SBIR/STTR Phase II Reviews - Revised January 2016
CAAR SBIR/STTR Phase II Administrative/Financial Reviews
When an SBIR/STTR Program Official has determined that it is likely that a Phase II proposal will be recommended for funding, the prospective awardee will be referred to this website and requested to provide documentation needed by NSF to conduct various administrative and financial reviews. These reviews are conducted to evaluate a prospective awardee's ability to effectively and efficiently manage a Federal award. If your organization has been directed to this site by an SBIR/STTR Program Official and requested to provide the documentation needed by NSF to conduct administrative and financial reviews, the documentation should be sent in electronic format (e.g. pdf) within 10 calendar days of the date of the request to: email@example.com.
Financial Information Checklist should be used as guide to put together documents necessary for the administrative and financial review.
NSF uses the services of CPA firms to perform reviews of the documentation submitted. If contacted by NSF staff or a contractor to provide clarification or additional documentation, responses should be provided as soon as possible to expedite the review process. Please direct questions on completing any of the required documentation to 703-292-8244.
Administrative/Financial Documentation Required:
Complete and submit the following five items contained in the Prospective New Awardee Guide:
- "Awardee Organization and Management Summary" found in Appendix 1 of Guide
- "Small Business Declaration" Form 359 found in Appendix 2 of Guide
- "Documentation of Organizational Establishment and Structure" (Articles of Incorporation and State certificate) Reference Section D.3 of Guide
- "Financial Management Systems Questionnaire" Form 358 found in Appendix 3 of the Guide
- "Project Cost Ledger" (PCL), actual expenses from the SBIR/STTR Phase I project Reference Section D.7 and B.2 of Guide. If a PCL from the Phase I project is not available, then the awardee organization should submit a copy of its General Ledger (GL), showing its accounting for normal organizational expenditures during its latest accounting period.
Additionally, Complete and submit the following:
Financial Capability Review - CAAR performs a Financial Capability Review on every prospective Phase II grantee to ensure that the organization is financially stable, has sufficient resources to complete its research program and does not expose the government to the possibility of waste, fraud or abuse of funds. NSF will decline funding when an organization is unable to demonstrate that it has sufficient financial resources as of the evaluation date, or in its opinion, there is a risk of inappropriate use of Federal funds.
The Financial Capability Review includes a review of the organization’s solvency (i.e. the level of capital invested by shareholders), debt obligations, liquidity (i.e. cash resources on hand to satisfy financial obligations), historical profit and loss, cash flows, operating trends and financial commitments.
The Financial Capability Review is performed through a review and analysis of the organization’s financial statements, tax returns and other information. Additional information may be requested to support an organization’s financial capability such as operating budgets, cash flow forecasts, lines of credit, details of liabilities, committed investments, other grant or revenue sources, updated interim financial statements, bank statements, etc.
Financial Information Required: Applicants for Phase II funding should provide the following information to support the Financial Capability Review. Additional information may be requested by CAAR after reviewing the information submitted.
A. Year-end financial statements. An applicant should submit financial statements for the company (including an income statement, balance sheet and cash flow statement) covering the results of operations for the two most recently completed fiscal years.
The financial statements should be prepared using the accounting principles described in the section entitled “Accounting Principles.”
The financial statements should also include basic “Notes to Financial Statements” and supplementary information to help the reader understand the nature of the accounts presented.
B. Interim financial statements – Interim financial statements for the current year should be provided if any one of the following circumstances exist:
- The year-end financial statements submitted are more than 180 days old. For example, if a company has a December 31 fiscal year-end and is submitting financial statements to CAAR on or after July 1 of the following year, the company should also submit interim financial statements covering operations of the current year up to the latest date such financial information is available.
- The company's financial position has changed in a significant and material manner since the year-end financial statements were prepared. This could occur, for example, if the company received a significant level of new investment since year-end; the company's liabilities/debt obligations changed significantly or other developments occurred affecting the financial position of the company and which would be relevant to assessing its financial capability.
C.Information concerning the basis of accounting - The company should provide a brief description of the basis of the accounting method used to prepare the year-end and interim financial statements. This should include a statement from the company's management or its external CPA/accounting consultant whether or not the financial statements were prepared in accordance with Generally Accepted Accounting Principles (GAAP).
D.Accountant's compilation report, review report or audit opinion - If available, companies should submit a copy of their external accountant’s most recent compilation, review or audit report on its financial statements; together with the related financial statements and notes thereto.
E. Details of debt obligations - Provide a schedule of all loans and long-term debt obligations outstanding, including:
- Name of person/organization to whom the balance is owed;
- Balance outstanding at the latest balance sheet date;
- Interest rate and interest payment provisions;
- Loan repayment date (or repayment provisions); and,
- Other significant terms of the debt (convertibility provisions, etc.).
Identify clearly all debt obligations of the company that are payable to shareholders of the company or the company’s management personnel.
The total balance shown on this schedule should be equal to (or reconcile with) the loan balance reported in the company’s financial statements.
For companies that have issued Preferred Stock, provide details of the dividend requirements, repurchase provisions, convertibility provisions, etc. to the extent such information is not already provided elsewhere in the information submitted.
F. Tax returns - If the company's year-end financial statements are unaudited, provide a copy of the company’s tax return for its most recently completed fiscal year.
G. Other information- Prospective Phase II grantees should submit any other information that they believe is relevant to understanding the financial capability and/or financial viability of their company. This includes details of any additional investments expected from shareholders (indicating the amount and timing); new contracts or grants received and other financial developments of the company that are relevant to understanding its financial capability and future prospects.
Additional Financial Information - CAAR performs additional procedures on companies whose financial statements indicate they may be in financial difficulty, or who are addressing financial solvency or liquidity issues. Applicants for Phase II funding who meet any one of the following criteria should provide the additional information listed below to enable a more complete review of their financial capability:
Indicators of Possible Financial Difficulty
- Solvency issue – As indicated by negative shareholders’ equity on their latest balance sheet. (i.e. a shareholders' equity balance that is less than zero).
For the purposes of this test, shareholders' equity consists of both (i) shareholders' equity or net worth as of the latest balance sheet and (ii) any shareholder loans or advances made to the company and reflected on the balance sheet, and which will be outstanding for at least the 2-year period while Phase II research is underway.
- Liquidity issue – indicated by both a Current Ratio of less than 1:1 and a Quick Ratio of less than 0.9:1. The current ratio is the ratio of current assets to current liabilities. The quick ratio is the ratio of quick assets to current liabilities. Quick assets are bank account balances and other liquid funds.
- Unfunded loan maturities – Significant loans coming due within the next 2 years, and for which the source of repayment is not evident.
Provide the following additional information if an indicator of financial difficulty is present:
- Cash flow forecast or operating budget for the upcoming 2-year period; indicating major categories of cash receipts and disbursements. Evidence must be provided to support the likelihood of actually receiving projected cash receipts;
- Details of additional investments expected from shareholders (indicating the amount and timing);
- New contracts or grants received; and,
- Other financial information of the company that is relevant to understanding its financial capability and future prospects.
Additional information to support an applicant’s financial capability may be requested following receipt and review of the above information.
Financial Support Letters - The financial viability of some companies depends on loans, advances and credit facilities provided by major shareholders or investors. Without these credit facilities, an organization could have difficulty paying expenses and meeting its financial obligations on a timely basis.
If a Phase II applicant’s financial viability relies on, among other things, the continuation of loans or credit facilities from shareholder(s) or investor(s), please provide Financial Support Letter(s) signed by such shareholder(s) or investor(s) confirming:
- (i) their intention to continue providing the loan or credit facilities to the company for the 2 year period Phase II research is underway and indicate the limits of that support; and
(ii) that the shareholder loans or advances that are outstanding as of the date of the letter and in the amount of $_____ will not be repaid during the 2 year period Phase II research underway if such repayment will affect the solvency of the company or its ability to meet its financial obligations in a timely basis.
Accounting Principles - Applicants for Phase II funding are encouraged to prepare and submit their financial statements in accordance with Generally Accepted Accounting Principles (GAAP).
Phase II applicants are permitted to submit their financial statements on either (a) the accrual basis of accounting; (b) the cash basis of accounting; or (c) the income tax basis of accounting; provided the following requirements are met:
(i) The company provides a description of the basis of accounting and accounting principles used to prepare the financial statements;
(ii) The company provides additional Notes to Financial Statements to explain the nature of accounts presented; and,
(iii) The company provides a listing and description of the major adjustments needed to present the submitted statements in accordance with GAAP. Companies new to financial reporting and preparation of GAAP financial statements should discuss this requirement with its external CPA.
Budget Reviews - Provide documentation as detailed below to support the proposed costs in the following categories. (CAAR Budget Reviews)
Senior Personnel: (1) Provide a current payroll register for each employee and clearly indicate payroll period, i.e., bi-monthly, bi-weekly, etc. (2) For each named individual who is not presently employed by the organization, provide an employment agreement that states the rate of payment with the organization's considerations in determining the rate of pay. (3) For positions where specific individuals have not been named, provide an explanation of how the rates were determined and any related documentation. (4) Salaries that can not be sustained by commercial activities will be limited to the amounts supported by the Bureau of Labor Statistics salary surveys from the Occupational Employment Statistics (OES). CAAR will not exceed the OES mean average salaries in its recommendations. CAAR also does not consider small business owners to be Chief Executives. Standard Occupational Classifications (SOCs) should be suggested, or they will be determined without input from the small business. (See www.bls.gov) (5) NSF will only fund reasonable increases in base salaries.
Other Personnel: For all "other personnel" proposed at an annualized salary in excess of $50,000, provide cost data as described for senior personnel above. If individual is administrative (i.e., accounting, secretarial, etc.), state reason they are proposed directly and not included in indirect costs.
Fringe Benefits: Provide the categories of costs (FICA, health benefits, etc.) included and the related amounts. Provide calculation of the actual fringe rate for previously completed fiscal year (total fringe costs / total labor costs). (See Indirect Costs below.)
Permanent Equipment: Defined as nonexpendable, tangible personal property, having a useful life of more than one year and an acquisition cost of $5,000 or more per unit. However, companies may elect to establish their capitalization threshold at less than $5,000. Provide cost data from three sources which can be in the form of written quotations and/or copies of pricing information contained in catalogs, trade journals, etc. In situations where equipment can only be provided by one specific source provide a sole source justification and a written quote from that source.
Travel: Provide an itemization of travel which should include the destination, purpose of travel, number of days in travel status, and the estimated costs for items included in the amount (airfare, cab fare, car rental, per diem rates, hotel and other incidentals.) First class and business class fares are unallowable. Per diem in excess of Federal Travel Regulation limits is unallowable. No supporting detail is required for attendance at the annual Grantee Conference budgeted at $2,000 (or less) per person, limited to $4,000/year. (Federal Travel Regulation)
Materials and Supplies: Provide an itemized listing of materials and supplies to include the item identification/description, vendor, quantity, price, and extended amount. Provide quotations or other appropriate documentation to support any single material and supply item with an extended amount in excess of $5,000.
Consultant Services: For each consultant, provide an agreement which includes the following information: (1) the services to be provided; (2) the period of performance and the consultant's availability; (3) the qualifications of the consultant to perform the work; and (4) the rate of pay, not to exceed $600 per 8 hour day. Consultants should be chosen using a competitive selection process; otherwise, sole source justifications should be maintained.
Subawards: For each subaward provide (1) a statement detailing the relationship between the awardee and the subawardee; (2) a statement describing the manner in which the subawardee budget was solicited; e.g., sole source or competitive; (3) the type of award contemplated; e.g., fixed price or cost reimbursement; and (4) an analysis to support that the subaward budgeted cost category amounts are reasonable; including supporting documentation for all budgeted cost categories if and when requested. (5) Subawardee universities and non-profit organizations that have a federally negotiated rate agreement should provide it. Subawardee indirect cost recoveries are also limited to 150% S&W. (6) Subawards should be chosen using a competitive selection process; otherwise, sole source justifications should be maintained.
Indirect Costs: No documentation is required to support budgeted indirect costs plus fringe with an effective rate of 50% or less of direct salaries and wages (S&W). Documenation is required to support indirect costs with an effective rate greater than 50% S&W and is limited to 150% S&W. Indirect costs budgeted at an effective rate greater than 50% must be substantiated by a current indirect rate proposal for the most recently completed fiscal year expenses. The indirect rate proposal must clearly reflect total expenses per your financial statement and show a reconciliation. Rate proposals that do not have a clear reconciliation to total expenses as reported in the financial statements will not be reviewed and the 50% S&W "safe rate" will be recommended for funding. If available, the corresponding rate agreement should be provided; however, NSF reserves the right to make adjustments for forward pricing purposes. In the event the most recently completed fiscal year of activity does not reasonably reflect performance under the Phase II award, a budgeted rate proposal may be submitted in addition to the most recently completed fiscal year actual calculation. Budgeted rate proposals submitted without an actual calculation for the most recently completed fiscal year will not be reviewed. Budgeted pool expenses must be supported by actual cost data or evidence must be provided that a future obligation will be in place accompanied by a reliable quotation. Budgeted indirect rate proposals must include a reference column for each pool expense and each supporting document must be attached and labeled accordingly. (Indirect Cost Proposal Guidance, see Indirect Rate Proposal Submission Procedures)
Indirect Rate Proposal Adjustments:
- IR&D must be treated as a direct cost and included in the indirect rate allocation base.
- The following expenses will not be funded as part of indirect cost pools:
- Patent and patent related expenses;
- Sales and marketing;
- Business development; and
- Manufacturing and production.
Small businesses are cautioned that it is their responsibility to provide adequate explanation and documentation to support budgeted costs. Funding recommendations will not be revised based on new documentation or explanations that are provided subsequent to the completion of budget reviews.