INTRINSYC TECHNOLOGIES CORPORATION ... INTRINSYC TECHNOLOGIES CORPORATION QUARTERLY REPORT THIRD QUARTER

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  • INTRINSYC TECHNOLOGIES CORPORATION

    QUARTERLY REPORT

    THIRD QUARTER FISCAL 2017

    For the Three and Nine Months ended September 30, 2017 and 2016

  • Chief Executive Officer Letter

    Dear Fellow Shareholder,

    Intrinsyc reported revenue of US$4.8 million (CDN$6.0 million), up 6% from the previous quarter and 19% over the

    same period in the prior year. The increase from the comparable periods was due to higher revenue from the Company’s

    computing products. Net income performance in the third quarter was higher than the previous quarter due primarily

    to an increase in revenue.

    The Company continued its steady progress with our fourth consecutive quarter of revenue growth. Revenue would

    have been higher except for the deferral of revenue from engineering services projects performed in the quarter, and

    delays in shipping some hardware orders. We expect to recognize revenue from the deferred engineering services

    projects and hardware sales in the fourth quarter. Another factor that hampered higher revenue growth in the quarter

    was the availability of engineering resources.

    Intrinsyc has been able to achieve four consecutive quarters of revenue growth in spite of the sequential and substantial

    decline in revenue derived from our largest client in the years 2014 – 2016. The combination of the decline in relatively

    higher margin engineering services revenue from this client and our increased R&D spending, as well as the increase in

    the value of the Canadian dollar, has impacted our EBITDA performance in 2017. We are optimistic that our client will

    receive the necessary funding to re-engage with Intrinsyc.

    We launched our first development kit and System on Module (“SOM”), the Open-Q™ 2100, to target the wearable

    computing market in the second quarter. The wearable computing market is forecasted to be worth over $34 billion by

    2020, by CCS Insight in their February 2016, “Global Wearable Forecast.”

    In the third quarter, Ken Tough, Director of Engineering Services at Intrinsyc, wrote a blog:

    https://www.intrinsyc.com/future-wearables-open-q-2100/, “The Future of Wearables” In this blog, Ken addresses the

    technical challenges in the wearables market and how Intrinsyc’s Open-Q™ 2100 platform, based on the Snapdragon

    2100 Wear from Qualcomm Technologies, Inc., is the ideal platform for small form factor wearables; such as smart

    watches, fitness trackers, elderly and kid trackers, and more.

    Intrinsyc was invited by Qualcomm to present our wearable computing solutions at the Wearable Computing VIP session

    at the Qualcomm 4G/5G summit, in Hong Kong, in early October.

    We have significant interest in our Open-Q 2100, and already signed our first agreement to assist in the development of

    a pet tracking device. We expect this product will be in production in the first quarter of 2018 and we will begin to ship

    computing modules for production at that time.

    The Open-Q™ 626 Development Kit and System on Module (“SOM”) was launched in the third quarter. The Open-

    Q™ 626 is ideal for connected camera devices and the trend toward putting more computing power in devices near the

    edges of networks, like sensor modules and gateways. Higher processing power in IoT devices is less expensive because

    filtering and analytics where the data is collected can reduce communications costs, and it enables faster decisions, rather

    than waiting for computations and analytics to take place in the cloud. The Open-Q™ 626 is based on the Snapdragon

    626 from Qualcomm Technologies Inc. This chip can capture 24-megapixel images and 4K video at 30 frames per

    second, and also has the capability for deep learning.

    We signed our first development services agreement with a client for the 626, even prior to announcing the Open-Q™

    626 on August 30, 2017. The agreement with this client will not include the purchase of computing modules, however

    Intrinsyc is being paid for engineering services performed and will receive a per device royalty once the client ships

    their product. We have several prospective OEM clients for the 626 in our sales pipeline.

    Just after quarter end, we announced the Open-Q™ 660 Hardware Development Kit, based on the Snapdragon 660 from

    Qualcomm Technologies, Inc. The Snapdragon 660 is designed to provide a leap in performance; supporting advanced

    photography and enhanced gaming, in addition to long battery life for top-tier mobile devices. The Open-Q™ 660 is an

    https://www.intrinsyc.com/future-wearables-open-q-2100/

  • early-access platform that supports the ecosystem of technology companies and application providers to integrate and

    innovate for devices based on the latest Snapdragon mobile platform, as well as provide original equipment

    manufacturers (“OEMs”), developers and engineers with next generation software technology and tools to accelerate

    development and testing of devices.

    Continuing our prolific product development pace, the Company is working in collaboration with Qualcomm to

    introduce two new products in the fourth quarter that are targeted at voice controlled products, such as smart speakers

    and other connected home devices. According to Global Market Insights, June 2017 Report, the Smart Speaker Market

    size was over US$400 million in 2016 and is predicted to grow at an estimated CAGR of over 50% from 2017 to 2024.

    With these new product introductions, the Company now has computing solutions across all four tiers of Qualcomm’s

    Snapdragon processors, 200 Series, 400 Series, 600 Series, and 800 Series. This enables Intrinsyc to address a broad set

    of IoT product opportunities. Our broad set of IoT computing solutions puts us into a favorable competitive position and

    makes Intrinsyc a valuable technology partner for Qualcomm’s IoT initiatives.

    We followed up last quarter’s strong order booking with another excellent quarter, positioning the Company for

    accelerated revenue growth in the fourth quarter. As a reminder, in the second quarter we received an order valued at

    US$2,990,000 for memory components, which are planned for use in building computing modules for a Global 500

    company. Revenue from the sale of memory components will be in approximately even installments in Q4 of 2017, and

    Q1 and Q2 of 2018. While not contractually obligated at this time, beyond the purchase of these memory components,

    we expect our client to place future orders for full computing modules that incorporate this memory. Should this occur

    as planned, the Company would recognize additional revenues in excess of US$10,000,000 through early fiscal 2019

    from this client.

    Quarterly Business Highlights

    • The Company increased design and production wins for Open-Q™ computing modules from 42 to 44 and 18 to 19, respectively, during the quarter. Design and production wins are important metrics to track our progress in building

    Intrinsyc’s business with scalable repeat revenue.

    • Received an order, from an existing client, that is valued at US$916,000. The non-cancellable order incorporates memory purchased by the client under a previous order valued at US$100,000, resulting in a net value of

    US$816,000. This order is expected to ship in the fourth quarter.

    • Received orders that are in aggregate valued at US$623,000. One order is from a medical device company that plans to use a next-generation design of the Company’s Open-Q™ embedded computing modules, currently in

    development; and the second order is for the development of a custom designed embedded computing module. The

    second order includes a provision for a per-unit royalty fee as the client ships their product. Product development

    services are expected to be completed in 2017.

    • Ken Tough, Manager, Director of Engineering Services at Intrinsyc, wrote a blog: https://www.intrinsyc.com/future-wearables-open-q-2100/, “The Future of Wearables” In this blog Ken addresses

    the technical challenges in the wearables market and how Intrinsyc’s Open-Q 2100 platform, is the ideal platform

    for small form factor wearables; such as smart watches, fitness trackers, elderly and kid trackers, and more. The

    wearable computing market is forecasted to be worth over $34 billion by 2020, by CCS Insight in their February

    2016 “Global Wearable Forecast.”

    • Intrinsyc launched its first development kit and system-on-module, the Open-Q™ 2100, to target the wearable computing market in the second quarter. By July, the Company received its first design win for use in a pet tracking

    device. Intrinsyc expects to start shipping modules for commercial products beginning in the first quarter 2018.

    • Announced the availability of the Open-Q™ 626 System on Module (“SOM”) and Development Kit and signed its first agreement for product development services based on this module. The Open-Q™ 626 is ideal for connected

    camera devices and the trend toward putting more computing power in devices near the edges of networks, like

    https://www.intrinsyc.com/future-wearables-open-q-2100/

  • sensor modules and g