Agile Technologies Inc. Agile Technologies Inc. (ATI) was founded in 2013 by Bernhart Vector and its head office and manufacturing facilities are in Vancouver, BC. ATI is an electronics research, development and manufacturing company and generally develops electronics to be used for recreational and competitive athletics. Their electronics range from GPS chips that are inserted into various watches, water navigational equipment and other sports accessories, to heart rate monitors for similar equipment and racing chips. Bernhart is a graduate of an electrical engineering degree program from the University of British Columbia and also minored in computer software and design. Bernhart is also an avid runner and overall sports enthusiast. ATI went public with a small public offering in 2020 after garnering media attention for its innovative and cutting-edge electronics. Appendix 1 contains summary financial information for ATI for 2022 and 2023. You are the audit senior on the ATI audit engagement. ATI is a new client of your accounting firm, having previously been audited by another firm since its inception. You were able to obtain the previous audited financial statements and noted that an unmodified opinion had been provided every year. The previous auditors were contacted satisfactorily and all pre-acceptance procedures (engagement letters and independence checks) have been performed. ATI has a year- end of April 30th and it is now April 12th Your partner has asked you to prepare an audit planning memo for ATI detailing everything that you believe is important and required. While your professional judgment in determining what should be in your planning memo is required, you should ensure to include audit procedures with assertions when there are areas that you know will need your attention. Any audit issues that you see should be noted along with how you will address them. In addition to the audit planning memo for ATI, your partner has asked you to update him on the status of Barrie Resistors Limited (BRL) as you are currently auditing the company. BRL is another company, wholly owned by Bernhart, with a year end of March 31st. Information related to BRL can be found in separate file within D2L along with more details of what your partner is requesting. You can find most of what you need for ATI in the Exhibits and Appendix that follows. Other information on ATI can be found in other documents on D2L. Required: Prepare the required reports substantial salary to Chris and also provided Chris with stock of ATI when they went public. Chris was able to successfully navigate the IPO and ran the accounting side of ATI until late, October 2022. Notes from your partner indicate that in mid-October, Bernhart confronted Chris about some financial accounting irregularities surrounding revenue. Bernhart was questioning the revenue results for 2022. Chris didn't respond to any of the questions and Bernhart and Chris parted ways. Chris subsequently sold his stock in ATI in November 2022. Some stock price information can be found in Appendix 1; In January 2023, a GPS component that was being manufactured by ATI was found to have a design flaw. While the development of the new component suggested that it could obtain a signal in under 5 seconds and keep the signal even when under bridges or in car parks, clients were indicating that this was not, in fact, happening. Bernhart noted that no client has sued them yet, but that sales for this particular chip have been suspended. Approximately 5% of the inventory on hand is this chip. Bernhart isn't sure if the chip can be modified in any way yet, and suspects that the cost to do so would be significant. He believes that if he cannot modify it, the value would be roughly 10% of the current inventory amount - representing the amount he can get for scrap metal; The defective chip in question required specialized machinery for production. The machinery is currently on the books of ATI for $450,000 with accumulated depreciation of $60,000. Bernhart told your engagement partner that they could sell the machinery to another company for $90,000. ATI would pay for the delivery of the equipment; roughly $2,000. When asked, Bernhart stated that there was very little use for the machinery to ATI if they couldn't find a way to fix the chip issue; Research and development make up a significant portion of ATI's activities. Engineers are constantly looking for new ways to improve the accuracy of the chip sets. ATI currently has a new project that Bernhart is very excited about; Developers are nearing design completion that would have a GPS/event timer chip that can be used by race participants to gauge how well they are doing during their race. The GPS/event chip would be a one use chip (so used by one person, for one race and then thrown away). This disposable chip, in itself is not new. Currently ATI and other companies produce a timing chip that gets attached to the back of a race bib (a race bib has the competitor number on it for running, triathlon, cycling, etc.). The chip is programmed to the race competitor prior to race day. Once a competitor crosses the start line the chip keeps their time and then records their finish time. Competitors can then view their times on the ATI website (designed and hosted by ATI). The chip itself is thrown away or kept by the participant. What the NEW chip does is allow the competitor to sync it to their Smartphone. Once they sync their own bib chip to their smartphone, they are able to see their position in the race while they are running and their own current time. ATI expects to have an app developed that would be available for smartphone users and could be used during the race with a headphone. The app, when linked to the chip would then provide audible feedback to the racer. Currently ATI has tested the new chip and it is working as designed. The Page 3 of 8 only concern would be the chip cost. Bernhart is trying to decide how much of the increased cost gets passed along to his customers. They tend to be very price sensitive since race entrance fees are typically very stable (they don't tend to increase much). Bernhart is concerned that the market won't be able to afford the new, highly innovative chip. ATI has spent about $1,100,000 to date on the new chip with about 50% of this amount recorded as development costs; Since Chris' departure, Bernhart has temporarily taken over the CFO duties. He admits that he is doing the best he can with his limited accounting knowledge; Bernhart owns 60% of the shares of ATI. 15% of the balance is owned by a single investor, Kevin O'Weery and the balance is widely held. Chris had owned 5% of the shares before he left and sold them; ATI signed a potentially very lucrative contract in March 2023. At the request of your audit partner, Bernhart provided the contract details (See Exhibit 2); There are $150,000 of management fees revenue recorded this year on ATL's books; Your audit partner had some brief conversations with the balance of the administrative and finance staff. Details of those conversations are in Exhibit #3; Bernhart also owns Barrie Resistors Ltd. (BRL). BRL is 100% owned by Bernhart directly and was incorporated in 2012. BRL produces small resistors used in the GPS modules and they have typically sold most of their products to other GPS Companies. ATI began purchasing the resistors from BRL in April of 2022 after its contract expired with another resistor company, and now purchases roughly 40% of their resistor requirements from BRL. Sales of BRL were approximately $600,000 during the start-up year. There is no debt as Bernhart personally financed all start-up costs. Bernhart previously engaged you to complete the audit of BRL. ATI had a contract with the London Marathon for the use of ATI's timing chips. While the chips themselves worked and kept time accurately, there was a flaw in the manufacture of the chip leaving it with a sharp edge. The sharp edge ultimately cut several competitors who subsequently complained to the race organizers. The organizers have sued ATI for $300,000. Bernhart has left the case with one of ATI's corporate lawyers Carpe Diem Law Firm. ATI has paid a $5,000 retainer so far to Carpe Diem for the case. Exhibit 2: Great Lakes Electronics Contract (GLEC) Contract calls for the development and production of a GPS sensing device capable of withstanding the depths and cold temperatures of Lake Superior. Details of the terms and payment are as follows: $300,000 upfront payment to be received by ATI by March 15, 2023. Payment to be used for the development of the GPS prototype. The prototype is to be completed no later than October 31, 2023; Upon successful development of the GPS prototype and approval by GLEC, GLEC to make a second payment of $500,000 for the production of the final GPS module; For every day that ATI is late past October 31st, they will incur a penalty of $1,000 to a maximum of $150,000. Should ATI fail to produce a successful prototype, they must return the deposit. Exhibit 3: Conversations with Administrative Staff The following information was obtained from conversations with the administrative staff: Bernhart is an excellent person to work for and has allowed the staff to learn new accounting functions since he took over; Chris was extremely regimented with monthly reconciliations and they were done regularly while he was with ATI. Since he left, the workload has increased with staff and reconciliations such as banks and accounts receivable have lagged behind. Currently January, February and March reconciliations have not yet been completed; Sales staff are paid a commission based on sales of products. At the end of the each month, each salesperson fills out a commission sheet that is signed by them and normally signed by Chris. The copies are then forwarded to the accounts payable department for processing and payment; Staff said that for the most part, things are running as smoothly as possible with no fulltime CFO. Small errors are happening but nothing that can't be fixed when found; The accounts payable subledger is currently listed at $101,345. Appendix 1: Summarized ATI Financial Statement Information (2023 Unaudited) 2023 (to April 2022 12) Revenues Product sales $1,693,248 $1,062,368 Professional services and 643,599 534,555 hosting revenues Cost of revenues Professional services and hosting 498,880 433,248 Maintenance and support 54,514 52,553 Amortization 212,000 208,000 Research and development 310,332 338,543 Sales and marketing 410,882 424,544 Other 60,000 21,000 Restructuring charges 98,000 Income (loss) from operations $692,239 $119,035 2023 2022 Assets Cash and cash equivalents $779,449 $547,230 Marketable securities 57,237 40,974 Accounts receivable 973,162 428,266 Inventory 2,987,654 1,458,987 Land, building and equipment 3,378,334 3,410,893 Research & Development 987,654 345,876 Liabilities Current portion of long-term debt 619,880 633,248 Accounts payable 89,654 61,760 Accrued expenses 224,609 241,279 Deferred revenue 324,709 298,225 Long-term portion of debt 2,118,821 2,127,392 Other liabilities 125,000 34,550 Appendix 1 (Continued): Summarized ATI Financial Statement Information Stock Prices of ATI: 2020 average $2.03 per share 2021 average $1.97 per share 2022 September $3.45 per share 2022 November $3.98 per share 2023 March $2.80 per share Memo Agile Technologies Inc. To: Bernhart From: Owens Corning CC: Date: April 5th Re: Hi Bernhart Research costs update I know you asked for an update on our research costs to date with Agile. I'm still accumulating all the costs for year-end but will get things squared away by the time the auditors get here. Since we are all so excited about some of our projects, I've ensured we've put more of the costs on the balance sheet. I can roughly estimate the following for you: Costs of exploring new GPS options: Testing of current new technologies Program costs of GPS Salary costs and overhead $230,000 $450,000 $120,000 $187,654 I think that's a pretty good approximation right now, but I'll square it up shortly. Cheers Owen