Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in business combinations. Goodwill was comprisedThe total value of the following amounts:Company’s goodwill was $21.9 million as of June 30, 2018 and December 31, 2017.
A reconciliation of net income and weighted average shares used in computing basic and diluted net income per share is as follows:
Share based awards, inclusive of all grants made under the Plan, for which either the stock option exercise price or the fair value of the restricted share award exceeds 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.
On July 1, 2016, the Company entered into a Loan and Security Agreement (the “Loan Agreement”), with its wholly-owned subsidiaries Ameri and Partners IncInc. and Ameri Georgia, as borrowers (the “Borrowers”), the Company and its wholly-owned subsidiaries Linear Logics, Corp. and WinHire IncInc. (dissolved in March 2017) serving as guarantors, the Company’s former 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 Ameri Arizona,California, Virtuoso and Ameri CaliforniaArizona 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”"Revolving Loans") for general working capital purposes, up to $2 million in principal pursuant to a term loan (the “Term Loan”"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 Ameri Georgia and Federal National Payables, Inc.
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”"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:
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’sSterling'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.
We pledged substantially all of our assets as collateral under the Loan Agreement. The Loan Agreement is also supported by a limitedvalidity guaranty from Giri Devanur, our President andformer Chief Executive Officer. If Sterling National Bank accelerates the repayment of our loans, there is no assurance that we will have sufficient assets to repay the loans. A default under the Loan Agreement may also result in an event of default under the Company’s outstanding convertible notes.2017 Notes (as defined below). We are currently looking for additional sources of financing, however there is no guarantee that we will have additional financing available to us.
Interest paid on the Term Loan during the period ended June 30, 2017 amounted to $69,625. Principal repaid on the Term Loan during the period ended June 30, 2017 was $200,000. The short term and long-term outstanding balances on the Term Loan as of June 30, 2017 was $399,996 and $1,323,470, respectively. The outstanding balance of the Revolving Loans as of June 30, 2017 was $3,794,042.
Our Indian subsidiary Bigtech which was acquired as of July 1, 2016, had a term loan of $16,283$9,682 and a line of credit for $311,412$324,899 as of June 30, 2017.2018. The Bigtech line of credit is with an Indian bank, HDFC Bank Limited, and was entered into on JuneSeptember 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 periodsix months ended June 30, 20172018 amounted to $20,543$731 for the term loan and $17,155 line of credit held by Bigtech. On August 6, 2018, we repaid the Bigtech line of credit.
NOTE 11.10. | 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$1.25 million from four accredited investors, including one of the Company’s directors,then-directors, Dhruwa N. Rai.Rai, and David Luci, who became a director of the Company in February 2018. 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. As of June 30, 2018, we were not current in the payment of interest on one of the 2017 Notes; however, as of the date of this quarterly report, all interest payments due on the 2017 Notes have been paid in full.
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 Securities and Exchange Commission (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%$2.80. The holders of the price per share of common stock offered2017 Notes have the right, at their option, at any time and sold pursuantfrom time to such registration statement,time to convert, in part or (ii) if no such registration statement is declared effective by December 31,in whole, the outstanding principal amount and all accrued and unpaid interest under the 2017 such price per share that is equal to the weighted average closing price per shareNotes into shares of the Company’s common stock forat the 20 trading days immediately preceding December 31, 2017, subject to adjustment under certain circumstances. conversion price.
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 12.11. | COMMITMENTS AND CONTINGENCIES: |
Operating Leases
The Company’sCompany's principal facility is located in Princeton, New Jersey.Suwanee, Georgia. The Company also leases office space in various locations with expiration dates between 2016 and 2020.2021. 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’sCompany's leases are accounted for as operating leases. Rent expense is recorded over the lease terms on a straight-line basis. Rent expense was $ 151,797and $57,434$147,751 and $153,285 for the six months ended June 30, 20172018 and 2016,2017, respectively. The increase during the comparative periods is due to the addition of office space through the acquisition of Ameri Arizona, Virtuoso, Bigtech and Ameri California.
The Company has entered into an operating lease for its primary office facility in Princeton, New Jersey, which expires in July 2019. The future minimum rental payments under these lease agreements are as follows:
| Year ending December 31, | | Amount | | | Amount | |
| 2017 | | $ | 124,334 | | |
| 2018 | | | 140,828 | | | | 45,613 | |
| 2019 | | | 103,283 | | | | 67,415 | |
| 2020 | | | 70,333 | | | | 70,333 | |
| 2021 | | | 7,371 | | | | 7,371 | |
| Total | | $ | 446,149 | | | $ | 190,732 | |
NOTE 13.12. | FAIR VALUE MEASUREMENT: |
The group’s financial instruments consist primarily of cash and cash equivalent, accounts receivable, accounts payable, contingent consideration liability and accrued liabilities. The carrying amounts of accounts receivable, accounts payable, cash and cash equivalents and accrued liabilities are considered to be the same as their fair value, due to their short-term nature.
Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The current accounting guidance for fair value measurements defines a three-level valuation hierarchy for disclosures as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; and
Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.
A financial asset or liability’s classification within the hierarchy is determined based upon the lowest level input that is significant to the fair value measurement.
The following table sets forth the financial assets, measured at fair value, by level within the fair value hierarchy as of June 30, 20172018 and December 31, 2016:2017:
| | June 30, 2017 | | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 | |
| | | | | | | | | |
| Level 3 | | | | | | | | | | | | |
| Contingent consideration | | $ | 5,346,688 | | | $ | 5,266,488 | | $ | | 1,390,991 | | $ | | 3,374,660 | |
The following table presents the change in level 3 instruments:
| | | Three Months Ended June 30, 2017 | | | Six Months Ended June 30, 2017 | |
| | | | | | | |
| Opening balance | | | 6,192,200 | | | | 5,266,488 | |
| Additions during the period | | $ | - | | | $ | 1,200,000 | |
| Paid/settlements | | | (445,512 | ) | | | (719,800 | ) |
| Total gains recognized in Statement of Operations | | | (400,000 | ) | | | (400,000 | ) |
| Closing balance | | | 5,346,688 | | | | 5,346,688 | |
| | | Six Months Ended June 30, 2018 | |
| | | | |
| Opening balance | | $ | 3,374,660 | |
| Paid/settlements(net) | | | (1,983,669 | ) |
| Closing balance | | $ | 1,390,991 | |
Contingent consideration pertaining to the acquisitions referred to in note 3 above as of June 30, 20172018 has been classified under level 3 as the fair valuation of such contingent consideration has been done using one or more of the significant inputs which are not based on observable market data.
The fair value of the contingent consideration was estimated using a discounted cash flow technique with significant inputs that are not observable in the market. The significant inputs not supported by market activity included our probability assessments of expected future cash flows related to the acquisitions during the earn-out period, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the respective terms of the share purchase agreements.
The amount of total gains/(losses) included in our Statement of Operations and Comprehensive Income/(Loss) is attributable to change in fair value of contingent consideration arising from the acquisition of Ameri Arizona were $(400,000) and $0 for the quarter ended June 30, 2017 and the year ended December 31, 2016, respectively.
Note 14.NOTE 13. | NON-CONTROLLING INTEREST: |
The subsidiaries of the Company are all direct or indirect wholly-owned subsidiaries, except for Bellsoft India Solutions Private Limited (“Bellsoft India”) and Ameritas Technologies India Private Limited,no non-controlling interest is held by the Company as of whichJune 30, 2018.
In prior periods when the Company held 72% and 76%non-controlling interests in one of the equity of each company, respectively, through March 31, 2017. On March 31, 2017, Ameri Georgia (parent of Bellsoft India) acquired the remaining 28% of the equity of Bellsoft India held by minority shareholders for approximately $8,200. At the time of the acquisition, theits subsidiaries ,the Company reversed the amount payable to non-controlling interest of $3,383 and the same amount was recorded as additional paid-in-capital.
The Company attributesattributed relevant gains and losses to such non-controlling interests for everyin each financial year. During the three months ended June 30, 2017, 2016, and the six months ended June 30, 2018 and 2017 2016 the profit attributable to the holders of non-controlling interests amounted to $15,388 and $0 and $11,872 and $0, respectively.$(11,872), respectively, as the Company no longer held any non-controlling interests following its 2017 fiscal year.
| NOTE 14. | RESTRUCTURING AND STREAMLINING COSTS: |
During the six ended June 30, 2018, the Company streamlined its operations by eliminating redundant positions across its acquired entities, which resulted in a restructuring charge of approximately $127,100.
| NOTE 15. | SUBSEQUENT EVENTS: |
DuringPrivate Placement and Securities Purchase Agreement
On July 25, 2018, we entered into a securities purchase agreement (the “Private Placement Purchase Agreement”) with certain institutional and accredited investors (collectively, the third quarter“Purchasers”) in connection with a private placement (the “Private Placement”) of 2017,shares of our common stock (“Common Stock”) and warrants (the “Private Placement Warrants”). Pursuant to the Private Placement, we agreed to issue 5,000,000 shares of Common Stock or common stock equivalents with an initial per share purchase price of $1.20 and Private Placement Warrants to purchase 4,000,000 shares of common stock with an initial exercise price equal to $1.60 per share, subject to adjustment. The Private Placement Warrants are immediately exercisable, subject to certain ownership limitations, and expire five years after the date of issuance. On July 30, 2018, we issued 3,250,000 of the shares of Common Stock to the Purchasers, and 1,750,000 shares of Common Stock will be issued pursuant to pre-funded warrants, subject to adjustment. The aggregate gross proceeds received by us for the Private Placement were approximately $6,000,000, which we have used and are using for the repayment of certain indebtedness, past acquisition obligations and working capital purposes.
We must seek stockholder approval for the Private Placement by September 27, 2018. In the event our stockholders do not approve the Private Placement, we are required to seek stockholder approval again by November 15, 2018 and then every four months until the transaction is approved or until the Private Placement Warrants have terminated.
The per share purchase price (through the pre-funded warrants) and Private Placement Warrant exercise price will automatically be adjusted lower (the “Price Adjustment”), if applicable, to 80% (with respect to the purchase price of the shares) and 110% (with respect to the exercise price of the Private Placement Warrants) of the lowest of the average daily prices on the 6 trading days after the date that (i) a registration statement covering the resale of the securities being issued in the transaction is declared effective by the Securities and Exchange Commission (the “SEC”) and (ii) our stockholders approve the Private Placement transaction. If all the shares issuable pursuant to the Private Placement Purchase Agreement are not included in the registration statement, another similar adjustment to the per share purchase price and Private Placement Warrant exercise price will occur on the date that such shares may be sold pursuant to Rule 144 under the Securities Act of 1933. Following any adjustment to the Private Placement Warrant exercise price, the number of shares that may be issued pursuant to a Private Placement Warrant will be proportionately increased. In no event will the purchase price or the Private Placement Warrant exercise price be less than $0.29 per share. In addition, the Private Placement Warrants have transaction-specific anti-dilution provisions.
The Private Placement was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D of the Securities Act and in reliance on similar exemptions under applicable state laws. Each of the Purchasers represented that it is either: (i) an “accredited investor” as defined in Rule 501 of the Securities Act or (ii) a “qualified institutional buyer” as defined in Rule 144A(a) under the Securities Act. The securities were offered without any general solicitation by the Company began to streamlineor its operations following the acquisitions of Ameri Arizona and Ameri California. This streamlining is expected to impact about 20 employees and will result in a restructuring charge of approximately $80,000 in the quarter ending September 30, 2017. The Company anticipates that streamlining of its operations will result in annual savings of approximately $1.5 million, inclusive of payroll, benefits, office consolidations and other ancillary employee related costs.representatives.
Registration Rights Agreement
In connection with the Private Placement, we entered into a registration rights agreement (the “Registration Rights Agreement”) with the Purchasers, effective as of the closing of the Private Placement. Pursuant to the Registration Rights Agreement, we agreed to prepare and file a registration statement (the “Resale Registration Statement”) with the SEC by August 24, 2018 for purposes of registering the resale of the shares of Common Stock and the shares of Common Stock issuable upon exercise of the Private Placement Warrants. We also agreed to use our reasonable best efforts to cause this registration statement to be declared effective by the SEC by September 23, 2018 (October 23, 2018 in the event the registration statement is reviewed by the SEC). If we fail to meet the specified filing deadlines or keep the Resale Registration Statement effective, subject to certain permitted exceptions, we will be required to pay liquidated damages to the Purchasers. We also agreed, among other things, to indemnify the selling holders under the registration statements from certain liabilities and to pay all fees and expenses incident to our performance of or compliance with the Registration Rights Agreement.
Voting Agreement
For the benefit of the Purchasers, certain officers, directors and stockholders of the Company, owning approximately 40% of the outstanding number of Common Stock, entered into voting agreements, pursuant to which such stockholders will agree to vote all shares of Common Stock owned by them in favor of the Private Placement.
Placement Agent
A.G.P. / Alliance Global Partners (“AGP”) acted as exclusive placement agent for the issuance and sale of the securities in the Private Placement. We agreed to pay AGP an aggregate fee equal to 7% of the gross proceeds received by us from the sale of the securities in the transaction, plus expenses. We also agreed to grant to AGP or its designees warrants to purchase up to 150,000 shares of Common Stock (the “Placement Agent Warrants”). The Placement Agent Warrants are exercisable on or after the later of (a) the effective date of the registration statement registering the Purchasers’ securities and (b) the date that stockholder approval is obtained and deemed effective, and the Placement Agent Warrants terminate on July 27, 2022. The Placement Agent Warrants have an exercise price of $1.32 per share. The terms of the Placement Agent Warrants are otherwise substantially similar to the terms of the Private Placement Warrants, except the Placement Agent Warrants have customary anti-dilution provisions and do not have the Price Adjustment mechanism. The Placement Agent Warrants and the shares issuable upon exercise of the Placement Agent Warrants will be issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act as transactions not involving a public offering and in reliance on similar exemptions under applicable state laws.
| ITEM 2. | MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements (and notes thereto) included in our Annual Report on Form 10-K for the year ended December 31, 2016.2017. This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. See “Special"Special Note Regarding Forward-Looking Statements”Statements" included elsewhere herein.
We use the terms “we,” “our,” “us,” “AMERI”"we," "our," "us," "AMERI" and “the Company”"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 our completion of a “reverse merger” transaction on May 26, 2015, 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 Inc (“Ameri and Partners”), a Delaware corporation (the “Merger”). 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 (doing business as 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 an Agreement of Merger and Plan of Reorganization, dated as of May 26, 2015 (the “Merger Agreement”), and in connection with the Merger we changed our name to AMERI Holdings, Inc. We are headquartered in Princeton, New Jersey.Suwanee, Georgia.
Overview
We specialize in delivering SAPTM cloud, digital and enterprise services to clients worldwide. Our SAP focus allows us to provide technological solutions to a broad and growing base of clients. We are headquartered in Princeton, NJ, and we have offices across the United States, which are supported by offices in India. Our model inverts the conventional global delivery model wherein offshore information technology (“IT”)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 services. We pursue an acquisition strategy that seeks to disrupt the established business model of offshore IT service providers.
We partnered with NEC Corporation of America (NEC), in February 2017, to offer SAP HANA Migration services. Through this partnership, the Company will offer solutions to its clients aspiring to make the transition from SAP ECC (on-premise) applications to SAP HANA applications. NEC is a leading technology integrator providing integrated communications, analytics, security, biometrics and technology solutions.
We generate revenue by providing consulting services under written service contracts with our customers. The service contracts we enter into generally fall into two categories: (1) time-and-materials contracts and (2) fixed-price contracts.
When a customer enters into a time-and-materials or fixed-price (or a periodic retainer-based) contract, the revenue is recognized in accordance with the deliverables of each contract. If the deliverables involve separate units of accounting, 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 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 June 30, 20172018 and June 30, 2016,2017, sales to five major customers accounted for 42%40% and 65%41% of our total revenue, respectively. TwoOne of our customers each contributed 10%13% of our revenue for the three months ended June 30, 2017.2018. For the comparable period of 2016,in 2017, two customers each contributed 23% and 17%10% each of our revenue, respectively..
For the six months ended June 30, 20172018 and June 30, 2016,2017, sales to five major customers accounted for 37%39% and 62%42% of our total revenue, respectively. Two of our customers each contributed 10%12% and 11% of our revenue each for the six months ended June 30, 2017.2018. For the comparable period of 2016,in 2017, two of our customers each contributed 21% and 16%10% each of our revenue, respectively.revenue.
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:
| · | Our ability to raise additional capital, if and when needed; |
| · | 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 capital, if and when 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 June 30, 20172018 Compared to the Three Months Ended June 30, 20162017 and for the Six Months Ended June 30, 20172018 Compared to the Six Months Ended June 30, 20162017
| | | Three Months Ended June 30, 2017 | | | Three Months Ended June 30, 2016 | | | Six Months Ended June 30, 2017 | | | Six Months Ended June 30, 2016 | | | Three Months Ended June 30, 2018 | | | Three Months Ended June 30, 2017 | | | Six Months Ended June 30, 2018 | | | Six Months Ended June 30, 2017 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 12,268,259 | | | $ | 6,686,938 | | | $ | 24,609,186 | | | $ | 13,699,902 | | | $ | 11,075,840 | | | $ | 12,268,259 | | | $ | 22,138,850 | | | $ | 24,609,186 | |
| Cost of revenue | | | 9,935,468 | | | | 5,169,538 | | | | 18,975,045 | | | | 10,926,845 | | | | 8,686,841 | | | | 9.935,468 | | | | 17,406,966 | | | | 18,975,045 | |
| Gross profit | | | 2,332,791 | | | | 1,517,400 | | | | 5,634,141 | | | | 2,773,057 | | | | 2,388,999 | | | | 2,332,791 | | | | 4,731,884 | | | | 5,634,141 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling and marketing | | | 434,895 | | | | 135,329 | | | | 767,205 | | | | 166,679 | | |
| General and administration | | | 4,405,377 | | | | 1,977,510 | | | | 7,106,522 | | | | 3,696,100 | | |
| Selling general and administration | | | | 2,524,588 | | | | 4,840,272 | | | | 5,403,530 | | | | 7,873,727 | |
| Acquisition related expenses | | | 175,136 | | | | 239,815 | | | | 384,480 | | | | 615,220 | | | | - | | | | 175,136 | | | | 10,000 | | | | 384,480 | |
| Depreciation and amortization | | | 825,657 | | | | 101,385 | | | | 1,514,757 | | | | 213,013 | | | | 809,282 | | | | 825,657 | | | | 1,630,018 | | | | 1,514,757 | |
| Operating expenses | | | 5,841,065 | | | | 2,454,039 | | | | 9,772,964 | | | | 4,691,012 | | | | 3,333,870 | | | | 5,841,065 | | | | 7,043,548 | | | | 9,772,964 | |
| Operating income (loss) | | | (3,508,274 | ) | | | (936,639 | ) | | | (4,138,823 | ) | | | (1,917,955 | ) | |
| Operating (loss) | | | | (944,871 | ) | | | (3,508,274 | ) | | | (2,311,664 | ) | | | (4,138,823 | ) |
| Interest expenses | | | (164,343 | ) | | | (270,514 | ) | | | (255,149 | ) | | | (384,260 | ) | | | (182,521 | ) | | | (164,343 | ) | | | (393,680 | ) | | | (255,149 | ) |
| Changes in estimates | | | 400,000 | | | | - | | | | 400,000 | | | | - | | | | (134,619 | ) | | | 400,000 | | | | (134,619 | ) | | | 400,000 | |
| Other expense – net | | | 8,624 | | | | (1,862 | ) | | | 4,475 | | | | (2,161 | ) | |
| Income (loss) before income taxes | | | (3,263,993 | ) | | | (1,209,015 | ) | | | (3,989,497 | ) | | | (2,304,376 | ) | |
| Others, net | | | | 1,790 | | | | 8,624 | | | | 7,989 | | | | 4,475 | |
| (Loss) before income taxes | | | | (1,260,221 | ) | | | (3,263,993 | ) | | | (2,831,974 | ) | | | (3,989,497 | ) |
| Tax benefit / (provision) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Income after income taxes | | | (3,263,993 | ) | | | (1,209,015 | ) | | | (3,989,497 | ) | | | (2,304,376 | ) | |
| Net income attributable to non-controlling interest | | | (15,388 | ) | | | - | | | | (11,872 | ) | | | - | | |
| Net income (loss) attributable to the Company | | | (3,279,381 | ) | | | (1,209,015 | ) | | | (4,001,369 | ) | | | (2,304,376 | ) | |
| (Loss) after income taxes | | | | (1,260,221 | ) | | | (3,263,993 | ) | | | (2,831,974 | ) | | | (3,989,497 | ) |
| Net income/(loss) attributable to non-controlling interest | | | | - | | | | (15,388 | ) | | | - | | | | (11,872 | ) |
| Net (loss) attributable to the Company | | | | (1,260,221 | ) | | | (3,279,381 | ) | | | (2,831,974 | ) | | | (4,001,369 | ) |
| Dividend on preferred stock | | | (504,826 | ) | | | - | | | | (1,004,791 | ) | | | - | | | | (104,136 | ) | | | (504,826 | ) | | | (661,553 | ) | | | (1,004,791 | ) |
| Net loss attributable to common stock holders | | | (3,784,207 | ) | | | (1,209,015 | ) | | | (5,006,160 | ) | | | (2,304,376 | ) | |
| Net loss attributable to common stockholders | | | | (1,364,357 | ) | | | (3,784,207 | ) | | | (3,493,527 | ) | | | (5,006,160 | ) |
| Other comprehensive income (loss), net of tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign exchange translation | | | (2,185 | ) | | | (2,808 | ) | | | 3,150 | | | | (65,698 | ) | | | (32,310 | ) | | | (2,185 | ) | | | (2,519 | ) | | | 3,150 | |
| Comprehensive income/(loss) | | $ | (3,786,392 | ) | | $ | (1,211,823 | ) | | $ | (5,003,010 | ) | | $ | (2,370,074 | ) | |
| Comprehensive income/(loss) attributable to the Company | | | (3,771,004 | ) | | | (1,211,823 | ) | | | (4,991,138 | ) | | | (2,370,074 | ) | |
| Comprehensive income/(loss) attributable to the non-controlling interest | | | (15,388 | ) | | | - | | | | (11,872 | ) | | | - | | |
| Comprehensive (loss) | | | $ | (1,396,667 | ) | | $ | (3,786,392 | ) | | $ | (3,496,046 | ) | | $ | (5,003,010 | ) |
| Comprehensive (loss) attributable to the Company | | | | (1,396,667 | ) | | | (3,771,004 | ) | | | (3,496,046 | ) | | | (4,991,138 | ) |
| Comprehensive (loss) attributable to the non-controlling interest | | | | - | | | | (15,388 | ) | | | - | | | | (11,872 | ) |
| | | | (3,786,392 | ) | | | (1,211,823 | ) | | | (5,003,010 | ) | | | (2,370,074 | ) | | | (1,396,667 | ) | | $ | (3,786,392 | ) | | $ | (3,496,046 | ) | | $ | (5,003,010 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic income (loss) per share | | $ | (0.26 | ) | | $ | (0.09 | ) | | $ | (0.35 | ) | | $ | (0.19 | ) | |
| Diluted income (loss) per share | | $ | (0.26 | ) | | $ | (0.09 | ) | | $ | (0.35 | ) | | $ | (0.19 | ) | |
| Basic (loss) per share | | | $ | (0.07 | ) | | $ | (0.26 | ) | | $ | (0.19 | ) | | $ | (0.35 | ) |
| Diluted (loss) per share | | | $ | (0.07 | ) | | $ | (0.26 | ) | | $ | (0.19 | ) | | $ | (0.35 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic weighted average number of common shares outstanding | | | 14,610,609 | | | | 12,845,057 | | | | 14,352,573 | | | | 12,359,709 | | | | 18,790,998 | | | | 14,610,609 | | | | 18,678,224 | | | | 14,352,573 | |
| Diluted weighted average number of common shares outstanding | | | 14,610,609 | | | | 12,845,057 | | | | 14,352,573 | | | | 12,359,709 | | | | 18,790,998 | | | | 14,610,609 | | | | 18,678,224 | | | | 14,352,573 | |
Revenues
Revenues for the three months ended June 30, 2017 increased2018 decreased by approximately $5.58$1.2 million, or 10%, as compared to the three months ended June 30, 2016. This increase is primarily attributable2017, mainly because we did not pursue certain low margin professional services business during the three months ended June 30, 2018.
For the three months ended June 30, 2018 and June 30, 2017, sales to five major customers accounted for approximately 40% and 41% of our acquisitiontotal revenue, respectively. For the three months ended June 30, 2018, one of Ameri California, Ameri Arizonaour customer contributed 13% of our revenue, and Bigtech. For changesfor the three months ended June 30, 2017, two of our customers each contributed 10% of our revenue. We derived most of our revenues from our customers located in revenue by entity please refer toNorth America for the table below.three months ended June 30, 2018 and June 30, 2017.
Revenues by subsidiary of the Company
(in millions of U.S. dollars)
| | | Three Months Ended June 30, 2017 | | Three Months Ended June 30, 2016 | | Increase (Decrease) | |
| | Ameri & Partners | 1.48 | | 1.80 | | (0.32) | |
| | Ameri Georgia | 4.73 | | 4.89 | | (0.16) | |
| | Bigtech | 0.29 | | - | | 0.29 | |
| | Ameri Arizona | 3.20 | | - | | 3.20 | |
| | Ameri California | 2.56 | | - | | 2.56 | |
| | Total | 12.27 | | 6.69 | | 5.58 | |
Revenues for the six months ended June 30, 2017 increased2018 decreased by approximately $10.91$2.5 million, or 10%, as compared to the six months ended June 30, 2016. This increase is primarily attributable2017, mainly due to our acquisitiona large project in the six months of Ameri California, Ameri Georgia2017 for which there was no comparable large project in the first six months ended June 30, 2018 and Bigtech. For changes in revenue by entity please refer to the table below.because we did not pursue certain low margin professional services business.
| | Revenues by subsidiary of the Company (in millions of U.S. dollars) |
| | | Six Months Ended June 30, 2017 | | Six Months Ended June 30, 2016 | | Increase (Decrease) | |
| | Ameri & Partners | 3.38 | | 3.46 | | (0.09) | |
| | Ameri Georgia | 10.17 | | 10.24 | | (0.07) | |
| | Bigtech | 0.51 | | - | | 0.51 | |
| | Ameri Arizona | 7.03 | | - | | 7.03 | |
| | Ameri California | 3.52 | | - | | 3.52 | |
| | Total | 24.61 | | 13.70 | | 10.91 | |
For the six months ended June 30, 2018 and June 30, 2017, sales to five major customers accounted for 39% and 42% of our total revenue, respectively. Two of our customers contributed 12% and 11% of our revenue for the six months ended June 30, 2018. For the comparable period in 2017, two customers each contributed 10% of our revenue. We derived most of our revenues from our customers located in North America for the six months ended June 30, 2018 and June 30, 2017.
Gross Margin
Our gross margin was 22% for the three months ended June 30, 2018, as compared to 19% for the three months ended June 30, 2017, as compared2017. The increase in gross margin was due to 23% foran increase in project-based revenue which carries higher margin in the three months ended June 30 2016. Gross margin from our acquired entities was 23%; without our acquisitions our gross margin was at 15%. The decrease in gross margins from our existing business was due2018 as compared to higher volume discounts, end of high margin contracts and revenue mix.three months ended June 30 2017.
Our gross margin was 21% for the six months ended June 30, 2018, as compared to 23% for the six months ended June 30, 2017, as compared to 20% for the six months ended June 30, 2016. Gross margin from our acquired entities was 24%; without our acquisitions our2017. The reduction in gross margin was at 22%.due to the ending of a large project in 2017 which carried a higher margin.
Our target gross margins in future periods are anticipated to be in the range of 25%20% to 30%25% based on thea mix of project revenues and professional service revenues. However, there is no assurance that we will achieve thesuch anticipated gross margins.
Selling and Marketing Expenses
Selling, and marketing expenses were $434,895 for the three months ended June 30, 2017, compared to $135,329 for the three months ended June 30, 2016. The increase in selling and marketing expenses was directly attributable to our acquisition of Ameri Arizona and Ameri California, which occurred subsequent to the comparable prior period.
Selling and marketing expenses were $767,205 for the six months ended June 30, 2017, compared to $166,679 for the six months ended June 30, 2016. The increase in selling and marketing expenses was directly attributable to our acquisition of Ameri Arizona and Ameri California, which occurred subsequent to the comparable prior period.
General and Administration Expenses
GeneralSelling, general and Administrationadministration (“GSG&A”) expenses include all costs, including rent costs, which are not directly associated with revenue-generating activities, as well as the non-cash expense for stock basedstock-based compensation. These include employee costs, corporate costs and facilities costs. Employee costs include administrative salaries and related employee benefits, travel, recruiting and training costs. Corporate costs include reorganization costs, legal, accounting and outside consulting fees. FacilityFacilities costs primarily include rent and communications costs.
GSG&A expenses for the three months ended June 30, 20172018 were $4,405,377$2.6 million, as compared to $1,977,510$4.8 million for the three months ended June 30, 2016. G2017. SG&A expenses, increasedexcluding stock-based compensation expenses decreased by $2,427,867, of which $1,562,526 was attributable to our stock based compensation expense due to grants made to our employees and accelerated expenses upon cancellation of restricted stock units. Ameri California, Ameri Arizona and Bigtech added an additional $1,018,717 to our G&A expenses forapproximately $700,000 in the three months ended June 30, 20172018 as comparedthe Company continues to the same period in 2016. Our G&A expenses for the three months ended June 30, 2017 excluding these acquisitions increased due to our continued fund-raising activityrestructure and preparation of a Nasdaq listing application.streamline its acquired entities.
GSG&A expenses for the six months ended June 30, 20172018 were $7,106,522$5.4 million, as compared to $3,696,100$7.9 million for the six months ended June 30, 2016. G2017. SG&A expenses, increasedexcluding stock-based compensation expenses decreased by $3,410,422, of which $2,027,276 was attributable to our stock based compensation expense due to grants made to our employees and accelerated expenses upon cancellation of restricted stock units. Ameri California, Ameri Arizona and Bigtech added an additional $1,736,843 to our G&A expenses forapproximately $600,000 in the six months ended June 30, 20172018 as comparedthe Company continues to the same period in 2016. The decrease in G&A expenses during the six months ended June 30, 2017 was attributable to the cost synergies we achieved with our previous acquisitions.restructure and streamline its acquired entities.
Depreciation and Amortization
Depreciation and amortization expense amounted to $825,657$0.8 million for the three months ended June 30, 2018, as compared to $0.8 million for the three months ended June 30, 2017 as compared to $101,385and $1.6 million for the threesix months ended June 30 2016.2018 as compared to $1.5 million for the six months ended June 30 2017. We capitalized the customer lists acquired during various acquisitions, resulting in increased amortization costs. The customer lists from each acquisition are amortized over a period of 60 months.
DepreciationOperating Loss
Our operating loss was $0.94 million for the three months ended June 30, 2018, as compared to $3.5 million for the three months ended June 30, 2017. The reduction in our operating loss was primarily driven by lower stock-based compensation expenses and amortization expense amounted to $1,514,757continued reduction in our operating expenses.
Our operating loss was $2.31 million for the six months ended June 30, 2017,2018, as compared to $213,013$4.14 million for the six months ended June 30, 2016. We capitalized the customer lists acquired during various acquisitions, resulting2017. The reduction in increased amortization costs. The customer lists from each acquisition are amortized over a period of 60 months.
Operating Income (Loss)
Ourour operating income (loss) was ($3,508,274) for the three months ended June 30, 2017, as compared to ($936,639) for the three months ended June 30, 2016. This increase in loss was mainly due to the increaseprimarily driven by lower stock-based compensation expenses and continued reduction in G&A expenses of our acquired entities.
Our operating income (loss) was ($4,138,823) for the six months ended June 30, 2017, as compared to ($1,917,955) for the six months ended June 30, 2016. This increase in loss was mainly due to the increase in G&A expenses of our acquired entities.expenses.
Interest Expense
Our interest expense for the three months ended June 30, 20172018 was $164,343$182,521 as compared to $270,514$164,343 for the three months ended June 30, 2016. The decrease is mainly due to changes in interest rates charged by our lenders.2017.
Our interest expense for the six months ended June 30, 20172018 was $255,149$0.4 million as compared to $384,260$0.3 million for the six months ended June 30, 2016.2017. The decrease isincrease was mainly due to changesthe full year effect of interest expenses on promissory notes issued to former stockholders of Ameri California in interest rates charged by our lenders.March 2017.
Changes in EstimatesIncome Taxes
Based on our current estimates of consideration payable under the Ameri Arizona purchase agreement, we do not believe Ameri Arizona will achieve its 2017 earn-out and we have adjusted the consideration payable in connection therewith by reducing the estimates by $400,000 and reflecting the adjustment in ourWe recorded no income statement for the quarter ended June 30, 2017.
Income taxes
Ourtax benefit or provision for income taxes for the three months ended June 30, 2017 and the three months period ended2018 or June 30, 2016 was $0 for each period.
Our provision for income taxes2017 or for the six months ended June 30, 2017 and the six months period ended2018 or June 30, 2016 was $0 for each period.2017.
Acquisition Related Expenses
We had acquisition related expenditures of $384,480$0 and $615,220$0.2 million during the three months ended June 30, 2018 and for June 30, 2017, respectively and $0.01 million and $0.4 million during the six months ended June 30, 20172018 and for June 30, 2016,2017, respectively. These expenses included acquisition costslegal, professional services, valuation and legal, bankingdue diligence services and other acquisition related fees incurred in connection with our acquisitions. The decrease iswas due to the decline in acquisition related activities in the three months and six months ended June 30, 20172018 as compared to the six months ended June 30, 2016.2017.
Liquidity and Capital Resources
Our cash position was $1,041,133$0.9 million as of June 30, 2017,2018, as compared to $1,379,887$4.9 million as of December 31, 2016,2017, a decrease of $338,754$4 million primarily due to the use of fundfunds towards working capital and earn-out payments.
Cash used for operating activities was $1,700,989$0.3 million during the six months ended June 30, 20172018 and was primarily a result of net changes in working capital requirements. Cash used in investing activities was $702,511$1.0 million during the six months ended June 30, 2017.2018. Cash provided byused for financing activities was $2,064,746$2.6 million during the six months ended June 30, 20172018.
Private Placement
On July 25, 2018, we entered into the Private Placement Purchase Agreement with certain institutional and was attributableaccredited investors for the Private Placement of Common Stock and Private Placement Warrants. Pursuant to the increased borrowingPrivate Placement, we agreed to issue 5,000,000 shares of Common Stock or common stock equivalents with an initial per share purchase price of $1.20 and Private Placement Warrants to purchase 4,000,000 shares of common stock with an initial exercise price equal to $1.60 per share, subject to adjustment. The Private Placement Warrants are immediately exercisable, subject to certain ownership limitations, and expire five years after the date of issuance. On July 30, 2018, we issued 3,250,000 of the shares of Common Stock to the Purchasers, and 1,750,000 shares of Common Stock will be issued pursuant to pre-funded warrants, subject to adjustment. The aggregate gross proceeds received by us for the Private Placement were approximately $6,000,000.
The per share purchase price (through the pre-funded warrants) and Private Placement Warrant exercise price will automatically be adjusted lower, if applicable, to 80% (with respect to the purchase price of the shares) and 110% (with respect to the exercise price of the Private Placement Warrants) of the lowest of the average daily prices on the 6 trading days after the date that (i) a registration statement covering the resale of the securities being issued in the transaction is declared effective by the SEC and (ii) our stockholders approve the Private Placement transaction. If all the shares issuable pursuant to the Private Placement Purchase Agreement are not included in the registration statement, another similar adjustment to the per share purchase price and Private Placement Warrant exercise price will occur on the date that such shares may be sold pursuant to Rule 144 under our linethe Securities Act of credit with Sterling National Bank1933. Following any adjustment to the Private Placement Warrant exercise price, the number of shares that may be issued pursuant to a Private Placement Warrant will be proportionately increased. In no event will the purchase price or the Private Placement Warrant exercise price be less than $0.29 per share. In addition, the Private Placement Warrants have transaction-specific anti-dilution provisions.
A.G.P. / Alliance Global Partners acted as exclusive placement agent for the issuance and sale of the securities in the Private Placement. We agreed to pay AGP an aggregate fee equal to 7% of the gross proceeds received by us from the sale of the securities in the transaction, plus expenses. We also agreed to grant to AGP or its designees warrants to purchase up to 150,000 shares of Common Stock. The Placement Agent Warrants are exercisable on or after the later of (a) the effective date of the registration statement registering the Purchasers’ securities and (b) the date that stockholder approval is obtained and deemed effective, and the issuancePlacement Agent Warrants terminate on July 27, 2022. The Placement Agent Warrants have an exercise price of convertible notes.$1.32 per share. The terms of the Placement Agent Warrants are otherwise substantially similar to the terms of the Private Placement Warrants, except the Placement Agent Warrants have customary anti-dilution provisions and do not have the Price Adjustment mechanism.
DueWe incurred recurring losses as a result of costs and expenses related to our current constraints inselling, general and administration activities and acquisition strategy. As of June 30, 2018, we had negative working capital weof $15.3 million and cash of $0.9 million. Our principal sources of cash have been unableincluded bank borrowings, the private placement of common stock, warrants and convertible notes and the public offering of common stock and warrants. Our operating expenses are likely to pay a few vendorscontinue to grow and, as a result, somewe will need to generate significant additional revenues to cover such expenses.
During the quarter ended June 30, 2018, we were unable to make payments in respect of themcertain outstanding notes, certain earn-out payments that were due and dividends on our Series A Preferred stock because of a lack of available cash. The aggregate gross proceeds received by the Company from the Private Placement on July 30, 2018 were approximately $6,000,000, and we have threatened legal action against us.used a portion of such proceeds for the repayment of certain outstanding obligations. We are currently working with these vendors to negotiate longer payment terms untilraise additional capital from which we arewill be able to raise more capital; the Company is trying to mitigate these efforts by raising more capital and through streamlining its operations which will provide cash savings going forward,pay other amounts owed; however, there can be no assurance that the Company will be able to secureraise any capital or pay the amounts owed.
Our financial statements as of June 30, 2018 have been prepared under the assumption that we will continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to raise additional sourcesfunding through the issuance of capital. In caseequity or debt securities, as well as to attain further operating efficiencies and, ultimately, to generate additional revenues. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. We can give no assurances that additional capital that we are unableable to pay these vendors, they can take legal action against us or stop doing business with us which may have an impact onobtain, if any, will be sufficient to meet our revenue.needs. The foregoing conditions raise substantial doubt about our ability to continue our operations.
Available Credit Facility, Borrowings and Repayment of Debt
On July 1, 2016, the Company entered into a Loan and Security Agreement (the “Loan Agreement”), with its wholly-owned subsidiaries Ameri and Partners IncInc. and Ameri Georgia, as borrowers (the “Borrowers”), the Company and its wholly-owned subsidiaries Linear Logics, Corp. and WinHire IncInc. (dissolved in March 2017) serving as guarantors, the Company’s former 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 Ameri California, Virtuoso and Ameri Arizona 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”"Revolving Loans") for general working capital purposes, up to $2 million in principal pursuant to a term loan (the “Term Loan”"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 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”"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’sSterling'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,Interest 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.during the six months ended June 30, 2018 amounted to $61,656. Principal repaid on the Term Loan during the six months ended June 30, 2018 was $543,200. The short term and long-term outstanding balances on the Term Loan as of June 30, 2018 were $400,000 and $923,466, respectively. The outstanding balance of the Revolving Loans as of June 30, 2018 was $2,027,743. On August 2, 2018, we repaid the Term Loan.
The Company has not been in conformance with the financial covenants contained in its Loan Agreement withOn July 9, 2018, we received a Notice of Default and Acceleration of Obligations from Sterling National Bank. The Company received a waiverNotice asserted events of default resulting from the Company’s failure to comply with certain financial covenants set forth in the Loan Agreement and the impaired financial condition of the Company. In the Notice, Sterling National Bank declares that all amounts due in respect of the loans shall be due and payable on August 31, 2018, and the Borrowers are required to pay Sterling National Bank all amounts due as obligations on or before the Termination Date. Until the Termination Date, Sterling National Bank will continue to fund the Revolving Loans to the Borrowers at its discretion; however, Sterling National Bank may decline to advance funds to the Borrowers at any time in its sole discretion. It is anticipated that, on the Termination Date, the financing commitments shall terminate and no further loans, advances or other extensions of credit will be made to or for its non-compliance withthe benefit of the Borrowers.
If the obligations are not satisfied by the Termination Date, all outstanding obligations will bear interest at the default rate under the Loan Agreement for the quarter ended March 31, 2017 and June 30, 2017 in exchange for the payment of a fee of $5,000 for each quarterly waiver. 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 addressmay exercise any or all of its non-compliance.
If we are unable to obtain future waivers fromrights and remedies under the loan documents, including foreclosing on any and all collateral. While the Notice does not state that Sterling National Bank is presently exercising, or will exercise prior to the bankTermination Date, its rights and remedies available upon an event of default, it reserves its right to do so at any time in its sole discretion. The exercise of certain remedies may have a material adverse effect on the liquidity, financial condition and results of operations of the Company and could declare our loans with itcause the Company to be in default and elect to claim all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If we are unable to repay the outstanding amounts, Sterling National Bank could proceed against the collateral granted to it to secure our indebtedness to it. become bankrupt or insolvent.
We pledged substantially all of our assets as collateral under the Loan Agreement. The Loan Agreement is also supported by a limitedvalidity guaranty from Giri Devanur, our President andformer Chief Executive Officer. If Sterling National Bank accelerates the repayment of our loans, there is no assurance that we will have sufficient assets to repay the loans. A default under the Loan Agreement may also result in an event of default under our convertible notes.the 2017 Notes. We are currently looking for additional sources of financing, however there is no guarantee that we will have additional financing available to us.
Interest paid on Term Loan during the period ended June 30, 2017 amounted to $69,625 Principal repaid on the Term Loan during the period ended June 30, 2017 was $200,000. The short term and long-term outstanding balances on the Term Loan as of June 30, 2017 was $399,996 and $1,323,470 respectively. The outstanding balance of the Revolving Loans as of June 30, 2017 was $3,794,042.
Our Indian subsidiary Bigtech which was acquired as of July 1, 2016, had a term loan of $16,283$9,682 and a line of credit for $311,412$324,899 as of June 30, 2017.2018. The Bigtech line of credit is with an Indian bank, HDFC Bank Limited, and was entered into on JuneSeptember 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 periodsix months ended June 30, 20172018 amounted to $20,543$731 for the term loan and $17,155 line of credit held by Bigtech. On August 6, 2018, we repaid the Bigtech line of credit.
On March 7, 2017, we completed the sale and issuance of 8% Convertible Unsecured Promissorythe 2017 Notes (the “2017 Notes”) for aggregate proceeds to us of $1,250,000$1.25 million from four accredited investors, including one of the Company’s directors,then-directors, Dhruwa N. Rai.Rai, and David Luci, who became a director of the Company in February 2018. 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. As of June 30, 2018, we were not current in the payment of interest on one of the 2017 Notes; however, as of the date of this quarterly report, all interest payments due on the 2017 Notes have been paid in full.
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%$2.80. The holders of the price per share of common stock offered2017 Notes have the right, at their option, at any time and sold pursuantfrom time to such registration statement,time to convert, in part or (ii) if no such registration statement is declared effective by December 31,in whole, the outstanding principal amount and all accrued and unpaid interest under the 2017 such price per share that is equal to the weighted average closing price per shareNotes into shares of the Company’s common stock forat the 20 trading days immediately preceding December 31, 2017, subject to adjustment under certain circumstances. conversion price.
The 2017 Notes rank junior to our secured credit facility with Sterling.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.
Accounts Receivable
Accounts receivable for the period ended June 30, 20172018 were $8,720,203$8 million as compared to $8,059,910$8.8 million as on December 31, 2016. The increase is due to acquisition of Ameri California.2017.
Accounts Payable
Accounts payable for the period ended June 30, 20172018 were $3,945,300$4.9 million as compared to $5,130,817$5.3 million as on December 31, 2016. The decrease is primarily due to the payoff of accumulated accounts payable during the six months ended June 30, 2017.
Accrued Expenses
Accrued expenses for the period ended June 30, 20172018 were $2,813,296$2.2 million as compared to $2,165,088$2.6 million as on December 31, 2016. Our acquisition of Ameri California led to an increase of accrued expenses of $762,752.2017.
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.customers. Our primary uses of cash for operating activities are for personnel-related expenditures, leased facilities and taxes.
Off- Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Impact of Inflation
We do not believe that inflation had a significant impact on our results of operations for the periods presented. On an ongoing basis, we attempt to minimize any effects of inflation on our operating results by controlling operating costs and, whenever possible, seeking to ensure that billing rates reflect increases in costs due to inflation.
For all significant foreign operations, the functional currency is the local currency. Assets and liabilities of these operations are translated at the exchange rate in effect at each period end. Statements of Operations accounts are translated at the exchange rate prevailing as of the date of the transaction. The gains or losses resulting from such translation are reported under accumulated other comprehensive income (loss) as a separate component of equity. Realized gains and losses from foreign currency transactions are included in other income, net for the periods presented.
Recent Accounting Pronouncements
See Note 2 to our unaudited condensed consolidated financial statements for additional information.
Critical Accounting EstimatesPolicies
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.
Stock-Based Compensation. Stock-based compensation expense for awards of equity instruments to employees and non-employee directors is determined based on the grant-date fair value of those awards. We recognize these compensation costs net of an estimated forfeiture rate over the requisite service period of the award. Forfeitures are estimated on the date of grant and revised if actual or expected forfeiture activity differs materially from original estimates.
Purchase Price Allocation.Impairment. Long-lived assets, which include property, plant and equipment, and certain other assets to be held and used by us, are reviewed when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable based on estimated future cash flows. If this assessment indicates that the carrying values will not be recoverable, as determined based on undiscounted cash flows over the remaining useful lives, an impairment loss is recognized based on the fair value of the asset.
Income Taxes. We allocateprovide for income taxes utilizing the purchase priceasset and liability method of our acquisitionsaccounting. Under this method, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities acquired, including identifiable intangible assets,and their financial reporting amounts at each balance sheet date, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. If it is determined that it is more likely than not that future tax benefits associated with a deferred income tax asset will not be realized, a valuation allowance is provided. The effect on deferred income tax assets and liabilities of a change in the tax rates is recognized in income in the period that includes the enactment date. Tax benefits earned on employee stock awards in excess of recorded stock-based compensation expense are credited to additional paid-in capital. Our provision for income taxes also includes the impact of provisions established for uncertain income tax positions, as well as the related interest.
Accounts Receivable. We extend credit to clients based upon management’s assessment of their respective fair values atcredit-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.
Business Combination. We account for business combinations using the date of acquisition. Someacquisition method, which requires the identification 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 atacquirer, the enterprise level and is deductible for tax purposes for certain types of acquisitions. Management finalizes the purchase price allocation within the defined measurement perioddetermination of the acquisition date and the allocation of the purchase price paid by the acquirer to the identifiable tangible and intangible assets acquired, the liabilities assumed, including any contingent consideration and any non-controlling interest in the acquiree at their acquisition date fair values. Goodwill represents the excess of the purchase price over the fair value of net assets acquired, including the amount assigned to identifiable intangible assets. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related costs are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in our consolidated financial statements from the acquisition date.
Goodwill and Purchased Intangibles. We evaluate goodwill and purchased intangible assets for impairment at least annually, or as certain initial accountingcircumstances warrant. Goodwill is evaluated at the reporting unit level by comparing the fair value of the reporting unit with its carrying amount. For purchased intangible assets, if our annual qualitative assessment indicates possible impairment, we test the assets for impairment by comparing the fair value of such assets to their carrying value. In determining the fair value, we utilize various estimates are resolved.and assumptions, including discount rates and projections of future cash flows. If an impairment is indicated, a write down to the implied fair value of goodwill or fair value of intangible asset is recorded.
Valuation of Contingent Earn-out Consideration. 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.
Property and Equipment. Property and equipment is stated at cost. 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 extend the lives of the assets to expenses as incurred.
Intangible assets. We account for computer software costs developed for internal use in accordance with U.S. GAAP, which requires 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.
Goodwill. We capitalize the excess of capitalized intangible assets of an acquisition over the purchase consideration as goodwill in for each of our acquisitions. Impairment of goodwill is analyzed on an annual basis as per Company policy.
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 20172018 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,”"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; (13) changes in our utilization levels; (14) competition in our markets; (15) our ability to grow and manage growth profitably; our ability to access additional capital; (16) changes in applicable laws or regulations; (17) the failure to fully integrate acquired businesses; and (18) poor performance of acquired businesses following the closing of the acquisition. 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.
Management’sManagement'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’sSEC'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 being June 30, 2017,on Form 10-Q, we have carried out an evaluation of the effectiveness of the design and operation of our Company’sCompany's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our Company’sCompany's management, including our Company’sCompany's Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our company’scompany's Chief Executive Officer and Chief Financial Officer concluded that our company’scompany's disclosure controls and procedures are not yet effective as of the end of the period covered by this report as noted below in management’smanagement'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’sSEC'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 June 30, 2017,2018, 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 June 30, 2017,2018, 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 on Form 10-Q does not include an attestation report of our independent auditors regarding internal control over financial reporting. Management’sManagement'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’smanagement's report in this Quarterly Report.Report on Form 10-Q.
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 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.
PART II - OTHER INFORMATION
None.On May 1, 2018, MACT Holdings LLC, one of the former members of our subsidiary, Ameri Arizona, filed suit against us in the United States District Court for the Southern District of New York seeking damages in an amount equal to such former member’s potion of accrued but unpaid earn-out payments of approximately $236,950 in respect of the 2017 earn-out period, plus attorneys’ fees and expenses. All such amounts had been paid as of August 3, 2018. Such former member has also asserted that he had elected to receive cash instead of stock consideration of 560,000 shares of common stock issued to him on July 30, 2018, but the Company disputes the assertion and will vigorously defend any claims related thereto.
Not applicable.In addition to the information set forth under Item 1A of Part I to our Annual Report on Form 10-K for the year ended December 31, 2017, the information set forth at the end of Management's Discussion and Analysis entitled "Special Note Regarding Forward-Looking Information," and updates noted below, you should consider that there are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. If any of these risks actually occur, our business, financial condition or results of operation may be materially and adversely affected. In such case, the trading price of our common stock could decline and investors could lose all or part of their investment. These risk factors may not identify all risks that we face and our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations.
Risk Factors Relating to Our Indebtedness
We have received a notice from our senior secured commercial lender for the termination of our revolving credit facility, which termination could significantly impair our operations and adversely affect our results of operations and financial condition.
On July 9, 2018, we received a Notice of Default and Acceleration of Obligations from Sterling National Bank. The Notice asserted events of default resulting from the Company’s failure to comply with certain financial covenants set forth in the Loan Agreement and the impaired financial condition of the Company. In the Notice, Sterling National Bank declares that all amounts due in respect of its loans shall be due and payable on August 31, 2018, and the Borrowers are required to pay Sterling National Bank all amounts due as obligations on or before the Termination Date. Until the Termination Date, Sterling National Bank will continue to fund the Revolving Loans to the Borrowers at its discretion; however, Sterling National Bank may decline to advance funds to the Borrowers at any time in its sole discretion. It is anticipated that, on the Termination Date, the financing commitments shall terminate and no further loans, advances or other extensions of credit will be made to or for the benefit of the Borrowers.
If the obligations are not satisfied by the Termination Date, all outstanding obligations will bear interest at the default rate under the Loan Agreement and Sterling National Bank may exercise any or all of its rights and remedies under the loan documents, including foreclosing on any and all collateral. While the Notice does not state that Sterling National Bank is presently exercising, or will exercise prior to the Termination Date, its rights and remedies available upon an event of default, it reserves its right to do so at any time in its sole discretion. The exercise of certain remedies may have a material adverse effect on the liquidity, financial condition and results of operations of the Company and could cause the Company to become bankrupt or insolvent.
Our level of indebtedness may make it difficult to repay our debt and may adversely affect our ability to obtain additional financing, use operating cash flow in other areas of our business or otherwise adversely affect our operations. We are currently looking for additional sources of financing, however there is no guarantee that we will have additional financing available to us.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.During the quarter ended June 30, 2018, we did not engage in any unregistered sales of equity securities. On July 30, 2018, we completed a Private Placement of common stock and warrants. See Note 15 to our Unaudited Condensed Consolidated Financial Statements for the Quarter Ended June 30, 2018 for additional information regarding the Private Placement.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
To date,During the quarter ended June 30, 2018, we were unable to make payments in respect of certain outstanding notes, certain earn-out payments that are due and dividends on our Series A Preferred stock because of a lack of available cash. The Company raised gross proceeds of $6,000,000 in the Private Placement, which were used for the repayment of certain indebtedness, past due obligations and working capital purposes, but the Company has not been in conformance withwill need to raise additional capital to fully fund all of its obligations. The Company is working to raise capital from which it would be able to pay the financial covenants contained in its Loan Agreement withamounts owed; however, there can be no assurance that the Company will be able to raise any additional capital or pay the amounts owed.
On July 9, 2018, we received a Notice of Default and Acceleration of Obligations from Sterling National Bank. The Company received a waiverNotice asserted events of default resulting from the Company’s failure to comply with certain financial covenants set forth in the Loan Agreement and the impaired financial condition of the Company. In the Notice, Sterling National Bank declares that all amounts due in respect of the loans shall be due and payable on August 31, 2018, and the Borrowers are required to pay Sterling National Bank all amounts due as obligations on or before the Termination Date. Until the Termination Date, Sterling National Bank will continue to fund the Revolving Loans to the Borrowers at its discretion; however, Sterling National Bank may decline to advance funds to the Borrowers at any time in its sole discretion. It is anticipated that, on the Termination Date, the financing commitments shall terminate and no further loans, advances or other extensions of credit will be made to or for its non-compliance withthe benefit of the Borrowers.
If the obligations are not satisfied by the Termination Date, all outstanding obligations will bear interest at the default rate under the Loan Agreement for the quarter ended March 31, 2017 and June 30, 2017 in exchange for the payment of a fee of $5,000 for each quarterly waiver. 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 may exercise any or all of its rights and remedies under the loan documents, including foreclosing on any and all collateral. While the Notice does not state that Sterling National Bank is presently exercising, or will exercise prior to addressthe Termination Date, its non-compliance.rights and remedies available upon an event of default, it reserves its right to do so at any time in its sole discretion. The exercise of certain remedies may have a material adverse effect on the liquidity, financial condition and results of operations of the Company and could cause the Company to become bankrupt or insolvent.
The Company accrued an aggregate of approximately $0.6 million for payment of dividends on its Series A Preferred Stock due for the six months ended June 30, 2018. The Company has been unable to declare and pay such dividend due to a lack of available cash.
On June 22, 2018, we entered into an Amendment Agreement with LSV, pursuant to which we and LSV agreed to the amendment and restatement of the certificate of designations for our Series A Preferred and the issuance of the Amendment Warrants for the purchase of 5,000,000 shares of our common stock to holders of the Series A Preferred (the “Warrant Issuance”), provided that the Amendment and the Warrant Issuance are subject to approval by our stockholders at the 2018 Annual Meeting.
The Amendment, which will be filed with the Delaware Secretary of State following stockholder approval, provides for, among other things:
| (a) | the payment of the March 31, 2018 dividend payment in-kind in shares of Series A Preferred; |
| (b) | elimination of any prior default in respect of non-payment of accrued dividends through the filing effective date of the Amendment; |
| (c) | payment in-kind in shares of Series A Preferred of dividends for all dividend periods from April 1, 2018 through March 31, 2020 at a rate of 2% per annum of the liquidation preference; and |
| (d) | commencing April 1, 2020, we will pay cash dividends per share at a rate per annum equal to the Adjusted Rate multiplied by the liquidation preference; provided, however, dividends for periods ending after April 1, 2020 may be paid at the election of our Board of Directors in-kind through the issuance of additional shares of Series A Preferred for up to four dividend periods in any consecutive 36-month period, determined on a rolling basis. |
In addition, the Amendment revises the change of control definition to mean a change in control of at least 70% of the voting power of all shares of stock of the Company has yetand clarifies that a change of control shall not be deemed to makebe a dissolution, liquidation or winding up of the dividend payment on itsCompany. The Amendment also eliminates voting rights with respect to the authorization, creation or issuance of any securities ranking senior or equal to the Series A Preferred Stock that was payable on June 30, 2017. ThePreferred.
If our stockholders approve the Amendment and the Warrant Issuance at the 2018 Annual Meeting, promptly following the effectiveness of the Amendment, the Company will paycomplete the sole holderWarrant Issuance to holders of the Series A Preferred Stock,at such time. The Amendment Warrants shall only be exercisable for cash, with an exercise price of $1.50 per share, for five years from the accrued dividend in-kind pursuantdate of issuance. In the event that the closing price of our common stock is $2.00 or higher for ten trading days out of a fifteen consecutive trading day period, we shall have the option, in our sole discretion, to elect to accelerate the termstermination date of the CertificateAmendment Warrants to such date that is 30 days (or more, in our sole discretion) following the date of Designation contemporaneously withsuch election. Following such accelerated termination date, any unexercised Amendment Warrants shall automatically be canceled without any further obligations on the filingpart of the Quarterly ReportCompany or the holders of Form 10-Q for the quarter ended June 30, 2017.such Amendment Warrants. The 2018 Annual Meeting will be held on August 16, 2018.
Not applicable.
None.
| Exhibit | Description |
| | |
| Agreement of Merger and Plan of Reorganization, dated as of May 26, 2015, among Spatializer Audio Laboratories, Inc., Ameri100 Acquisition, Inc. and Ameri and Partners Inc. (filed as Exhibit 2.1 to AMERI Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on May 26, 2015 and incorporated herein by reference). |
2.2 | Stock Purchase Agreement by and between Ameri Holdings, Inc. and the shareholders of Ameri Consulting Service Private Limited. (filed as Exhibit 10.3 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on June 1, 2015 and incorporated herein by reference). |
2.3 | Share Purchase Agreement, dated as of November 20, 2015, by and among Ameri Holdings, Inc., Bellsoft, Inc., and all of the shareholders of Bellsoft, Inc. (filed as Exhibit 10.12.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on November 23, 2015 and incorporated herein by reference). |
2.4 | Agreement of Merger and Plan of Reorganization, dated as of July 22, 2016, by and among Ameri Holdings, Inc., Virtuoso Acquisition Inc., Ameri100 Virtuoso Inc., Virtuoso, L.L.C. and the sole member of Virtuoso, L.L.C. (filed as Exhibit 2.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on July 27, 2016 and incorporated herein by reference). |
2.5 | Membership Interest Purchase Agreement, dated as of July 29, 2016, by and among Ameri Holdings, Inc., DC&M Partners, L.L.C., all of the members of DC&M Partners, L.L.C., Giri Devanur and Srinidhi “Dev” Devanur (filed as Exhibit 2.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on August 1, 2016 and incorporated herein by reference). |
2.6 | Share Purchase Agreement, dated as of March 10, 2017, by and among Ameri Holdings, Inc., ATCG Technology Solutions, Inc., all of the stockholders of ATCG Technology Solutions, Inc., and the Stockholders’ representative (filed as Exhibit 2.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on March 13, 2017 and incorporated herein by reference). |
| Amended and Restated Certificate of Incorporation of Ameri Holdings, Inc. (filed as Exhibit 3.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on June 23, 2016 and incorporated herein by reference). |
| Certificate of Designation of Rights and Preferences of 9.00% Series A Cumulative Preferred Stock (filed as Exhibit 3.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on January 4, 2017 and incorporated herein by reference). |
| Corrected Certificate of Designation of Rights and Preferences of 9.00% Series A Cumulative Preferred Stock (filed as Exhibit 3.3 to Ameri Holdings, Inc.’s Registration Statement on Form S-1, Amendment No. 1, filed with the SEC on April 18, 2017 and incorporated herein by reference). |
| Amended and Restated Bylaws of Ameri Holdings, Inc. (filed as Exhibit 3.2 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on June 23, 2016 and incorporated herein by reference). |
| Form of Certificate Representing Shares of common stock of Registrant (filed as Exhibit 4.1 to Ameri Holdings, Inc.’s Registration Statement on Form S-8 filed with the SEC on December 17, 2015 and incorporated herein by reference). |
4.2 | Form of common stock Purchase Warrant issued by Ameri Holdings, Inc. to Lone Star Value Investors, LP, dated May 26, 2015 (filed as Exhibit 4.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on June 1, 2015 and incorporated herein by reference). |
4.3 | Common Stock Purchase Warrant, dated May 12, 2016, issued by Ameri Holdings, Inc. to Lone Star Value Investors, LP, dated May 12, 2016 (filed as Exhibit 4.3 to Ameri Holdings, Inc.’s Quarterly Report on Form 10-Q filed with the SEC on May 16, 2016 and incorporated herein by reference). |
4.4 | Amended and Restated Registration Rights Agreement, dated May 12, 2016, by and between Ameri Holdings, Inc. and Lone Star Value Investors, LP (filed as Exhibit 10.3 to Ameri Holdings, Inc.’s Quarterly Report on Form 10-Q filed with the SEC on May 16, 2016 and incorporated herein by reference). |
4.5 | Form of 8% Convertible Unsecured Promissory Note due March 2020 (filed as Exhibit 10.2 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on March 8, 2017 and incorporated herein by reference). |
4.6 | Form of Registration Rights Agreement for 2017 Notes Investors (filed as Exhibit 10.3 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on March 8, 2017 and incorporated herein by reference). |
4.7 | Form of 6% Unsecured Promissory Note (filed as Exhibit 10.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on March 13, 2017 and incorporated herein by reference). |
10.1 | Employment Agreement, dated asForm of May 26, 2015, between Giri Devanur and Ameri Holdings, Inc.Private Placement Warrant (filed as Exhibit 10.44.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on June 1, 2015July 30, 2018 and incorporated herein by reference). |
10.2 | Employment Agreement, dated asForm of May 26, 2015, between Srinidhi “Dev” Devanur and Ameri Holdings, Inc.Placement Agent Warrant (filed as Exhibit 10.54.2 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on June 1, 2015July 30, 2018 and incorporated herein by reference). |
10.3 | Employment Letter, dated April 24, 2016, between Ameri and Partners Inc and Viraj PatelAmendment Agreement (filed as Exhibit 10.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on April 25, 2017June 26, 2018 and incorporated herein by reference). |
10.4 | Form ofPrivate Placement Securities Purchase Agreement for 2017 Notes Investors (filed as Exhibit 10.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on March 8, 2017 and incorporated herein by reference). |
10.5 | Exchange Agreement, dated as of December 30, 2016, between Ameri Holdings, Inc. and Lone Star Value Investors, LP (filed as Exhibit 10.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on January 4, 2017 and incorporated herein by reference). |
10.6 | Loan and Security Agreement dated as of July 1, 2016,25, 2018, by and among AmeriAMERI Holdings, Inc. and Partners Inc, Bellsoft, Inc., Ameri Holdings, Inc., Linear Logics, Corp., Winhire Inc, Giri Devanur,each purchaser named in the lenders which become a party to the Loan and Security Agreement, and Sterling National Bank, N.A. (a lender and as agent for the lenders) (filedsignature pages thereto (filed as Exhibit 10.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on July 7, 201630, 2018 and incorporated herein by reference). |
| Private Placement Registration Rights Agreement by and among AMERI Holdings, Inc. and each purchaser named in the signature pages thereto (filed as Exhibit 10.2 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on July 30, 2018 and incorporated herein by reference). |
| Section 302 Certification of Principal Executive Officer |
| Section 302 Certification of Principal Financial and Accounting Officer |
| Section 906 Certification of Principal Executive Officer |
| Section 906 Certification of Principal Financial and Accounting Officer |
| 101** | The following materials from Ameri Holdings, Inc.’s Quarterly Report on Form 10-Q for the three months ended June 30, 2017March 31, 2018 are formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statement of Stockholders’ Equity (Deficit), (iv) the Consolidated Statements of Cash Flow, and (iv) Notes to the Consolidated Financial Statements. |
| ** | In accordance with Item 601of Regulation S-K, this Exhibit is hereby furnished to the SEC as an accompanying document and is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933. |
Pursuant to the requirements of the Section 13 or 15 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 14th day of August 2017.2018.
| | AMERI Holdings, Inc. |
| | |
| | By: | /s/ Giri DevanurBrent Kelton |
| | | Giri DevanurBrent Kelton |
| | | President and Chief Executive Officer (Principal Executive Officer) |
| | |
| | By: | /s/ Viraj Patel |
| | | Viraj Patel |
| | | Chief Financial Officer (Principal Accounting Officer) |