the amount billed to the customer. Our contract liabilities consist
of advance payments and billings in excess of costs
incurred.
Costs,
estimated earnings and billings on uncompleted contracts consisted
of the following (dollars in thousands):
|
|
|
Costs incurred on
uncompleted contracts
|
$44,912
|
$39,154
|
Estimated earnings
on uncompleted contracts
|
5,253
|
4,388
|
Earned
revenues
|
50,165
|
43,542
|
Less: billings to
date
|
51,077
|
40,710
|
Net costs and
estimated earnings in excess of billings (billings in excess of
costs) on uncompleted contracts
|
$(912)
|
$2,832
|
|
|
|
Contract
assets
|
$1,322
|
$4,090
|
Contract
liabilities
|
(2,234)
|
(1,258)
|
Net contract
assets
|
$(912)
|
$2,832
|
NOTE 5 – DEBT
The
components of debt were as follows (dollars in
thousands):
|
|
|
PPP
Loan (1)
|
$4,961
|
$4,949
|
Revolving
Credit Facility (2)
|
1,515
|
1,491
|
Total
debt
|
6,476
|
6,440
|
Amount
due within one year
|
4,579
|
3,707
|
Total long-term
debt
|
$1,897
|
$2,733
|
(1)
On April 13, 2020, the Company was granted an
unsecured loan (the “PPP Loan”) from Origin Bank in the
aggregate principal amount of $4,915,800 pursuant to the Paycheck
Protection Program (the “PPP”) under Division A,
Title I of the Coronavirus Aid, Relief and Economic
Security Act (“CARES Act”). The PPP Loan is evidenced by a promissory note,
dated as of April 13, 2020 (the “Note”), by ENGlobal in
favor of Origin Bank, as lender. The PPP Loan balance has
increased due to accrued interest.
Interest Rate:
The interest rate on the PPP Loan is
1% per year.
Potential PPP Loan
Forgiveness: Under the PPP, ENGlobal may apply for
forgiveness of the amount due on the PPP Loan in an amount equal to
the sum of the following costs incurred during the covered period
beginning on the date of the first disbursement of the PPP Loan:
(a) payroll costs, (b) any payment of interest on a covered
obligation (which shall not include any prepayment of or payment of
principal on a covered mortgage obligation), (c) any payment on a
covered rent obligation, and (d) any covered utility payment,
calculated in accordance with the terms of the CARES
Act.
We have
elected to utilize a 24-week covered period as allowed by the
Paycheck Protection Program Flexibility Act (“PPPFA”)
enacted on June 5, 2020. When applying for PPP Loan forgiveness, we
have the option to increase the repayment period for any unforgiven
portion of the PPP Loan to five years as permitted under the
PPPFA.
We have
calculated qualified forgivable expenses in excess of our PPP Loan
amount. Although we expect the full PPP Loan amount to be forgiven,
we cannot guarantee our forgiveness application will be accepted
allowing for a fully forgiven loan. On November 30, 2020, our
lender, Origin Bank, transmitted our PPP Loan forgiveness
application to the U.S. Small Business Administration. We have not
received a forgiveness decision on our PPP Loan.
(2)
On May 21, 2020 (the “Closing Date”), the Company and
its wholly owned subsidiaries, ENGlobal U.S., Inc. and ENGlobal
Government Services, Inc. (collectively, the
“Borrowers”) entered into a Loan and Security Agreement
(the “Revolving Credit Facility”) with Pacific Western
Bank dba Pacific Western Business Finance, a California
state-chartered bank (the “Lender”), pursuant to which
the Lender agreed to extend credit to the Borrowers in the form of
revolving loans (each a “Loan” and collectively, the
“Loans”) in the aggregate amount of up to $6.0 million
(the “Maximum Credit Limit”).
Set
forth below are certain of the material terms of the Revolving
Credit Facility:
Credit
Limit: The credit limit
is an amount equal to the lesser of (a) the Maximum Credit Limit
and (b) the sum of (i) 85% of the Borrowers’ Eligible
Accounts (as defined in the Revolving Credit Facility), plus
(ii) the lesser of (A) 75% of the Borrowers’
Eligible Unbilled Accounts (as defined in the Revolving Credit
Facility), or (B) $3,000,000 plus (iii) the lesser of
(A) 20% of Borrowers’ Eligible Fixed Price Accounts, or
(B) $250,000. As of March 27, 2021, the credit limit under the
Revolving Credit Facility was $2.5 million.
Interest: Any
Loans will bear interest at a rate per annum equal to the Prime
rate (defined as the rate announced as the “prime rate”
or “bank prime rate” in the Western Edition of the Wall
Street Journal) plus 2.0%; provided that interest will not be less
than $7,500 per month.
Collateral:
Lender receives a first priority lien on all assets of the
Borrowers, including accounts receivable, inventory, equipment,
deposit accounts, general intangibles and investment
property.
Maturity: The
maturity date is May 20, 2023 and shall be automatically extended
for additional periods of one-year each, if written notice of
termination is not given by one party to the other at least thirty
days prior to the maturity date.
Loan Fee: The Borrowers will pay to Lender a loan fee of
1.00% of the Maximum Credit Limit at the time of funding and
annually thereafter on the anniversary date of the initial
funding.
Termination
Fee: In the event the Borrowers
terminate the Revolving Credit Facility prior to the maturity date,
the Borrowers will pay to Lender a termination fee of (i) 2.00% of
the Maximum Credit Limit, if the termination occurs on or prior to
the first anniversary of the Closing Date, (ii) 1.00% of the
Maximum Credit Limit, if the termination occurs after the first
anniversary of the Closing Date and on or prior to the second
anniversary of the Closing Date and (iii) 0.05% of the Maximum
Credit Limit, if the termination occurs after the second
anniversary of the Closing Date.
Covenants: The Revolving Credit Facility requires the
Borrowers to comply with certain customary affirmative covenants,
and negative covenants that, among other things, restrict, subject
to certain exceptions, the ability of the Borrowers to engage in
mergers, acquisitions or other transactions outside of the ordinary
course of business, make loans or investments, incur indebtedness,
pay dividends or repurchase stock, or engage in affiliate
transactions. The Revolving Credit Facility does not require the
Borrowers to comply with any financial
covenants.
The
future scheduled maturities of our debt are (in
thousands):
|
PPP Loan and
Revolving Credit Facility (1)
|
Revolving Credit
Facility (1)
|
2021
|
$3,430
|
$—
|
2022
|
1,531
|
—
|
2023
|
1,515
|
1,515
|
Thereafter
|
—
|
—
|
|
$6,476
|
$1,515
|
(1)
If the PPP Loan is
entirely forgiven, only the Revolving Credit Facility would remain
as debt.
NOTE 6 – SEGMENT INFORMATION
Our
segments are strategic business units that offer our services and
products to customers in their respective industry segments. The
operating performance of our segments is regularly reviewed with
operational leaders in charge of these segments, the chief
executive officer (“CEO”), the chief financial officer
(“CFO”) and others. This group represents the chief
operating decision maker (“CODM”) for
ENGlobal.
We have
identified five strategic markets where we have a long history of
delivering project solutions and can provide complete project
execution. These five targeted markets include: (i) Renewables;
(ii) Automation; (iii) Refining and Transportation; (iv) Upstream;
and (v) Government Services.
Within
the Renewables group, our focus is to design and build production
facilities for hydrogen and associated products, together with
converting existing production facilities to produce products from
renewable feedstock sources. These projects often utilize
technologies that are more fuel efficient, and therefore reduce the
associated carbon footprint of the facility. Our scope of work on
these projects will typically include front-end development,
engineering, procurement, mechanical fabrication, automation and
commissioning services, and may be performed in conjunction with a
construction partner.
Our
Automation group designs, integrates and commissions modular
systems that include electronic distributed control, on-line
process analytical data, continuous emission monitoring, and
electric power distribution. Often these packaged systems are
housed in a fabricated metal enclosure, modular building or
freestanding metal rack, which are commonly included in our scope
of work. We provide automation engineering, procurement,
fabrication, systems integration, programing and on-site
commissioning services to our clients for both new and existing
facilities.
Our
Refining and Transportation group focuses on providing engineering,
procurement and automation services as well as fabricated products
to downstream refineries and petrochemical facilities as well as
midstream pipeline, storage and other transportation related
companies. These services are often applied to small capital
improvement and maintenance projects within refineries and
petrochemical facilities. For our transportation clients, we work
on facilities that include pumping, compression, gas processing,
metering, storage terminals, product loading and blending systems.
In addition, this group designs, programs and maintains supervisory
control and data acquisition (“SCADA”) systems for our
transportation clients.
The
Upstream group provides engineering, fabrication and automation
services to clients who have operations in the U.S. oil and gas
exploration and development markets. The operations are usually
associated with the completion, purification, storage and
transmission of the oil and gas from the well head to the terminal
or pipeline destination.
Our
Government Services group provides services related to the
engineering, design, installation and maintenance of automated fuel
handling and tank gauging systems for the U.S. military across the
globe in addition to cybersecurity assessment and SCADA systems
design and maintenance in the private sector.
We have
two reportable segments: Commercial and Government Services. Our
Renewables, Automation, Refining and Transportation, and Upstream
groups are aggregated into one reportable segment,
Commercial.
Revenues, operating
income, and identifiable assets for each segment are set forth in
the following table. The amount identified as Corporate includes
those activities that are not allocated to the operating segments
and includes costs related to business development, executive
functions, finance, accounting, safety, human resources and
information technology that are not specifically identifiable with
the segments. The segment information for the three months ended
March 28, 2020 and as of December 26, 2020 has been recast to align
with our current reportable segments.
Segment
information is as follows (dollars in thousands):
|
|
|
|
|
For
the three months ended March 27, 2021:
|
|
|
|
|
Revenue
|
$10,048
|
$2,401
|
$—
|
$12,449
|
Gross
profit
|
915
|
89
|
—
|
1,004
|
Gross profit
margin
|
9.1%
|
3.7%
|
|
8.1%
|
SG&A
|
1,294
|
209
|
1,058
|
2,561
|
Operating
income
|
(379)
|
(120)
|
(1,058)
|
(1,557)
|
Other income,
net
|
|
|
|
1,684
|
Interest expense,
net
|
|
|
|
(58)
|
Tax
expense
|
|
|
|
(23)
|
Net
income
|
|
|
|
46
|
|
|
|
|
|
For
the three months ended March 28, 2020:
|
|
|
|
|
Revenue
|
$16,510
|
$2,750
|
$—
|
$19,260
|
Gross
profit
|
2,846
|
414
|
—
|
3,260
|
Gross profit
margin
|
17.2%
|
15.1%
|
|
16.9%
|
SG&A
|
830
|
170
|
1,133
|
2,133
|
Operating
income
|
2,016
|
244
|
(1,133)
|
1,127
|
Other income,
net
|
|
|
|
1
|
Interest expense,
net
|
|
|
|
(5)
|
Tax
expense
|
|
|
|
(22)
|
Net
income
|
|
|
|
1,101
|
Total
assets by segment are as follows (dollars in
thousands):
Total Assets by
Segment
|
|
|
|
|
Commercial
|
$10,107
|
$11,130
|
Government
Services
|
2,580
|
3,151
|
Corporate
|
17,704
|
16,157
|
Consolidated
|
$30,391
|
$30,438
|
NOTE 7 – FEDERAL AND STATE INCOME TAXES
The
Company accounts for income taxes in accordance with FASB
Accounting Standards Codification 740, “Income Taxes”
(“ASC 740”). Under ASC 740-270 we estimate an annual
effective tax rate based on year-to-date operating results and our
projection of operating results for the remainder of the year. We
apply this annual effective tax rate to the year-to-date operating
results. If our actual results differ from the estimated annual
projection, our estimated annual effective tax rate can change
affecting the tax expense for successive interim results as well as
the estimated annual tax expense results. Certain states are not
included in the calculation of the estimated annual effective tax
rate because the underlying basis for the tax is related to
revenues and not taxable income. Amounts for Texas margin taxes are
reported as income tax expense.
The
Company applies a more likely than not recognition threshold for
all tax uncertainties. The FASB guidance for uncertain tax
positions only allows the recognition of those tax benefits, based
on their technical merits that are greater than 50 percent
likelihood of being sustained upon examination by the taxing
authorities. Management has reviewed the Company’s tax
positions and determined there are no uncertain tax positions
requiring recognition in the financial statements. U.S. federal tax
returns prior to 2016 and Texas margins tax returns prior to 2016
are closed. Generally, the applicable statues of limitations are
three to four years from their filings.
The
Company recorded income tax expense of $23 thousand for the three
months ended March 27, 2021 as compared to income tax expense of
$22 thousand for the three months ended March 28,
2020.
The
effective income tax rate for the three months ended March 27, 2021
was 50.0% as compared to 2.15% for the three months ended March 28,
2020.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
From
time to time, ENGlobal or one or more of its subsidiaries is
involved in various legal proceedings or is subject to claims that
arise in the ordinary course of business alleging, among other
things, claims of breach of contract or negligence in connection
with the performance or delivery of goods and/or services. The
outcome of any such claims or proceedings cannot be predicted with
certainty. Management is not aware of any pending or threatened
lawsuits or proceedings that are expected to have a material effect
on our financial position, results of operations or
liquidity.
We
carry a broad range of insurance coverage, including general and
business automobile liability, commercial property, professional
errors and omissions, workers’ compensation insurance,
directors’ and officers’ liability insurance and a
general umbrella policy, all with standard self-insured
retentions/deductibles. We also provide health insurance to our
employees (including vision and dental) which is partially
self-funded for these claims. Provisions for expected future
payments are accrued based on our experience, and specific stop
loss levels provide protection for the Company. We believe we have
adequate reserves for the self-funded portion of our insurance
policies. We are not aware of any material litigation or claims
that are not covered by these policies or which are likely to
materially exceed the Company’s insurance
limits.
NOTE 9 – LEASES
The
Company leases land, office space and equipment. Arrangements are
assessed at inception to determine if a lease exists and, with the
adoption of ASC 842, “Leases,” right-of-use
(“ROU”) assets and lease liabilities are recognized
based on the present value of lease payments over the lease term.
Because the Company’s leases do not provide an implicit rate
of return, the Company uses its incremental borrowing rate at the
inception of a lease to calculate the present value of lease
payments. The Company has elected to apply the short-term lease
exception for all asset classes, excluding lease liabilities from
the balance sheet and recognizing the lease payments in the period
they are incurred.
The
components of lease expense were as follows (dollars in
thousands):
|
Financial
Statement Classification
|
Three months
ended
March
27,
2021
|
Three months
ended
March
28,
2020
|
Finance
leases:
|
|
|
|
Amortization
expense
|
SG&A
Expense
|
$19
|
$19
|
Interest
expense
|
Interest expense,
net
|
4
|
5
|
Total finance lease
expense
|
|
23
|
24
|
|
|
|
|
Operating
leases:
|
|
|
|
Operating
costs
|
Operating
costs
|
152
|
219
|
Selling, general
and administrative expenses
|
SG&A
Expense
|
449
|
438
|
Total operating
lease expense
|
|
601
|
657
|
Total lease
expense
|
|
$624
|
$681
|
Supplemental
balance sheet information related to leases was as follows (dollars
in thousands):
|
Financial
Statement Classification
|
|
|
ROU
Assets:
|
|
|
|
Operating
leases
|
Right of Use
asset
|
$1,539
|
$1,628
|
Finance
leases
|
Property and
equipment, net
|
413
|
442
|
|
|
$1,952
|
$2,070
|
|
|
|
|
Lease
liabilities:
|
|
|
|
Current
liabilities
|
|
|
|
Operating
leases
|
Current portion of
leases
|
$1,173
|
$1,421
|
Finance
leases
|
Current portion of
leases
|
121
|
120
|
Noncurrent
Liabilities:
|
|
|
|
Operating
leases
|
Long Term
Leases
|
430
|
286
|
Finance
leases
|
Long Term
Leases
|
285
|
322
|
Total lease
liabilities
|
|
$2,009
|
$2,149
|
The
weighted average remaining lease term and weighted average discount
rate were as follows:
|
|
Weighted average
remaining lease term (years)
|
|
Operating
leases
|
1.4
|
Finance
leases
|
4.0
|
Weighted average
discount rate
|
|
Operating
leases
|
1.1%
|
Finance
leases
|
5.4%
|
Maturities of
operating lease liabilities as of March 27, 2021 are as follows
(dollars in thousands):
Year
ending:
|
|
|
|
2021 (remaining
months)
|
962
|
99
|
1,061
|
2022
|
658
|
112
|
770
|
2023
|
—
|
92
|
92
|
2024
|
—
|
72
|
72
|
2025 and
thereafter
|
—
|
56
|
56
|
Total lease
payments
|
1,620
|
431
|
2,051
|
Less: imputed
interest
|
(19)
|
(23)
|
(42)
|
Total lease
liabilities
|
$1,601
|
$408
|
$2,009
|
NOTE 10 – EMPLOYEE RETENTION CREDIT
Pursuant to the
CARES Act, the Company is
eligible for an employee
retention credit subject to certain criteria. Since
there is no US GAAP guidance for for-profit business entities that
receive government assistance that is not in the form of a loan, an
income tax credit or revenue from a contract with a customer, we
determined the appropriate accounting treatment by analogy to other
guidance. We accounted for the employee retention credit by analogy
to International Accounting Standards (IAS) 20, Accounting for
Government Grants and Disclosure of Government Assistance, of
International Financial Reporting Standards (IFRS).
Under
an IAS 20 analogy, a business entity would recognize the employee
retention credit on a systematic basis over the periods in which
the entity recognizes the payroll expenses for which the grant
(i.e., tax credit) is intended to compensate when there is
reasonable assurance (i.e., it is probable) that the entity will
comply with any conditions attached to the grant and the grant
(i.e., tax credit) will be received.
We have
accounted for the $1.7 million employee retention credit as other
income on the Statement of Operations and as a receivable on the
Balance Sheet.
NOTE 11 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date these
financial statements were issued. The Company determined there were
no events, other than as described below, that required disclosure
or recognition in these financial statements.
At-the-market Offering
On
January 29, 2021, we entered into an at market issuance sales
agreement (the “ATM Agreement”) with B. Riley
Securities, Inc. pursuant to which we may offer and sell shares of
our common stock having an aggregate offering price of up to $25
million to or through B. Riley, as sales agent, from time to time,
in an “at the market offering”. In April 2021, 400,538
shares were issued pursuant to the ATM Agreement for net proceeds
of approximately $1.5 million.