Andrew Parrish, Diligentiam PostedFriday, June 5, 2020 Q Why was Diligentiam formed? A Diligentiam was formed to help small to mid-size businesses unleash cash within their business through various tax and financial strategies. Our team has years of experience in corporate tax and finance management and works with companies to implement strategies that can help meet financial goals. Q Tell me about the name Diligentiam, what does that mean? A The word Diligentiam is a derivation of the Latin conjugation for “I am diligent” or “I am attendant.” Part of our philosophy is to apply diligence to every area of a client’s business to help identify areas for value, to include actual buy-side and sell-side due diligence services. The partners found a cool way to express that philosophy through one word Diligent-I am. I believe it is the accusative form of the word diligentia. Q Does Diligentiam specialize in industry, product, or discipline? A I am the vice president handling our company’s R&D Tax Credit division. There, I oversee and directly handle projects to help client across the country claim federal and state R&D tax credits for their efforts to solve the everyday problems faced in our world. My team and I specialize in tracking all legislation, court precedent, and guidelines surrounding application of the R&D tax credit. Q How do you describe to laypeople what you do? A We help businesses figure out how to meet financial goals through the application of niche tax strategies and our expertise in corporate financial management. We mainly work through CPAs and with CFOs to provide value-added services to client and businesses. Q Tell us a little more about the R&D credit and how it works? A The R&D tax credit has been around since the 1980s. This program rewards companies that use trial-and-error-based activities to overcome uncertainties during their business activities by allowing for a dollar-for-dollar offset of income tax liabilities. In general, the wages, contractor expenses, and supply costs associated with “qualified research activities” are calculated through a tax form to generate a tax credit. The tax credit ends up being about 7.5 to 10 cents of every research dollar. For example, if you have $1 million in qualified research wages, you could get about $100,000 in tax credits. To qualify for the tax credit, a company must prove that it can pass what is known as the four-part or four-gate test. These gates are: 1. A company must prove that it is working to produce a qualified business component. This can be a product or a service. 2. A company must show that it faces uncertainty in its efforts to reach a final deliverable. 3. A process of trial and error or experimentation that allows the company to overcome uncertainties must be utilized. 4. The work must be technical in nature, meaning that it is based in various science or engineering disciplines. When you apply these four gates to a typical system integrator, one can see how their day-to-day activities working on projects for clients meet these gates. • Business component: Integrators perform research and development to design and install systems for clients under fixed-price contracts. These contracts usually require the integrator to assume some risk of technical failure since deficiencies must be corrected in any system at the integrator’s own cost. • Uncertainty: This one is so apparent when you look at the work of an integrator. Taking a production system from concept design to completion requires encountering and eliminating numerous technical problems along the way. • Experimentation: Almost every integrator will have to analyze alternative mechanical designs, wiring schemes, PLC architecture, WCS architecture, etc. during the process of developing and implementing a system. Usually projects are executed using a repetitive set of activities that allow the company to do so. The testing of systems and concepts also takes place at multiple levels. • Technical in nature: Integration and automation projects often rely on one (if not multiple) disciplines of engineering, including mechanical engineering, controls engineering, software development, industrial engineering, etc. The thing that makes the R&D credit so beneficial for companies in the manufacturing systems integrator space is that so much of an integrator’s payroll is tied up in engineering or support of engineering linked to fixed-price projects. We have seen higher ratios of total payroll applicable toward the R&D credit than almost any other industry. Many of our clients can claim close to 100% of their engineering payroll towards this credit. The best part for us is that explaining and documenting how systems integrators meet the requirements for the credit is easy since the work is so technical and often well documented. Q How has Diligentiam grown or changed in the past year, and what do you expect for your company in the next 12 to 24 months? A We have greatly expanded our business valuation and M&A due diligence team. We are also making investments in our own R&D to develop predictive analytics tools that will allow companies to better forecast revenue so they can implement financial strategies that will lead to higher future profits. Current revenue forecasting tools are backward looking and have wide error bars. We are attempting to change that. Q What challenges are your customers facing now? A We work with customers to get cash back into their business. Obviously, right now cash flow is a major concern. Our clients need access to cash to help finance continuing operations and expansion plans in a difficult economic time. Luckily, the services we offer allow companies to capitalize on things like PPP and other provisions in the CARES Act. For example, the CARES Act has enabled companies to carry net operating losses (NOLs) back five years. Tax strategies, such as cost segregation analysis and bonus depreciation, can allow companies to create a loss in the current year. When this loss is applied to prior years where taxes were paid, the company could get a refund check from the government, thus, giving it access to much needed cash. I know a lot of our clients are also having problems getting their banks to come through on PPP funding. It seems as if large banks, such as Bank of America, are having a hard time meeting the demand. We are seeing more success with smaller regional banks, but many of them are not filling out any PPP loans for businesses without existing accounts or lines of credit. Q In your opinion, what is the biggest challenge facing the automation marketplace today and in the future? A Since my automation client base is in the U.S., I will limit my observations to the domestic market. We think that soon there will be a large effort to reshore a lot of production capabilities from overseas (particularly from China). However, companies will not be simply copying and pasting their overseas production lines into U.S. plants. Having grown accustomed to a lower cost of labor, companies will want to maintain margins and will rely heavily on automation to do so. Meeting these demands poses challenges on multiple fronts for U.S. integrators. One challenge my clients talk about often is the ability to attract and maintain a workforce with the requisite skills to work on complex projects. Some of our clients are having a hard time finding young mechanical engineers that can perform at the same level as the old guard who are now retiring, thus, leading to a knowledge gap. Other companies can find controls engineers that are great with programming but do not like doing a monthlong startup at a client site. Also, in general, it seems as if we are not where we need to be with our ability to utilize robots. This leads into the second challenge I think U.S. integrators will need to rise to. We have fallen behind countries like Germany and Japan in robotics innovation. I know I have a few clients that are great at programming and implementing robots, but I think we need to invest more in pure robotics R&D and robotics education. However, one of the things that is great about our country is our ability to adapt and overcome. Challenges present opportunity, and I have certainly seen some of our clients rise to the occasion. For example, we have one client that develops robotic systems for the auto industry and has helped create a program that pays for local high school grads to go to a local community college for two years to learn controls and robotics. While in school, they work for my client and then are hired right after they finish. Within five years, they are making six-figures. This seems to be an incentive-based model that can be replicated to solve both challenges I have discussed. Q What makes you optimistic about the future of the automation industry? A I think the fact that there will be so much demand for industrial automation in the near and the long-term presents unbounded opportunities for this industry. Robotics and automation have been proven to produce positive bottom line impacts for manufacturing companies. When picking projects to invest in, CFOs look at things like the internal rate of return (IRR) and the net present value (NPV). Automation projects tend to produce immediate positive NPV and a strong IRR. CFOs know this, and I expect that we will continue to see increases in capital investment towards automation projects. This will only be heightened by social distancing requirements. Obviously, experts who have a proven track record of providing automation solution stand to gain from this windfall. Q Tell us why your customers return to you project after project. A The service that my team provides with R&D tax credits allows us to develop relationships with clients across multiple years. This means that I am visiting my clients year after year and engaging in hours-long discussion with them. Naturally, we tend to develop deep personal connections with our clients and possess an intimate understanding of how their business works. We work heavily in the small to mid-size business space. A lot of our clients, especially in the automation space, are family-owned companies. Diligentiam is also a family-run company. I work with my father and my brothers, so there is often a lot of common ground to connect on. Of course, besides the personal relationships, our service helps companies get cash back into their business. It not uncommon to see the fruits of this labor when we return for annual visits year after year. We often see new young engineers that have been hired or investments in new state-of-the-art technology. I like to think we have played a small part in that.