Washington, D.C. 20549
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐☐ No ☑
AMERI HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERQUARTERLY PERIOD ENDED MARCH 31, 20162017
INDEX
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PART I - FINANCIAL INFORMATION | |
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Item 1 - Financial Statements | | | | |
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| | 2016 | 3 | |
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| | 2016 | 4 | |
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| | 2016 | 5 | |
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| | | 6 | |
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Business Overview | | | 12 | |
Results for the Three Months Ended March 31, 2016 Compared to Results for the Three Months Ended March 31, 2015 | | | 13 | |
Liquidity and Capital Resources | | | 14 | |
Critical Accounting Policies and Estimates | | | 15 | |
Recent Accounting Pronouncements | | | 16 | |
Special Note Regarding Forward-Looking Statements | | | 16 | |
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| | | 17 | 21 |
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Management's Report on Disclosure Controls and Procedures | | | 17 | |
Management's Report on Internal Control over Financial Reporting | | | 18 | |
Inherent Limitations of Effectiveness of Controls | | | 18 | |
Changes in Internal Control over Financial Reporting | | | 18 | 21 |
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PART II - OTHER INFORMATION | | |
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| 19 | |
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| 19 | |
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Item 4 - Mine Safety Disclosures | | | 19 | |
Item 5 - Other Information | | | 19 | |
Item 6 - Exhibits | | | 20 | 23 |
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Signatures | 23 |
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21 | 23 |
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| 24 |
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| 26 |
PART I
PART I – FINANCIAL INFORMATION
ITEM 1. ITEM 1. | FINANCIAL STATEMENTS |
The financial information set forth below with respect to the financial statements as of March 31, 2016 and 2015 and for the three-month periods ended March 31, 2016 and 2015 is unaudited. This financial information, in the opinion of our management, includes all adjustments consisting of normal recurring entries necessary for the fair presentation of such data. The results of operations for the three-month period ended March 31, 2016 are not necessarily indicative of results to be expected for any subsequent period. Our fiscal year end is December 31.
AMERI HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| | March 31, 2016 | | | December 31, 2015 | |
Assets | | | | | | |
Cash and cash equivalents | | $ | 505,173 | | | $ | 1,878,034 | |
Accounts receivable | | | 4,929,298 | | | | 4,872,082 | |
Investments | | | - | | | | 82,908 | |
Other current assets | | | 318,826 | | | | 343,809 | |
Total current assets | | | 5,753,297 | | | | 7,176,833 | |
Other assets: | | | | | | | | |
Property and equipment, net | | | 134,914 | | | | 73,066 | |
Intangible assets, net | | | 3,072,617 | | | | 3,114,513 | |
Acquired goodwill | | | 3,670,522 | | | | 3,470,522 | |
Total other assets | | | 6,878,053 | | | | 6,658,101 | |
| | | | | | | | |
Total assets | | $ | 12,631,350 | | | $ | 13,834,934 | |
| | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 2,587,069 | | | $ | 2,597,385 | |
Other accrued expenses | | | 2,236,466 | | | | 1,093,814 | |
Consideration payable | | | 1,630,490 | | | | 3,649,267 | |
Short term notes | | | 1,477,386 | | | | 1,235,935 | |
Total current liabilities | | | 7,931,411 | | | | 8,576,401 | |
Long term liabilities | | | | | | | | |
Convertible notes | | | 5,000,000 | | | | 5,000,000 | |
Long term acquisition consideration | | | 500,000 | | | | - | |
Total long term liabilities | | | 5,500,000 | | | | 5,000,000 | |
| | | | | | | | |
Total liabilities: | | | 13,431,411 | | | | 13,576,401 | |
| | | | | | | | |
Stockholders' equity: | | | | | | | | |
Preferred stock, $0.01 par value; 1,000,000 authorized, none issued and outstanding | | | - | | | | - | |
Common stock, $0.01 par value; 100,000,000 shares authorized, 11,874,361 and 11,874,361 issued and outstanding as of March 31, 2016 and December 31, 2015, respectively | | | 118,743 | | | | 118,743 | |
Additional paid-in capital | | | 1,294,369 | | | | 1,192,692 | |
Retained earnings | | | (2,213,173 | ) | | | (1,052,902 | ) |
Total stockholders' equity | | | (800,061 | ) | | | 258,533 | |
| | | | | | | | |
Total liabilities and stockholders' equity | | $ | 12,631,350 | | | $ | 13,834,934 | |
| | March 31, 2017 | | | December 31, 2016 | |
Assets | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 1,812,600 | | | $ | 1,379,887 | |
Accounts receivable | | | 9,590,446 | | | | 8,059,910 | |
Investments | | | 82,908 | | | | 82,908 | |
Other current assets | | | 866,505 | | | | 542,237 | |
Total current assets | | | 12,352,459 | | | | 10,064,942 | |
| | | | | | | | |
Other assets: | | | | | | | | |
Property and equipment, net | | | 113,505 | | | | 100,241 | |
Intangible assets, net | | | 11,845,910 | | | | 8,764,704 | |
Acquired goodwill | | | 21,879,572 | | | | 17,089,076 | |
Deferred income tax assets, net | | | 3,488,960 | | | | 3,488,960 | |
Total other assets | | | 37,327,947 | | | | 29,442,981 | |
Total assets | | $ | 49,680,406 | | | $ | 39,507,923 | |
| |
Current liabilities: | | | | | | | | |
Line of credit | | | 3,956,494 | | | | 3,088,890 | |
Accounts payable | | | 4,468,533 | | | | 5,130,817 | |
Other accrued expenses | | | 3,147,210 | | | | 2,165,088 | |
Bank Term Loan | | | 399,996 | | | | 405,376 | |
Consideration payable – Cash | | | 4,199,238 | | | | 1,854,397 | |
Consideration payable – Equity | | | 596,763 | | | | 64,384 | |
Dividend Payable | | | 499,965 | | | | - | |
Total current liabilities | | | 17,268,199 | | | | 12,708,952 | |
| | | | | | | | |
Long term liabilities: | | | | | | | | |
Convertible notes | | | 1,250,000 | | | | - | |
Bank Term Loan – Net of Current Portion | | | 1,023,474 | | | | 1,536,191 | |
Consideration payable – Cash | | | 3,375,000 | | | | 2,711,717 | |
Consideration payable – Equity | | | 11,993,723 | | | | 10,887,360 | |
Total Long-term Liabilities | | | 17,642,197 | | | | 15,135,268 | |
Total liabilities | | | 34,910,396 | | | | 27,844,220 | |
| | | | | | | | |
Stockholders' equity: | | | | | | | | |
Preferred stock, $0.01 par value; 1,000,000 authorized, 363,611 issued and outstanding as of March 31, 2017 and as of December 31, 2016 | | | 3,636 | | | | 3,636 | |
Common stock, $0.01 par value; 100,000,000 shares authorized, 14,579,417 and 13,885,972 issued and outstanding as of March 31, 2017 and December 31, 2016 respectively. | | | 145,794 | | | | 138,860 | |
Additional paid-in capital | | | 19,850,002 | | | | 15,358,839 | |
Accumulated deficit | | | (5,226,646 | ) | | | (3,833,588 | ) |
Accumulated other comprehensive income (loss) | | | 740 | | | | (7,426 | ) |
Non-Controlling Interest | | | (3,516 | ) | | | 3,382 | |
Total stockholders' equity | | | 14,770,010 | | | | 11,663,703 | |
Total liabilities and stockholders' equity | | $ | 49,680,406 | | | $ | 39,507,923 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
- 3 -
AMERI HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8.NET INCOME (LOSS) PER SHARE:
A reconciliationGoodwill represents the excess of net income and weighted average shares used in computing basic and diluted net income per share is as follows:
| Three Months Ended | |
| March 31, | |
| 2016 | | 2015 | |
| (in thousands, except per share data) | |
Basic net income (loss) per share: | | | | |
Net income (loss) applicable to common shares | | $ | (0.10 | ) | | $ | 0.11 | |
Weighted average common shares outstanding | | | 11,874 | | | | 9,992 | |
Basic net income (loss) per share of common stock | | $ | (0.10 | ) | | $ | 0.11 | |
Diluted net income (loss) per share: | | | | | | | | |
Net income (loss) applicable to common shares | | $ | (0.10 | ) | | $ | 0.11 | |
Weighted average common shares outstanding | | | 11,874 | | | | 9,992 | |
Dilutive effects of convertible debt, stock options and warrants | | | - | | | | - | |
Weighted average common shares, assuming dilutive effect of stock options | | | 11,874 | | | | 9,992 | |
Diluted net income (loss) per share of common stock | | $ | (0.10 | ) | | $ | 0.11 | |
Share-based awards, inclusive of all grants made under the Company's equity plans, for which either the stock option exerciseaggregate purchase price orover the fair value of the restricted share award exceedsnet assets acquired in businesses combinations. Goodwill was comprised of the average market price over the period, have an anti-dilutive effect on earnings per share, and accordingly, are excluded from the diluted computations for all periods presented.following amounts:
| | March 31, 2017 | | | December 31, 2016 | |
Virtuoso | | $ | 939,881 | | | $ | 939,881 | |
DCM | | | 10,416,000 | | | | 10,416,000 | |
Bigtech | | | 292,808 | | | | 314,555 | |
Ameri Consulting Service Pvt. Ltd. | | | 1,948,118 | | | | 1,948,118 | |
Ameri Georgia | | | 3,470,522 | | | | 3,470,522 | |
ATCG | | | 4,812,243 | | | | - | |
Total | | $ | 21,879,572 | | | $ | 17,089,076 | |
As per Company policy, goodwill impairment tests will be conducted on an annual basis and any impairment will be reflected in the Company’s statements of March 31, 2016, there were approximately 338,189 share-based awards outstanding, respectively, under the Company's equity plans leaving 1,661,811 share-based units available under the Plan. During the three months ended March 31, 2016, we granted options to purchase 105,000 shares of our common stock to employees.
operations.
NOTE 8. | EARNINGS (LOSS) PER SHARE: |
| Three Months Ended March 31, | |
| 2017 | | 2016 | |
| | | | |
| | | | |
Net income (loss) attributable to the Company | | $ | (1,225,469 | ) | | $ | (1,097,381 | ) |
Weighted average common shares outstanding | | | 14,094,536 | | | | 11,874,361 | |
Basic net income (loss) per share of common stock | | $ | (0.09 | ) | | $ | (0.09 | ) |
Diluted net income (loss) per share of common stock | | $ | (0.09 | ) | | $ | (0.09 | ) |
Due to the Company's net loss, potential dilutive shares were not included in the calculation of diluted EPS onearnings per share for the periods ended March 31, 2017 and March 31 2016, as it willthey would have an antidilutive effect.
On January 27, 2017, the Company issued 33,333 shares of its common stock to its legal counsel, Olshan Frome Wolosky LLP ("Olshan"), in exchange for the cancellation of a portion of accrued and unpaid legal fees owed by the Company to Olshan.
The Company is yet to make the dividend payment on its Series A Preferred Stock that was payable on March 31, 2017. The Company will pay the sole holder of the Series A Preferred Stock, the accrued dividend in-kind (common stock of AMRH) pursuant to the terms of the Certificate of Designation contemporaneously with the filing of the Quarterly Report of Form 10-Q for the quarter ended March 31, 2017.
On July 1, 2016, the Company entered into that certain Loan and Security Agreement (the "Loan Agreement"), with its wholly-owned subsidiaries Ameri and Partners Inc and Bellsoft, Inc., as borrowers (the "Borrowers"), the Company and its wholly-owned subsidiaries Linear Logics, Corp. and WinHire Inc serving as guarantors, the Company's Chief Executive Officer, Giri Devanur, serving as a validity guarantor, and Sterling National Bank, N.A. (as lender and as agent, "Sterling"). The Company joined DCM, Virtuoso and ATCG as borrowers under the Loan Agreement following their respective acquisition.
Under the Loan Agreement, the Borrowers can borrow up to an aggregate of $10 million, which includes up to $8 million in principal for revolving loans (the "Revolving Loans") for general working capital purposes, up to $2 million in principal pursuant to a term loan (the "Term Loan") for the purpose of a permitted business acquisition and up to $200,000 for letters of credit. A portion of the proceeds of the Loan Agreement were also used to repay the November 20, 2015 credit facility that was entered into between the Company, its wholly-owned subsidiary Bellsoft, Inc. (Ameri Georgia) and Federal National Payables, Inc.
The maturity of the loans under the Loan Agreement are as follows:
Revolving Loan Maturity Date: July 1, 2019; provided, however, that the Revolving Loan Maturity Date will extend and renew automatically for successive one-year terms on each anniversary of the initial Revolving Loan Maturity Date (each an "Anniversary Date") thereafter, unless not less than sixty (60) days prior to any such Anniversary Date, written notice of non-renewal is given by either party to the other, in which case the Revolving Loan Maturity Date will be such next Anniversary Date.
Term Loan Maturity Date: The earliest of (a) the date following acceleration of the Term Loan and/or the Revolving Loans; (b) the Revolving Loan Maturity Date; or (c) July 1, 2019.
Interest under the Loan Agreement is payable monthly in arrears and accrues as follows:
| (a) | in the case of Revolving Loans, a rate per annum equal to the sum of (i) the Wall Street Journal Prime Rate plus (ii) 2.00%; |
| (b) | in the case of the Term Loan, a rate per annum equal to the sum of (i) the Wall Street Journal Prime Rate plus (ii) 3.75%; and |
| (c) | in the case of other obligations of the Borrowers, a rate per annum equal to the sum of (i) the greater of (A) 3.25% or (B) Wall Street Journal Prime Rate plus (ii) 3.75%. |
The Loan Agreement also requires the payment of certain fees, including, but not limited to letter of credit fees and an unused Revolving Loans fee.
The Loan Agreement contains financial and other covenant requirements, including, but not limited to, financial covenants that require the Borrowers to not permit capital expenditures above $150,000 in any fiscal year, maintain a fixed charge coverage ratio of not less than 2.00 to 1.00 and maintain certain debt to EBITDA ratios. The Loan Agreement also requires the Company and Borrowers to obtain Sterling's consent before making any permitted acquisitions. The amounts borrowed by the Borrowers under the Loan Agreement are guaranteed by the guarantors, and the Loan Agreement is secured by substantially all of the Borrowers’ assets.
The principal amount of the Term Loan will be repaid as follows: (i) equal consecutive monthly installments in the amount of $33,333.33 each, paid on the first day of each calendar month and (ii) one final payment of the entire remaining principal balance, together with all accrued unpaid interest on the Term Loan maturity date.
To date, the Company is not in conformance with the financial covenants contained in its Loan Agreement with Sterling National Bank. The Company received a waiver from Sterling National Bank for its non-compliance with the Loan Agreement through March 31, 2017 in exchange for the payment of a fee of $5,000. The Company is currently negotiating a waiver with Sterling National Bank to waive the Company's compliance with the Loan Agreement during the second quarter of 2017 in exchange for the payment of an additional fee that is to be determined. The Company does not expect to be in compliance with the terms of the Loan Agreement following the conclusion of the terms of the waivers granted by Sterling National Bank. The Company is continuing to work with Sterling National Bank to address its non-compliance.
Interest paid during the period ended March 31, 2017 amounted to $79,933 Principal repaid on the term loan during the period ended March 31, 2017 was $100,000.The short term and long term loan outstanding balances on the term loan as of March 31, 2017 is $399,996 and $1,023,474 respectively. The revolving line of credit outstanding balance as of March 31, 2017 was $2,440,971.
COMMITMENTS AND CONTINGENCIES:12
Bigtech, which was acquired as of July 1, 2016, had a term loan of $17,637 and a line of credit for $373,040 as of March 31, 2017. The Bigtech line of credit is with an Indian bank, HDFC Bank Limited and was entered into on June 3, 2015 for Bigtech’s working capital requirements. The line of credit is for up to $416,667 with an interest rate of 11.85% per annum and maturity in June 2020. The Bigtech term loan accrues interest at the rate of 10.30% per annum and matures in 2020. Both the term loan and the line of credit were already in place when the Company acquired Bigtech. Interest paid during the period ended March 31,2017 amounted to $10,873 for the term loan and line of credit held by Bigtech.
NOTE 11. | CONVERTIBLE NOTES: |
On March 7, 2017, we completed the sale and issuance of 8% Convertible Unsecured Promissory Notes (the “2017 Notes”)for aggregate proceeds to us of $1,250,000 from four accredited investors, including one of the Company's directors, Dhruwa N. Rai. The 2017 Notes were issued pursuant to Securities Purchase Agreements between the Company and each investor. The 2017 Notes bear interest at 8% per annum until maturity in March 2020, with interest being paid annually on the first, second and third anniversaries of the issuance of the 2017 Notes beginning in March 2018. From and after an event of default and for so long as the event of default is continuing, the 2017 Notes will bear default interest at the rate of 10% per annum. The 2017 Notes can be prepaid by us at any time without penalty.
The 2017 Notes are convertible into shares of our common stock at a conversion price of (i) in the event that any registration statement for the public offering of common stock filed by the Company with the SEC in connection with an uplisting to a national stock exchange is declared effective by the SEC on or prior to December 31, 2017, such price per share that is equal to 68% of the price per share of common stock offered and sold pursuant to such registration statement, or (ii) if no such registration statement is declared effective by December 31, 2017, such price per share that is equal to the weighted average closing price per share of the Company's common stock for the 20 trading days immediately preceding December 31, 2017, subject to adjustment under certain circumstances. The 2017 Notes rank junior to our secured credit facility with Sterling National Bank. The 2017 Notes also include certain negative covenants including, without the investors' approval, restrictions on dividends and other restricted payments and reclassification of its stock.
NOTE 12. | COMMITMENTS AND CONTINGENCIES: |
Operating Leases
The Company's principal facility is located in Princeton, New Jersey. The Company also leases office space in various locations with expiration dates between 2016 and 2018.2020. The lease agreements often include leasehold improvement incentives, escalating lease payments, renewal provisions and other provisions which require the Company to pay taxes, insurance, maintenance costs, or defined rent increases. All of the Company's leases are accounted for as operating leases. Rent expense is recorded over the lease terms on a straight-line basis. Rent expense was $26,222$62,878 and $3,312$26,222 for the three months ended March 31, 20162017 and March 31, 2015,2016, respectively. The increase during thesethe comparative periods is due to new office space that was leased by the Company in Princeton, New Jersey on July 1, 2015 and the addition of office space through the acquisition of Bellsoft.
The Company has entered into an operating lease for its primary office facility in Princeton, New Jersey, which expires in July 2017. The future minimum rental payments under these lease agreements are as follows:
Years ending December 31, | | (in thousands) | |
2016 | | $ | 90 | |
2017 | | | 60 | |
2018 | | | 20 | |
Total | | $ | 170 | |
AMERI HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DCM, Virtuoso, Bigtech and ATCG.
NOTE 10. OPTIONS13
| | Number of Shares | | | Weighted Avg. Exercise Price | |
Options outstanding at December 31, 2015 | | | 150,000 | | | | 2.67 | |
Granted | | | 105,000 | | | $ | 6.02 | |
Exercised | | | — | | | | — | |
Outstanding at March 31, 2016 | | | 255,000 | | | $ | 4.05 | |
As of March 31, 2016 and March 31, 2015 the outstanding options had a weighted average remaining term and intrinsic value of 4.53 and 0 years and $84,660 and $0, respectively.
Outstanding and Exercisable Options
Average Exercise Price | | Number of Shares | | Remaining Average Contractual Life (in years) | | Exercise Price times number of Shares | | Weighted Average Exercise Price | | Intrinsic Value | |
| $ | 4.05 | | | | 255,000 | | | | 4.53 | | | $ | 1,032,600 | | | $ | 4.05 | | | $ | 84,660 | |
The options are valued using the Black-Scholes pricing model. The expensed amount for options for March 31, 2016 and 2015 was determined to be $28,678 and $0, respectively.Contents
NOTE 11.WARRANTS
On May 26, 2015, the Company issued a warrant for the purchase of 2,777,777 shares of its common stock to Lone Star Value, which vested immediately, has an exercise price of $1.80 and expires on May 26, 2020. The warrant is valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include stock price on the measurement date of $1.50, expected term of 2.5 years, expected volatility of 50%, risk free interest rate of 1.53%, and expected dividend yield of 0%. The value on the grant date of the warrant was $1,078,523 and the expense for each of March 31, 2016 and March 31, 2015 was determined to be $0.
On May 13, 2016, Lone Star Value completed an early partial exercise of its 2015 warrant (the "Original Warrant") for 1,111,111 shares the Company's common stock at a price of $1.80 per share, for total consideration to the Company of $2,000,000, and Lone Star Value was issued a replacement warrant for the remaining 1,166,666 shares under the Original Warrant on the same terms as the Original Warrant. Lone Star Value also agreed to an amendment of its 5% Convertible Note, issued by the Company on May 26, 2015, to extend the maturity of the Note for two years in exchange for (i) the right to request that the Board of Directors of the Company (the "Board") expand the size of the Board to nine directors from the current eight, with Lone Star Value having the right to designate up to four of the nine directors, and (ii) the issuance of a new five-year warrant (the "New Warrant") for the purchase of 1,000,000 shares of the Company's common stock at a price of $6.00 per share, on substantively the same terms as the Original Warrant, except the New Warrant may only be exercised for cash. Lone Star Value's Registration Rights Agreement, dated May 26, 2015, with us was also amended and restated to include the shares of common stock issuable under the New Warrant.
AMERI HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
There was no warrant activity in 2015. Below is a table summarizing the Company's outstanding warrants as of December 31, 2015 and March 31, 2016:
| | | | | Weighted Avg. | | | |
| Number of | | Weighted Avg. | | Remaining | | | Intrinsic |
| Shares | | Exercise Price | | Term | | | Value |
Outstanding at December 31, 2015 | | | 2,777,777 | | | | 1.8 | | | | 4.41 | | | $ | 13,333,330 | |
| | | | | | | | | | | | | | | | |
Granted | | | — | | | | — | | | | — | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding at March 31, 2016 | | | 2,777,777 | | | | 1.8 | | | | 4.15 | | | | $13,333,330 | |
For the three months ended March 31, 2016 and March 31, 2015, the Company incurred no warrants based expense.
NOTE 12.RESTRICTED STOCK UNITS:
On August 4, 2015, the Company issued restricted stock units for the right to receive, at settlement, 83,189 shares of common stock. Prior to this issuance there had been no restricted stock unit grants. This tranche of restricted stock units is valued at $3.51 or market value on the date of the grant and vest over 1 year. The value on the grant date of the restricted stock units was $291,994 and the restricted stock units expense for March 31, 2016 and March 31, 2015 was determined to be $72,999 and $0, respectively. As of March 31, 2016, no restricted stock units were vested.
NOTE 13.SUBSEQUENT EVENTS:
On April 20, 2016, the Company entered into a Stock Purchase Agreement with Dhruwa N. Rai, pursuant to which Mr. Rai purchased from the Company 500,000 unregistered shares of its common stock at a price per share of $6.00 for aggregate consideration to the Company of $3,000,000.
On May 10, 2016, the Company increased the size of the Board to eight people. Following the increase in the size of the Board, the Board appointed Dhruwa N. Rai, a member of the advisory council of Ameri and Partners Inc., one of the Company's operating subsidiaries, to fill the vacancy created by such increase, effective immediately. On May 10, 2016, the Company also formed an Executive Strategy Committee, which will consider, and advise the Board on, strategic opportunities of the Company. Following the formation of the Executive Strategy Committee, the Board appointed Mr. Rai as its chairman and Giri Devanur, the Company's President and Chief Executive Officer, and Srinidhi "Dev" Devanur, the Company's Executive Vice Chairman, as additional members of the committee. Upon Mr. Rai's appointment to the Board and the Executive Strategy Committee, the Compensation Committee granted Mr. Rai an option to purchase 500,000 shares of common stock of the Company, with an exercise price of $7.00, and restricted stock units to receive 500,000 shares of common stock of the Company in consideration and contingent upon Mr. Rai's service to the Board of Directors and the Executive Strategy Committee.
On May 13, 2016, Lone Star Value completed an early partial exercise of its Original Warrant for 1,111,111 shares of the Company's common stock at a price of $1.80 per share, for total consideration to the Company of $2,000,000, and Lone Star Value was issued a replacement warrant for the remaining 1,166,666 shares under the Original Warrant on the same terms as the Original Warrant. Lone Star Value also agreed to an amendment of the Convertable Note to extend the maturity of the Convertable Note for two years in exchange for (i) the right to request that the Board expand the size of the Board to nine directors from the current eight, with Lone Star Value having the right to designate up to four of the nine directors, and (ii) the issuance of a new five-year warrant for the purchase of 1,000,000 shares of the Company' common stock at a price of $6.00 per share, on substantively the same terms as the Original Warrant, except the New Warrant may only be exercised for cash. Lone Star Value's Registration Rights Agreement, dated May 26, 2015, with the Company was also amended and restated to include the shares of common stock issuable under the New Warrant.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following information should be read in conjunction with the information contained in the Unaudited Condensed Consolidated Financial Statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. See "Risk Factors" and "Special Note Regarding Forward-Looking Statements" included elsewhere herein.
We use the terms "we," "our," "us," "AMERI" and "the Company" in this report to refer to AMERI HOLDINGS, Inc. and its wholly-owned subsidiaries.
Company History
We were incorporated under the laws of the State of Delaware in February 1994 as Spatializer Audio Laboratories, Inc., which was a shell company immediately prior to the Merger, onMerger. On May 26, 2015, we completed the Merger, in which we caused Ameri100 Acquisition, Inc., a Delaware corporation and our newly created, wholly owned subsidiary, to be merged with and into Ameri and Partners (dba Ameri100), a Delaware corporation. As a result of the Merger, Ameri and Partners became our wholly owned operating subsidiary. The Merger was consummated under Delaware law, pursuant to the Merger Agreement, and in connection with the Merger we changed our name to AMERI Holdings, Inc. We are headquartered in Princeton, New Jersey.
Overview
We are a next generation technology-management solutions firm. We have built productsspecialize in delivering SAPTM cloud, digital and enterprise services to assist global 2000 companies by architectingclients worldwide. Our SAP focus allows us to provide technological solutions to a broad and delivering the best technology solutions enabling customers to transform their business processes.growing base of clients. We have built a new method of measuring the effectiveness of technology deployments across largeare headquartered in Princeton, NJ, and medium size companies. Through acquisitions, we have built deep consulting expertiseoffices across the United States, which are supported by offices in business process management,India. Our model inverts the conventional global delivery model wherein offshore information technology ("IT") service providers are based abroad and maintain a minimal presence in the United States. With a strong SAP focus, our client partnerships anchor around SAP cloud services, artificial intelligence, internet of things and robotic process automation, digital transformation services and enterprise resource planning particularly surrounding SAP software and technology.automation. We pursue an acquisition strategy that seeks to disrupt the established business model of offshore IT service providers.
We generate revenue primarily through the provision of consulting services. We generate revenue by providing consulting services under written service contracts with our customers. The service contracts we enter into generally fall into two specific categories: time(1) time-and-materials contracts and materials and fixed-price.(2) fixed-price contracts.
When a customer enters into a time and materials,time-and-materials or fixed-price or(or a periodic retainer-basedretainer-based) contract, we recognizethe revenue is recognized in accordance with its evaluation of the deliverables inof each contract. If the deliverables representinvolve separate units of accounting, we then measure and allocate the consideration from the arrangement is measured and allocated to the separate units, based on vendor specific objective evidence of the value for each deliverable.
The revenue under time and materials contracts is recognized as services are rendered and performed at contractually agreed upon rates. Revenue pursuant to fixed-price contracts is recognized under the proportional performance method of accounting. We routinely evaluate whether revenue and profitability should be recognized in the current period. We estimate the proportional performance on our fixed-price contracts on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project.
For the three months ended March 31, 2017 and March 31,2016, sales to five major customers, accounted for 38.51% and 60.15% of our total revenue, respectively.
We continue to explore strategic alternatives to improve the market position and profitability of our product and service offerings in the marketplace, generate additional liquidity for the Company, and enhance our valuation. We expect to pursue our goals during the next twelve months through organic growth and through other strategic alternatives. Some of these alternatives have included, and could continue to include, selective acquisitions. The Company has obtained financing and additional capital from the sale of equity and incurrence of indebtedness in the past, and continues to consider capital raising and financing from the sale of various types of equity and incurrence of indebtedness to provide capital for our business plans and operations in the future. The Company has also provided, and may from time to time in the future provide, information to interested parties.
Matters that May or Are Currently Affecting Our Business
The main challenges and trends that could affect or are affecting our financial results include:
Result of Operations | · | Our ability to enter into additional technology-management and consulting agreements, to diversify our client base and to expand the geographic areas we serve; |
| · | Our ability to attract competent, skilled professionals and on-demand technology partners for our operations at acceptable prices to manage our overhead; |
| · | Our ability to acquire other technology services companies and integrate them with our existing business; |
| · | Our ability to raise additional equity capital, if and when we needed; and |
| · | Our ability to control our costs of operation as we expand our organization and capabilities. |
RESULTS OF OPERATIONS
Results of Operations for the Three Months Ended March 31, 20162017 Compared to the Three Months Ended March 31, 20152016
| | Three Months Ended March 31, | |
| | 2017 | | | 2016 | |
| | | | | | |
Net revenue | | $ | 12,340,927 | | | $ | 7,012,964 | |
Cost of revenue | | | 9,039,577 | | | | 5,365,561 | |
Gross profit | | | 3,301,350 | | | | 1,647,403 | |
| | | | | | | | |
Operating expenses: | | | | | | | | |
Selling and marketing | | | 332,310 | | | | 31,350 | |
General and administration | | | 2,701,145 | | | | 2,110,336 | |
Acquisition related expenses | | | 209,344 | | | | 375,405 | |
Depreciation and amortization | | | 689,100 | | | | 111,628 | |
Operating expenses | | | 3,931,899 | | | | 2,628,719 | |
Operating income (loss): | | | (630,549 | ) | | | (981,316 | ) |
| | | | | | | | |
Interest expense | | | (90,806 | ) | | | (113,746 | ) |
Interest income/other income | | | - | | | | 2,005 | |
Other expense | | | (4,149 | ) | | | (2,304 | ) |
Total other income (expenses) | | | (94,955 | ) | | | (114, 045 | ) |
Income (loss) before income taxes | | | (725,504 | ) | | | (1,095,361 | ) |
Income tax benefit (provision) | | | | | | | (2,020 | ) |
Net income (loss) after tax | | | (725,504 | ) | | | (1,097,381 | ) |
Dividend on Preference Shares | | | (499,965 | ) | | | - | |
Net income (loss) attributable to the Company | | | (1,225,469 | ) | | | (1,097,381 | ) |
Non-Controlling Interest | | | 3,516 | | | | | |
Foreign exchange translation adjustment | | | 5,335 | | | | (62,890 | ) |
Net income (loss) | | $ | (1,216,618 | ) | | | (1,160,271 | ) |
Basic income (loss) per share attributable to the Company | | $ | (0.09 | ) | | $ | (0.09 | ) |
Diluted income (loss) per share attributable to the Company | | $ | (0.09 | ) | | $ | (0.09 | ) |
| | | | | | | | |
Basic weighted average number of shares | | | 14,094,536 | | | | 11,874,361 | |
Diluted weighted average number of shares | | | 14,094,536 | | | | 11,874,361 | |
| | Three Months Ended March 31, | | | Three Months Ended March 31, | |
| | 2016 | | | 2015 | |
Net Revenue | | $ | 7,012,964 | | | $ | 4,284,750 | |
Cost of revenue | | | 3,865,561 | | | | 3,166,080 | |
Gross profit | | $ | 3,147,403 | | | $ | 1,118,670 | |
| | | | | | | | |
Operating expenses: | | | | | | | | |
Selling and Marketing | | $ | 31,350 | | | $ | - | |
General and administrative | | | 3,610,336 | | | | 33,720 | |
Nonrecurring expenditures | | | 375,405 | | | | - | |
Depreciation and amortization | | | 111,628 | | | | 8,267 | |
Operating expenses | | $ | 4,128,719 | | | $ | 41,987 | |
| | | | | | | | |
Income from operations | | | (981,316 | ) | | | 1,076,683 | |
| | | | | | | | |
Interest expense | | $ | (113,746 | ) | | $ | - | |
Interest income | | | 2,005 | | | | - | |
Other expense | | | (2,304 | ) | | | - | |
Tax benefit/(provision) | | | (2,020 | ) | | | - | |
Foreign exchange translation | | | (62,890 | ) | | | - | |
Net income | | $ | (1,160,271 | ) | | $ | 1,076,683 | |
15
Revenues
Revenues for the three months ended March 31, 20162017 increased by 63.7% from76% as compared to the three months ended March 31, 2015.2016. The increase in revenue is directlywas primarily attributable to our acquisition of Bellsoft, Inc. We derived 100% of ouradditional revenues from our acquisitions, with DCM contributing 73% percent of the total increase and ATCG, Virtuoso and Bigtech contributing 15%, 4% and 4%, respectively, of the total increase. Our existing customers locatedaccounted for the remaining 4% of the total increase in North Americarevenues.
Gross Margin
Our gross margin was 27% for the three months ended March 31, 2016.
Gross margin
Our gross margin percentage (gross margin2017, as percentage of revenues) was 44.8%compared to 23% for the three months ended March 31, 2016. The improved gross margin is due to additional project based revenues. Our target gross margins are anticipated in the range of 25% -30% based on the mix of project revenues and professional service revenues. However, there is no assurance that we will achieve the anticipated gross margin.
During first quarter of 2016, the Company erroneously classified approximately $1.5 million of expenses as compared to 26.1%general and administrative expenses which should have been classified as cost of revenue. The Company has corrected this error in this quarterly report. The reclassification did not change the Company’s net income or loss for the periods reported.
Selling and Marketing Expenses
Selling and marketing expenses were $332,310 for the three months ended March 31, 2015.
Selling, general2017, compared to $31,350 for the three months ended March 31, 2016. The increase in selling and administrativemarketing expenses was directly attributable to our acquisitions, with 82% of the increase attributable to DCM, 6% to ATCG and the remaining 12% of the total increase attributable to increased marketing expenses of Ameri and Partners and Ameri Georgia.
Selling, generalGeneral and administrativeAdministration Expenses
General and Administration ("G&A") expenses ("SG&A") include all costs, including rent costs, which are not directly associated with revenue-generating activities.activities, as well as the non-cash expense for stock based compensation. These include employee costs, corporate costs and facilities costs. Employee costs include selling, marketing and administrative salaries and related employee benefits, travel, recruiting and training costs. Corporate costs include costs such as reorganization costs, legal, accounting and outside consulting fees. Facilities costs primarily include rent and communications costs.
SGG&A expenses for the three months ended March 31, 2016 increased2017 were $2,701,145 as compared to $3,641,686 from $33,720 and$2,110,336 for the three months ended March 31, 2015. The2016. $464,750 of the increase in SG&A is directlywas attributable to our acquisition of Bellsoftstock based compensation expense due to grants made to our employees and increased corporate overhead.
Nonrecurring expenses$132,420 was attributable to additional non-billable staff we added in connection with our acquisitions.
NonrecurringDuring first quarter of 2016, the Company erroneously classified approximately $1.5 million of expenses as general and administrative expenses which should have been classified as cost of revenue. The Company has corrected this error in this quarterly report. The reclassification did not change the Company’s net income or loss for the periods reported.
Acquisition Related Expenses
Acquisition related expenditures of $209,344 and $375,405 occurred during the three months ended March 31, 2017 and March 31, 2016, and were primarily costs and expenses that are unlikely to occur again in the normal course of business.respectively. These expenditures included restructuring costslegal fees, integration expenses and legal fees. There were no nonrecurring expendituresother acquisition related costs. The decrease is due to the decline in acquisition related activities in the first quarter of 2017 as compared to the first quarter of 2016.
Depreciation and Amortization
Depreciation and amortization expense amounted to $689,100 for the three months ended March 31, 2015.
Depreciation and amortization costs
Depreciation and amortization expense amounted2017, as compared to $111,628 for the three months ended March 31, 2016. We capitalized the customer lists acquired during various acquisitions between April 2016 as compared to $8,267 for the period endedand March 31 2015.2017, resulting in increased amortization costs. The increase in depreciation and amortization costs was primarily due to additioncustomer lists from each acquisition are amortized over a period of assets and acquisition of Bellsoft Inc. customer lists.
60 months.
Operating incomeIncome
Our operating income percentage(loss) was (14.0)%(630,549) for the three months ended March 31, 2016,2017, as compared to 25.1%(981,316) for the three months ended March 31, 2015.2016. This changereduction was mainly due to an increase in SG&A expenses and nonrecurring expenditures.increased gross margins.
Income taxes
Interest Expense
Our provision for income taxesinterest expense for the three months ended March 31, 2016 and year2017 was $90,806 as compared to $113,746 for the three months ended March 31, 2015, amounted2016. The decrease is mainly due to approximately $2,020 and $0, respectively.
changes in interest rates charged by our lenders.
Liquidity and Capital Resources
Our cash position was $505,173$1,812,600 as of March 31, 20162017, as compared to $1,878,034$1,379,887 as of December 31, 2015, a decrease2016, an increase of $1,372,861$432,713 primarily as a resultdue to the sale and issuance of working capital uses. the 2017 Notes.
Cash used byfor operating activities was $1,565,640$837,933 during the three months ended March 31, 20162017 and was primarily a result of net decreases fromchanges in working capital.capital requirements. Cash used fromin investing activities was $48,672$321,963 during the three months ended March 31, 20162017 primarily due primarily to acquisitions and assets purchased for the purpose of providing future revenues.ATCG. Cash provided by financing activities was $241,451$1,592,609 during the three months ended March 31, 20162017 and was attributable to the issuance of additional shares for our ATCG acquisition, the 2017 Notes and increased borrowing under our line of credit with Sterling National Bank.
On July 1, 2016, the Company entered into that certain Loan and Security Agreement (the "Loan Agreement"), with its wholly-owned subsidiaries Ameri and Partners Inc and Ameri Georgia, as borrowers (the "Borrowers"), the Company and its wholly-owned subsidiaries Linear Logics, Corp. and WinHire Inc serving as guarantors, the Company's Chief Executive Officer, Giri Devanur, serving as a validity guarantor, and Sterling National Bank, N.A. (as lender and as agent, "Sterling"). The Company joined DCM, Virtuoso and ATCG as borrowers under the Loan Agreement following their respective acquisition.
Under the Loan Agreement, the Borrowers can borrow up to an aggregate of $10 million, which includes up to $8 million in principal for revolving loans (the "Revolving Loans") for general working capital purposes, up to $2 million in principal pursuant to a term loan (the "Term Loan") for the purpose of a permitted business acquisition and up to $200,000 for letters of credit. A portion of the proceeds of the Loan Agreement were also used to repay the November 20, 2015 credit facility with FNCC.
that was entered into between the Company, its wholly-owned subsidiary Bellsoft, Inc. (Ameri Georgia) and Federal National Payables, Inc.- 14 -
Revolving Loan Maturity Date: July 1, 2019; provided, however, that the Revolving Loan Maturity Date will extend and renew automatically for successive one-year terms on each anniversary of the initial Revolving Loan Maturity Date (each an "Anniversary Date") thereafter, unless not less than sixty (60) days prior to any such Anniversary Date, written notice of non-renewal is given by either party to the other, in which case the Revolving Loan Maturity Date will be such next Anniversary Date.
Term Loan Maturity Date: The earliest of (a) the date following acceleration of the Term Loan and/or the Revolving Loans; (b) the Revolving Loan Maturity Date; or (c) July 1, 2019.
Interest under the Loan Agreement is payable monthly in arrears and accrues as follows:
| (a) | in the case of Revolving Loans, a rate per annum equal to the sum of (i) the Wall Street Journal Prime Rate plus (ii) 2.00%; |
| (b) | in the case of the Term Loan, a rate per annum equal to the sum of (i) the Wall Street Journal Prime Rate plus (ii) 3.75%; and |
| (c) | in the case of other obligations of the Borrowers, a rate per annum equal to the sum of (i) the greater of (A) 3.25% or (B) Wall Street Journal Prime Rate plus (ii) 3.75%. |
The Loan Agreement also requires the payment of certain fees, including, but not limited to letter of credit fees and an unused Revolving Loans fee.
The Loan Agreement contains financial and other covenant requirements, including, but not limited to, financial covenants that require the Borrowers to not permit capital expenditures above $150,000 in any fiscal year, maintain a fixed charge coverage ratio of not less than 2.00 to 1.00 and maintain certain debt to EBITDA ratios. The Loan Agreement also requires the Company and Borrowers to obtain Sterling's consent before making any permitted acquisitions. The amounts borrowed by the Borrowers under the Loan Agreement are guaranteed by the guarantors, and the Loan Agreement is secured by substantially all of the Borrowers’ assets.
The principal amount of the Term Loan will be repaid as follows: (i) equal consecutive monthly installments in the amount of $33,333.33 each, paid on the first day of each calendar month and (ii) one final payment of the entire remaining principal balance, together with all accrued unpaid interest on the Term Loan maturity date.
To date, the Company is not in conformance with the financial covenants contained in its Loan Agreement with Sterling National Bank. The Company received a waiver from Sterling National Bank for its non-compliance with the Loan Agreement through March 31, 2017 in exchange for the payment of a fee of $5,000. The Company is currently negotiating a waiver with Sterling National Bank to waive the Company's compliance with the Loan Agreement during the second quarter of 2017 in exchange for the payment of an additional fee that is to be determined. The Company does not expect to be in compliance with the terms of the Loan Agreement following the conclusion of the terms of the waivers granted by Sterling National Bank. The Company is continuing to work with Sterling National Bank to address its non-compliance.
Principal repaid on the term loan during the period ended March 31, 2017 was $100,000. The short term and long term loan outstanding balances on the term loan as of March 31,2017 are $399,996 and $1,023,474, respectively. The revolving line of credit outstanding balance as of March 31, 2017 was $2,440,971.
Bigtech, which was acquired as of July 1, 2016, had a term loan of $17,637 and a line of credit for $373,040 as of March 31, 2017. The Bigtech line of credit is with an Indian bank, HDFC Bank Limited and was entered into on June 3, 2015 for Bigtech’s working capital requirements. The line of credit is for up to $416,667 with an interest rate of 11.85% per annum and maturity in June 2020. The Bigtech term loan accrues interest at the rate of 10.30% per annum and matures in 2020. Both the term loan and the line of credit were already in place when the Company acquired Bigtech.
On March 7, 2017, we completed the sale and issuance of the 2017 Notes for aggregate proceeds to us of $1,250,000 from four accredited investors, including one of the Company's directors, Dhruwa N. Rai. The 2017 Notes were issued pursuant to Securities Purchase Agreements between the Company and each investor. The 2017 Notes bear interest at 8% per annum until maturity in March 2020, with interest being paid annually on the first, second and third anniversaries of the issuance of the 2017 Notes beginning in March 2018. From and after an event of default and for so long as the event of default is continuing, the 2017 Notes will bear default interest at the rate of 10% per annum. The 2017 Notes can be prepaid by us at any time without penalty.
The 2017 Notes are convertible into shares of our common stock at a conversion price of (i) in the event that any registration statement for the public offering of common stock filed by the Company with the SEC in connection with an uplisting to a national stock exchange is declared effective by the SEC on or prior to December 31, 2017, such price per share that is equal to 68% of the price per share of common stock offered and sold pursuant to such registration statement, or (ii) if no such registration statement is declared effective by December 31, 2017, such price per share that is equal to the weighted average closing price per share of the Company's common stock for the 20 trading days immediately preceding December 31, 2017, subject to adjustment under certain circumstances. The 2017 Notes rank junior to our secured credit facility with Sterling. The 2017 Notes also include certain negative covenants including, without the investors' approval, restrictions on dividends and other restricted payments and reclassification of its stock.
Accounts Receivable
Accounts receivable for the period ended March 31, 2017 were $9,590,446 as compared to $8,059,910 as on December 31,2016. The increase is due to acquisition of ATCG during the period ended March 31, 2017.
Accounts Payable
Accounts payable for the period ended March 31, 2017 was $4,468,533 as compared to $5,130,817 as on December 31,2016. The decrease is primarily due to the payoff of accumulated accounts payable during the three months ended March 31, 2017.
Accrued Expenses
Accrued expenses for the period ended March 31, 2017 was $3,147,210 as compared to $2,165,088 as on December 31,2016. Our acquisition of ATCG led to an increase of accrued expenses of $819,574.
Operating Activities
Our largest source of operating cash flows is cash collections from our customers for different information technology services we render under various statements of work. Our primary uses of cash fromfor operating activities are for personnel-related expenditures, leased facilities and taxes.
Critical Accounting Policies
Purchase Price Allocation.We allocate the purchase price of our acquisitions to the assets and liabilities acquired, including identifiable intangible assets, based on their respective fair values at the date of acquisition. Some of the items, including accounts receivable, property and equipment, other intangible assets, certain accrued liabilities and other reserves require a degree of management judgment. Certain estimates may change as additional information becomes available. Goodwill is assigned at the enterprise level and is deductible for tax purposes for certain types of acquisitions. Management finalizes the purchase price allocation within the defined measurement period of the acquisition date as certain initial accounting estimates are resolved.
Valuation of Contingent Earn-out ConsiderationConsideration.. Acquisitions may include contingent consideration payments based on the achievement of certain future financial performance measures of the acquired company. Contingent consideration is required to be recognized at fair value as of the acquisition date. We estimate the fair value of these liabilities based on financial projections of the acquired companies and estimated probabilities of achievement. We believe our estimates and assumptions are reasonable, however, there is significant judgment involved. We evaluate, on a routine, periodic basis, the estimated fair value of the contingent consideration and changes in estimated fair value, subsequent to the initial fair value estimate at the time of the acquisition, will be reflected in income or expense in the consolidated statements of operations. Changes in the fair value of contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of revenue and/or earnings estimates and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria. Any changes in the estimated fair value of contingent consideration may have a material impact on our operating results.
Revenue Recognition. We recognize revenue in accordance with the Accounting Standard Codification 605 "Revenue Recognition." Revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller's price to buyer is fixed and determinable, and (4) collectability is reasonably assured. We recognize revenue from information technology services as the services are provided. Service revenues are recognized based on contracted hourly rates, as services are rendered or upon completion of specified contracted services and acceptance by the customer.
Accounts Receivable. We extend credit to clients based upon management's assessment of their credit-worthiness on an unsecured basis. We provide an allowance for uncollectible accounts based on historical experience and management evaluation of trend analysis. We include any balances that are determined to be uncollectible in allowance for doubtful accounts.
Intangible Assets. We capitalize the customer lists received from each of our acquisition considering projected revenue from the top 8 to 10 customers over a period of three years. The allowancescustomer lists from each acquisition are amortized over a period of 60 months.
Goodwill. We capitalize the excess of capitalized intangible assets of an acquisition over the purchase consideration as goodwill in for uncollectible accountseach of our acquisitions. Impairment of goodwill is analyzed on an annual basis as per Company policy.
Recent Accounting Pronouncements
On November 17, 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2016-18, Statement of
March 31, 2016Cash Flows (Topic 230): Restricted Cash, which is intended to reduce diversity in the presentation of restricted cash and
March 31, 2015 was $0. Basedrestricted cash equivalents in the statement of cash flows. The new standard requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the
information available, management believes our accounts receivable, netstatement of
allowancecash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for
doubtful accounts, are collectible.Property and Equipment. Property and equipmentannual periods beginning after December 15, 2017 including interim periods within those fiscal years, but earlier adoption is stated at cost.permitted. We provide for depreciation of property and equipment using the straight-line method over the estimated useful lives of the related assets ranging from 3 to 7 years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease terms or the useful lives of the improvements. We charge repairs and maintenance costs that do not extendbelieve the livesadoption of the assets to expenses as incurred.
We account for computer software costs developed for internal use in accordance with accounting principles generally accepted in the Unites States, which require companies to capitalize certain qualifying costs during the application development stage of the related software development project and to exclude the initial planning phase that determines performance requirements, most data conversion, general and administrative costs related to payroll and training costs incurred. Whenever a software program is considered operational, we consider the project to be completed, place it into service, and commence amortization of the development cost in the succeeding month.
Recent Accounting Pronouncements
The Company is reviewing the effects of following recent updates. The Company has no expectation that any of these itemsthis new standard will have a material effect uponimpact on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, which clarifies and provides a more robust framework to use in determining when a set of assets and activities is a business. The amendments in this update should be applied prospectively on or after the effective date. This update is effective for annual periods beginning after December 15, 2017 and interim periods within those periods. Early adoption is permitted for acquisition or deconsolidation transactions occurring before the issuance date or effective date and only when the transactions have not been reported in issued or made available for issuance financial statements. We do not believe the adoption of this new standard will have a material impact on our consolidated financial statements.
· | Update 2015-16 - Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments |
19
· | Update 2015-15 – Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update) |
· | Update 2015-11 - Inventory (Topic 330): Simplifying the Measurement of Inventory |
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. Under this new standard, goodwill impairment would be measured as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods. Early adoption is permitted for interim or annual goodwill impairment test performed on testing dates after January 1, 2017. We do not believe the adoption of this new standard will have a material impact on our consolidated financial statements.· | Update 2015-08 - Business Combinations (Topic 805): Pushdown Accounting - Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115 (SEC Update) |
· | Update No. 2015-03 – Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs |
· | Update 2015-17 - Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes |
· | Update 2016-01 - Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities |
· | Update No. 2015-02 - Consolidation (Topic 810): Amendments to the Consolidation Analysis |
· | Update 2016-09 - Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting |
In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, "Revenue from Contracts with Customers (Topic 606)," which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605).” This ASU requires an entity to recognize revenue when goods are transferred or services are provided to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This ASU also requires disclosures enabling users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date.” With the issuance of ASU 2015-14, the new revenue guidance ASU 2014-09 will be effective for fiscal 2019, including interim periods within that reporting period, using one of two prescribed retrospective methods. In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customer (Topic 606), Identifying Performance Obligations and Licensing." This ASU finalizes the amendments to the guidance on the new revenue standard on the identification of performance obligations and accounting for licenses of intellectual property. We do not believe that the new standard will have a material impact on our consolidated financial statements.
Special Note Regarding Forward-Looking Information
Some of the statements in this Quarterly Report on Form 10-Q and elsewhere constitute forward-looking statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements involve known and unknown risks, uncertainties and other factors that may cause results, levels of activity, growth, performance, tax consequences or achievements to be materially different from any future results, levels of activity, growth, performance, tax consequences or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, those listed below.
The forward-looking statements included in this Form 10-Q and referred to elsewhere are related to future events or our strategies or future financial performance, including statements concerning our 20152017 outlook, future revenue and growth, customer spending outlook, general economic trends, IT service demand, future revenue and revenue mix, utilization, new service offerings, significant customers, competitive and strategic initiatives, growth plans, potential stock repurchases, future results, tax consequences and liquidity needs. In some cases, you can identify forward-looking statements by terminology such as "may," "should," "believe," "anticipate," "anticipated," "expectation," "continued," "future," "forward," "potential," "estimate," "estimated," "forecast," "project," "encourage," "opportunity," "goal," "objective," "could," "expect," "expected," "intend," "plan," "planned," or the negative of such terms or comparable terminology. These forward-looking statements inherently involve certain risks and uncertainties, although they are based on our current plans or assessments which are believed to be reasonable as of the date of this Form 10-Q. Factors that may cause actual results, goals, targets or objectives to differ materially from those contemplated, projected, forecasted, estimated, anticipated, planned or budgeted in such forward-looking statements include, among others, the following possibilities: (1) failure to obtain new customers or retain significant existing customers; (2) the loss of one or more key executives and/or employees; (3) changes in industry trends, such as a decline in the demand for Enterprise Resource Planning and Enterprise Performance Management solutions, custom development and system integration services and/or declines in industry-wide information technology spending, whether on a temporary or permanent basis and/or delays by customers in initiating new projects or existing project milestones; (4) inability to execute upon growth objectives, including new services and growth in entities acquired by our Company; (5) adverse developments and volatility involving geopolitical or technology market conditions; (6) unanticipated events or the occurrence of fluctuations or variability in the matters identified as delays in, or the failure of, our sales pipeline being converted to billable work and recorded as revenue; (8) termination by clients of their contracts with us or inability or unwillingness of clients to pay for our services, which may impact our accounting assumptions; (9) inability to recruit and retain professionals with the high level of information technology skills and experience needed to provide our services; (10) failure to expand outsourcing services to generate additional revenue; (11) any changes in ownership of the Company or otherwise that would result in a limitation of the net operating loss carry forward under applicable tax laws; (12) the failure of the marketplace to embrace advisory and product-based consulting services; and (13) changes in our utilization levels. In evaluating these statements, you should specifically consider various factors described above. These factors may cause our actual results to differ materially from those contemplated, projected, anticipated, planned or budgeted in any such forward-looking statements.
Although we believe that the expectations in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, growth, earnings per share or achievements. However, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Except as otherwise required, we undertake no obligation to update any of the forward-looking statements after the date of this Form 10-Q to conform such statements to actual results.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
ITEM 4. | CONTROLS AND PROCEDURES |
Management's Report on Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this quarterly report,Quarterly Report, being March 31, 2016,2017, we have carried out an evaluation of the effectiveness of the design and operation of our Company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our Company's management, including our Company's Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our company's Chief Executive Officer and Chief Financial Officer concluded that our company's disclosure controls and procedures are not yet effective as atof the end of the period covered by this report as noted below in management's report on internal control over financial reporting. This is largely due to the fact that we are acquiring privately held companies as part of our growth strategy and our control procedures over all acquired subsidiaries will not be effective until such time as we are able to fully integrate the acquisition with our company and set processes and procedures for the acquired entities. We are working to improve and harmonize our financial reporting controls and procedures across all of our companies. There have been no changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
Disclosure controls and procedures and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time period specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. Our management has assessed the effectiveness of our internal control over financial reporting as of March 31, 2016,2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with generally accepted accounting principles; providing reasonable assurance that receipts and expenditures are made in accordance with authorizations of management and our directors; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. As a result of this assessment, our management concluded that, as of March 31, 2016,2017, our internal control over financial reporting was not yet effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. This is largely due to the fact that we are acquiring privately held companies as part of our growth strategy and our control procedures over all acquired subsidiaries will not be effective until such time as we are able to fully integrate the acquisition with our company and set processes and procedures for the acquired entities. We are working to improve and harmonize our financial reporting controls and procedures across all of our companies.
This Quarterly Report does not include an attestation report of our independent auditors regarding internal control over financial reporting. Management's report was not subject to attestation by our independent auditors pursuant to temporary rules of the SEC that permit our company to provide only management's report in this Quarterly Report.
Inherent Limitations on Effectiveness of Controls
Internal control over financial reporting has inherent limitations which include but is not limited to the use of independent professionals for advice and guidance, interpretation of existing and/or changing rules and principles, segregation of management duties, scale of organization and personnel factors. Internal control over financial reporting is a process, which involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis, however these inherent limitations are known features of the financial reporting process and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There were no changes to correct certain internal control inadequacies, due to the privately held nature of acquired subsidiaries in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the period covered by this report that have not materially affected, or are not reasonably likely to materially affect, our internal control over financial reporting.