Florida
|
0-54249
|
27-1230588
|
(State or Other Jurisdiction of Incorporation
or Organization)
|
(Commission file number)
|
(I.R.S. Employer Identification Number)
|
o
|
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
|
o
|
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
|
o
|
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
|
o
|
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
|
Name
|
Payout as a % of
Base Salary
at Threshold (75% of target performance) |
Payout as a % of
ase Salary at Target |
Payout as a % of
Base Salary at Maximum |
Richard Resnick
|
50%
|
100%
|
150%
|
Three months ended September 30
|
Nine months ended September 30
|
|||||||||||||||
2016
|
2015
|
2016
|
2015
|
|||||||||||||
Revenue
|
$
|
321,479
|
$
|
-
|
$
|
784,187
|
$
|
-
|
||||||||
Cost of sales
|
95,585
|
-
|
191,095
|
-
|
||||||||||||
Gross profit
|
225,894
|
-
|
593,092
|
-
|
||||||||||||
Operating expenses:
|
||||||||||||||||
Product development
|
838,950
|
-
|
1,329,462
|
-
|
||||||||||||
Sales and marketing
|
308,225
|
-
|
554,908
|
-
|
||||||||||||
General and administrative
|
2,403,942
|
704,509
|
5,448,048
|
1,472,604
|
||||||||||||
Total operating expenses
|
3,551,117
|
704,509
|
7,332,418
|
1,472,604
|
||||||||||||
Loss from operations
|
(3,325,223
|
)
|
(704,509
|
)
|
(6,739,326
|
)
|
(1,472,604
|
)
|
||||||||
Other income (expense):
|
||||||||||||||||
Gain on debt extinguishment
|
172,446
|
-
|
741,852
|
-
|
||||||||||||
Net loss on Investment in LifeMed ID, Inc.
|
(46,280
|
)
|
-
|
(404,310
|
)
|
-
|
||||||||||
Interest expense, net of interest income
|
(1,616,364
|
)
|
(171,842
|
)
|
(2,451,259
|
)
|
(226,278
|
)
|
||||||||
Loss before income taxes
|
(4,815,421
|
)
|
(876,351
|
)
|
(8,853,043
|
)
|
(1,698,882
|
)
|
||||||||
Income tax expense
|
-
|
-
|
-
|
-
|
||||||||||||
Net loss before non-controlling interest in subsidiary
|
(4,815,421
|
)
|
(876,351
|
)
|
(8,853,043
|
)
|
(1,698,882
|
)
|
||||||||
Non-controlling interest in subsidiary
|
(67,357
|
)
|
-
|
(53,110
|
)
|
-
|
||||||||||
Net loss
|
$ |
(4,748,064
|
)
|
$ |
(876,351
|
)
|
$ |
(8,799,933
|
)
|
$ |
(1,698,882
|
)
|
Revenue
|
Cost of Goods Sold
|
Gross Profit
|
||||||||||
Salamander
|
$
|
223,621
|
$
|
43,305
|
$
|
180,316
|
||||||
Agilivant
|
24,755
|
-
|
24,755
|
|||||||||
LifeMed ID
|
73,103
|
52,280
|
20,823
|
|||||||||
Totals
|
$
|
321,479
|
$
|
95,585
|
$
|
225,894
|
Revenue
|
Cost of Goods Sold
|
Gross Profit
|
||||||||||
Salamander
|
$
|
684,298
|
$
|
138,815
|
$
|
545,483
|
||||||
Agilivant
|
26,786
|
-
|
26,786
|
|||||||||
LifeMed ID
|
73,103
|
52,280
|
20,823
|
|||||||||
Totals
|
$
|
784,187
|
$
|
191,095
|
$
|
593,092
|
|
2015 |
2014 |
||||||
Revenue |
$ | 244,902 | $ | - | ||||
Cost of sales |
31,863 | - | ||||||
Gross profit |
213,039 | - | ||||||
Operating expenses: |
||||||||
Product development |
140,730 | - | ||||||
Sales and marketing |
122,944 | - | ||||||
General and administrative |
3,538,957 | 172,864 | ||||||
Total operating expenses |
3,802,631 | 172,864 | ||||||
Loss from operations |
(3,589,592 | ) | (172,864 | ) | ||||
Other income (expense): |
||||||||
Gain on debt extinguishment |
403,553 | - | ||||||
Interest expense, net of interest income |
(494,332 | ) | (6,036 | ) | ||||
Loss before income taxes |
(3,680,371 | ) | (178,900 | ) | ||||
Income tax expense |
- | - | ||||||
Net loss |
$ | (3,680,371 | ) | $ | (178,900 | ) |
Beneficial Owners
|
Amount and Nature
of Beneficial Ownership
|
Percent of
Class
|
||
Name and Address of Beneficial Owner
|
||||
Alpha Capital Anstalt
Lettstrasse 32
9490 Vaduz
Principality of Liechtenstein
|
9,759,242 (1)
|
17.5%
|
||
Alan Donenfeld
General Partner of Paragon Capital LP
110 E. 59th St. 22nd Fl.
New York, NY 10022
|
7,909,978 (2)
|
15.7%
|
Beneficial Owners |
Amount and Nature
of Beneficial Ownership
|
Percent of
Class
|
||
Sandor Capital Master Fund
2828 Routh Street, Suite 500
Dallas, TX 75201
|
6,709,580
|
13.8%
|
||
Paragon Capital LP
110 E. 59th St. 22nd Fl.
New York, NY 10022
|
6,294,340 (3)
|
12.5%
|
||
David W Raisbeck
26640 Edgewood Rd.
Shorewood, ME 55331
|
3,645,320
|
7.5%
|
||
Gregory Osborn
202 Mountain Ave
Ridgewood NJ 07450
|
3,017,405 (4)
|
6.0%
|
||
Named Executive Officers and Directors
|
||||
Richard Resnick
|
8,679,744 (5)
|
15.2%
|
||
James Mandel
|
250,000
|
*
|
||
David Carlson
|
--
|
--
|
||
Jeffrey Hattara
|
--
|
--
|
||
David Batchelor
|
--
|
--
|
||
Donald Miller
|
--
|
--
|
||
Whitney Peyton
|
--
|
--
|
||
Salvatore Fazzolari
|
--
|
--
|
||
Jonathan Dodge
|
--
|
--
|
||
All Directors and Executive Officers as a Group (12 persons)
|
9,263,078
|
15.2%
|
(1) |
Includes (i) 925,926 shares of
Nuvel Common Stock
, (ii) an aggregate of 1,939,301 shares of
Nuvel Common Stock
issuable upon the exercise of the warrants held by such holder, (iii) 5,194,632 shares of
Nuvel Common Stock
upon the conversion of notes held by Alpha Capital Anstalt, and (iv) 1,699,383 shares of
Nuvel Common Stock issuable
upon the conversion of Nuvel's Series D preferred stock. Konrad Ackerman is the director of Alpha Capital Anstalt ("Alpha"), and in such capacity, has voting and dispositive power over the securities held by Alpha. The shares issuable upon the conversion of notes and the shares of Nuvel's Series D preferred stock held by Alpha contain "blocker" provisions that limits Alpha's and certain related parties' ability to convert such notes and Series D preferred stock to the extent that either conversion would cause Alpha's beneficial ownership in Nuvel to exceed 4.99% of the outstanding shares of Nuvel Common Stock. The calculation of beneficial ownership of Alpha does not take into account the effect of such "blocker" provisions.
|
(2) |
Includes (i) 1,615,638 shares of
Nuvel Common Stock
held directly by Mr. Donenfeld, (ii) 4,550,340 shares of
Nuvel Common Stock
held by Paragon Capital, LP, (iii) and an aggregate of 1,744,000 shares of
Nuvel Common Stock
issuable upon the exercise of the warrants held by Paragon Capital LP. Mr. Donenfeld is the General Partner of Paragon Capital, LP, and in such capacity, has voting and dispositive power over the securities held by Paragon Capital, LP.
|
(3) |
Includes (i) 4,550,340 shares of
Nuvel Common Stock
and (ii) an aggregate of 1,744,000 shares of
Nuvel Common Stock
issuable upon the exercise of the warrants held by such holder. Alan Donenfeld is the General Partner of Paragon Capital, LP, and in such capacity, has voting and dispositive power over the securities held by Paragon Capital, LP.
|
(4) |
Includes (i) 1,161,012 shares of
Nuvel Common Stock
, (ii) an aggregate of 698,996 shares of
Nuvel Common Stock
issuable upon the exercise of the warrants held by such holder, and (iii) 1,157,397 shares of
Nuvel Common Stock
upon the conversion of notes held by Gregory Osborn. Mr. Osborne disclaims beneficial ownership over any securities held by his wife, Elizabeth Luongo.
|
(5) |
Includes
(i) 166,666 shares of Nuvel Common Stock and (ii) an aggregate of 8,513,078 shares of Nuvel Common Stock issuable upon the exercise of warrants held by such holder.
|
Beneficial Owners
|
Amount and Nature of
Beneficial Ownership
|
Percent of
Class
|
||
Name of and Address of Beneficial Owner
|
||||
David L. Kessenich & Colleen B. Kessenich
240 Jersey Street
Denver, CO 80220
|
44,971.02
(1)
|
14.8%
|
||
Green Planet LLC
3000 St. Albans Mill Road, #209
Minnetonka, MN 55305
|
19,007.55
(2)
|
6.5%
|
||
Named Executive Officers and Directors
|
||||
James Mandel
|
48,151.87
(3)
|
16.4%
|
||
David Carlson
|
8,897.66
(4)
|
2.8%
|
||
Jeffrey Hattara
|
34,431.35
(5)
|
11.8%
|
||
David Batchelor
|
42,473.28
(6)
|
14.0%
|
||
Richard Resnick
|
61.81
(7)
|
*
|
||
Donald Miller
|
25,316.95
(8)
|
8.2%
|
||
Whitney Peyton
|
46,719.21
(9)
|
15.4%
|
||
Salvatore Fazzolari
|
9,770.22
(10)
|
3.3%
|
||
Jonathan Dodge
|
4,691.74
|
1.6%
|
||
All Directors and Executive Officers as a Group (12 persons)
|
227,349.38
|
76.0%
|
Beneficial Owners
(1)
|
Amount and Nature of
Beneficial Ownership
(2)
|
Percent of
Class
|
||
Name of and Address of Beneficial Owner
|
||||
David L. Kessenich & Colleen B. Kessenich
240 Jersey Street
Denver, CO 80220
|
2,000
|
20.1%
|
||
Banque Heritage
Route de Chêne 61
Case Postale 6600
1211 Geneva 6, Switzerland
|
2,000
|
20.1%
|
||
Named Executive Officers and Directors
|
||||
James Mandel
|
368
|
4.2%
|
||
David Carlson
|
50
|
*
|
||
Jeffrey Hattara
|
50
|
*
|
||
David Batchelor
|
--
|
--
|
||
Richard Resnick
|
15
|
*
|
||
Donald Miller
|
460
|
5.2%
|
||
Whitney Peyton
|
500
|
5.7%
|
||
Salvatore Fazzolari
|
100
|
1.1%
|
||
Jonathan Dodge
|
--
|
--
|
||
All Directors and Executive Officers as a Group (12 persons)
|
1,673
|
19.1%
|
Beneficial Owners
|
Amount and Nature of Beneficial Ownership
|
Percent of Class
|
||
Name of and Address of Beneficial Owner
|
||||
Phoenix-95 Investments, LLC
37428 Rancho Manana
Cave Creek, AZ 85331
|
20,000
|
100.0%
|
||
Named Executive Officers and Directors
|
--
|
--
|
||
James Mandel
|
||||
David Carlson
|
--
|
--
|
||
Jeffrey Hattara
|
--
|
--
|
||
David Batchelor
|
--
|
--
|
||
Richard Resnick
|
--
|
--
|
||
Donald Miller
|
--
|
--
|
||
Whitney Peyton
|
--
|
--
|
||
Salvatore Fazzolari
|
--
|
--
|
||
Jonathan Dodge
|
--
|
--
|
||
All Directors and Executive Officers as a Group (12 persons)
|
--
|
--
|
Beneficial Owners
(1)
|
Amount and Nature of Beneficial Ownership
|
Percent of Class
|
||
Name of and Address of Beneficial Owner
|
||||
Leon Frenkel
1600 Flat Rock Road
Penn Valley, PA 19072
|
32,716
|
8.8%
|
||
Paragon Capital LP
110 E. 59th St. 22nd Fl.
New York, NY 10022
|
227,517
|
61.3%
|
||
The Really Cool Group
1 Hastings Rd
St. Helier, JE14HE
Channel Islands
|
72,377
|
19.5%
|
||
Timothy Lane
322 Harbour Dr. Apt 204 D
Naples, FL 34103
|
38,442
|
10.4%
|
||
Named Executive Officers and Directors
|
||||
James Mandel
|
--
|
--
|
||
David Carlson
|
--
|
--
|
||
Jeffrey Hattara
|
--
|
--
|
||
David Batchelor
|
--
|
--
|
||
Richard Resnick
|
--
|
--
|
||
Donald Miller
|
--
|
--
|
||
Whitney Peyton
|
--
|
--
|
||
Salvatore Fazzolari
|
--
|
--
|
||
Jonathan Dodge
|
--
|
--
|
||
All Directors and Executive Officers as a Group (12 persons)
|
--
|
--
|
Beneficial Owners
|
Amount and Nature of Beneficial Ownership
|
Percent of Class
|
||
Name of and Address of Beneficial Owner
|
||||
Alpha Capital Anstalt
Aulestrasse 60,
LI-9490 Vaduz
Liechtenstein
|
1,699,383
(1)
|
96.15%
|
||
Named Executive Officers and Directors
|
||||
James Mandel
|
--
|
--
|
||
David Carlson
|
--
|
--
|
||
Jeffrey Hattara
|
--
|
--
|
||
David Batchelor
|
--
|
--
|
||
Richard Resnick
|
--
|
--
|
||
Donald Miller
|
--
|
--
|
||
Whitney Peyton
|
--
|
--
|
||
Salvatore Fazzolari
|
--
|
--
|
||
Jonathan Dodge
|
--
|
--
|
||
All Directors and Executive Officers as a Group (12 persons)
|
--
|
--
|
(1) |
Shares of Series D Convertible Preferred Stock are convertible on a one-to-one basis into shares of Common Stock at the election of the holder. Alpha Capital Anstalt ("Alpha") has entered into a Note Conversion Agreement with Nuvel pursuant to which Alpha has agreed to convert all of its Series D Convertible Preferred Stock and certain convertible notes into a total of 222,857 shares of post-Reverse Stock Split Nuvel Common Stock upon
consummation of the Reverse Stock Split.
The shares issuable upon the conversion of Series D Convertible Preferred Stock held by Alpha (including pursuant to the Note Conversion Agreement) contain "blocker" provisions that limit Alpha's and certain related parties' ability to convert Series D Convertible Preferred Stock to the extent that either conversion would cause Alpha Capital Anstalt's beneficial ownership in Nuvel to exceed 4.99% of Nuvel's outstanding shares of common stock. The calculation of beneficial ownership of Alpha does not take into account the effect of such "blocker" provisions. Konrad Ackerman is the director of Alpha, and in such capacity, has voting and dispositive power over the securities held by Alpha.
|
Name
|
Age
|
Title
|
||
James Mandel
|
60
|
President and Chief Executive Officer
|
||
David Carlson
|
60
|
Chief Financial Officer
|
||
David Batchelor
|
62
|
Chief Relations Officer
|
||
Jeffrey Hattara
|
60
|
Chief Strategy Officer
|
||
Colleen Davenport
|
53
|
Secretary and General Counsel
|
||
Robert Riess
|
40
|
Chief Operations Officer and Chief Marketing Officer
|
||
Richard Resnick
|
50
|
Executive Vice President of Operations
|
||
Robert Philbin
|
60
|
Chief Executive Officer and Chairman of the Board of Agilivant
|
Name
|
Age
|
Title
|
||
Donald Miller
|
76
|
Director (Chairman)
|
||
Whitney Peyton
|
64
|
Director
|
||
Jonathon Dodge
|
69
|
Director
|
||
Salvatore Fazzolari
|
64
|
Director
|
||
James Mandel
|
60
|
Director
|
||
Richard Resnick
|
50
|
Director
|
||
David Batchelor
|
62
|
Director
|
||
Jeffrey Hattara
|
60
|
Director
|
Name & Title
|
Term of Agreement
|
|
James L. Mandel
President and Chief Executive Officer
|
July 1, 2015 – December 31, 2018
|
|
David Carlson
Chief Financial Officer
|
February 2, 2015 – February 1, 2018
|
|
Jeffrey Hattara
Chief Strategy Officer
|
July 1, 2015 – June 30, 2018
|
|
Robert Riess
Chief Operations and Chief Marketing Officer
|
April 23, 2015 – April 22, 2018
|
|
David Batchelor
Chief Relations Officer and CEO/CRO of LifeMed ID
|
March 15, 2016 – March 14, 2022
|
|
Richard Resnick
Executive Vice President of Operations
|
3-year term (entered into in connection with closing of the Merger)
|
|
Collen Davenport
Secretary and General Counsel
|
October 21, 2016 – October 20, 2017, subject to automatic renewal with a two-year term
|
|
Robert Philbin
Chief Executive Officer and Chairman of the Board of Agilivant
|
November 9, 2016 – November 8, 2017, subject to automatic renewal with a two-year term
|
Name & Title
|
Annualized Base Salary
(1)
|
|
James L. Mandel
President and Chief Executive Officer
|
FY15: $350,000
FY16: $375,000
FY17 and FY18: $400,000
|
|
David Carlson
Chief Financial Officer
|
$240,000
(2)
|
|
Jeffrey Hattara
Chief Strategy Officer
|
$240,000
(3)
|
|
Robert Riess
Chief Operations and Chief Marketing Officer
|
$175,000
(4)
|
|
David Batchelor
Chief Relations Officer and CEO/CRO of LifeMed ID
(5)
|
$321,000, which increases by 7% annually
|
|
Richard Resnick
Executive Vice President of Operations
(6)
|
$250,000, which increases by 5% annually
|
|
Collen Davenport
Secretary and General Counsel
|
$150,000, which increases by 5% annually
|
|
Robert Philbin
Chief Executive Officer and Chairman of the Board of Agilivant
|
$275,000, which increases by 5% annually
(7)
|
(1)
|
Subject to adjustment by the board of directors based on the recommendation of the Compensation Committee following a review of individual and company performance goals and objectives and evaluation of the executive officer's performance in light of these goals.
|
(2)
|
Mr. Carlson's base salary was increased from $200,000 to $240,000 effective May 2, 2016.
|
(3)
|
On December 29, 2015, Jeffrey Hattara accepted 1,150,000 shares of OrangeHook Common Stock in lieu of cash compensation for services provided to OrangeHook during fiscal 2015.
|
(4)
|
Mr. Riess's annual base salary was increased from $150,000 to $175,000 effective January 1, 2016.
|
(5)
|
Mr. Batchelor currently serves as Chief Executive Officer of LifeMed ID; LifeMed ID expects to hire a new Chief Executive Officer, at which point Mr. Batchelor is expected to transition to Chief Relations Officer of that entity. He will remain CRO of Nuvel.
|
(6)
|
In connection with the closing of the Merger, Nuvel entered into an employment agreement with Richard Resnick. Refer to "
The Merger and Related Transactions
" for a description of the material terms of Mr. Resnick's employment agreement. A copy of the employment agreement is attached as an exhibit to this Current Report on Form 8-K.
|
(7)
|
Mr. Philbin has agreed to defer payment of 50% of his annual base salary until such time as our Chief Executive Officer and board of directors determine that our liquidity and capitalization position can support payment the entire amount.
|
Name
|
Payout as a % of
Base
Salary at Threshold (80% of
target
performance)
|
Payout as a %
of
Base Salary
at
Target
|
Payout as a %
of
Base Salary
at
Maximum
|
James Mandel
|
50%
|
100%
|
150%
|
David Carlson
|
50%
|
100%
|
150%
|
Jeffrey Hattara
|
50%
|
100%
|
150%
|
Robert Riess
|
50%
|
75%
|
150%
|
Robert Philbin
(1)
|
N/A
|
N/A
|
N/A
|
David Batchelor
(2)
|
N/A
|
N/A
|
N/A
|
Richard Resnick
(3)
|
N/A
|
N/A
|
N/A
|
Colleen Davenport
(4)
|
N/A
|
N/A
|
N/A
|
Name and Position
|
Year
(1)
|
Salary
($) |
Stock
Awards
(2)
($) |
Option
Awards
($) |
All Other
Compensation
($) |
Total
($) |
James L. Mandel,
President
and Chief Executive Officer
|
2015
|
175,000
(3)
|
-
|
-
|
4,500
|
179,500
|
2014
|
-
|
13,500
(4)
|
-
|
-
|
13,500
|
|
David Carlson,
Chief Financial Officer
|
2015
|
183,333
(5)
|
22,400
(6)
|
-
|
4,855
|
210,588
|
2014
|
-
|
-
|
-
|
-
|
-
|
|
David Batchelor,
Chief Relations Officer
|
2015
|
-
|
-
|
559,000
(7)
|
-
|
559,000
|
2014
|
-
|
-
|
-
|
-
|
-
|
|
Richard Resnick,
Executive Vice President
of Operations
(8)
|
2015
|
300,000
|
-
|
-
|
-
|
-
|
2014
|
225,000
|
-
|
-
|
-
|
-
|
|
Jay Elliot
(9)
|
2015
|
38,013
|
-
|
-
|
-
|
-
|
2014
|
80,100
|
-
|
-
|
-
|
-
|
Name
|
Number of Securities
Underlying
Unexercised Options
(#) Exercisable
|
Number of Securities
Underlying
Unexercised Options
(#) Unexercisable
|
Option
Exercise Price
($)
|
Option
Expiration Date |
Number of Shares
of Stock that
Have Not
Vested
(#)
|
Market Value of
Shares of Stock
that Have Not
Vested
($)
|
James L. Mandel
|
-
|
-
|
-
|
-
|
-
|
-
|
David Carlson
|
-
|
-
|
-
|
-
|
-
|
-
|
David Batchelor
|
178,571
(1)
|
-
|
0.16
|
11/24/2022
|
-
|
-
|
(1) |
On May 31, 2016, Mr. Batchelor's option was rescinded and replaced with a seven-year nonqualified stock option to purchase up to 228,413 shares of OrangeHook Common Stock at an exercise price of $3.18 per share.
|
Executive Officer or Director
|
Issue Date
|
Principal
Amount
(1)
|
Interest Rate
(per annum)
(2)
|
Maturity Date
(3)
|
||||
Whitney Peyton
(4)
|
Dec. 2, 2014
|
$1,300,000
|
5%
|
Dec. 31, 2017
|
||||
James Mandel
(5)
|
Dec. 2, 2014
|
$180,000
|
5%
|
Mar. 1, 2016
|
||||
Whitney Peyton
|
Jun. 4, 2015
|
$500,000
|
5%
|
Dec. 31, 2016
|
||||
Jeffrey Hattara/Whitney Peyton
(12)
|
Oct. 29, 2015
|
$450,000
|
6%
|
Jun. 30, 2016
|
||||
James Mandel
(6)
|
Jan. 20, 2016
|
$150,000
|
10%
|
Mar. 30, 2016
|
||||
Jeffrey Hattara
|
Jan. 20, 2016
|
$50,000
|
10%
|
Mar. 20, 2016
|
||||
Donald Miller
(7)
|
Jan. 25, 2016
|
$100,000
|
10%
|
Jul. 25, 2016
|
||||
Donald Miller
(7)
|
Jan. 25, 2016
|
$500,000
|
10%
|
Jul. 29, 2016
|
||||
Jeffrey Hattara
(8)
|
Feb. 8, 2016
|
$100,000
|
10%
|
Jun. 30, 2016
|
||||
James Mandel
(6)
|
Feb. 9, 2016
|
$60,000
|
10%
|
Mar. 9, 2016
|
||||
Donald Miller
(7)
|
Feb. 16, 2016
|
$300,000
|
10%
|
Aug. 16, 2016
|
||||
Jeffrey Hattara
(8)
|
Feb. 26, 2016
|
$10,000
|
10%
|
Jun. 30, 2016
|
||||
Jonathon Dodge
|
Mar. 9, 2016
|
$25,000
|
10%
|
Apr. 9, 2016
|
||||
Whitney Peyton
(9)
|
May 3, 2016
|
$400,000
|
6%
|
Jun. 30, 2016
|
||||
Jeffrey Hattara
|
May 12, 2016
|
$200,000
|
10%
|
Jun. 30, 2016
|
||||
James Mandel
(6)
|
Sept. 19, 2016
|
$18,000
|
0%
|
Due on demand
|
||||
James Mandel
(10)
|
Sept. 19, 2016
|
$32,000
|
0%
|
Due on demand
|
||||
David Carlson
|
Sept. 19, 2016
|
$25,000
|
0%
|
Due on demand
|
||||
Richard Resnick
(11)
|
Sept. 19, 2016
|
$50,000
|
0%
|
Due on demand
|
||||
David Carlson
(13)
|
Sept. 20, 2016
|
$4,000
|
0%
|
Due on demand
|
||||
Donald Miller
(7)
|
Sept. 28, 2016
|
$60,000
|
0%
|
Due on demand
|
||||
Whitney Peyton
|
Nov. 11, 2016
|
$250,000
|
5.5%
|
Nov. 9, 2017
|
||||
Robert Philbin
|
Oct. 3, 2016
|
$50,000
|
0%
|
Due on demand
|
||||
Robert Philbin
(14)
|
Sept. 29, 2016
|
$300,000
|
--
|
Due on demand
|
(1) |
The entire principal amount of each promissory note remains outstanding, except as otherwise noted.
|
(2) |
Table does not present any interest payments that have been made on the notes.
|
Name
|
Audit Committee
|
Compensation Committee
|
Nominating and Governance Committee
|
|||
Donald Miller
|
x
|
Chair
|
||||
Whitney Peyton
|
x
|
|||||
Jonathon Dodge
|
Chair
|
x
|
||||
Salvatore Fazzolari
|
x
|
Chair
|
||||
James Mandel
|
||||||
Richard Resnick
|
||||||
David Batchelor
|
||||||
Jeffrey Hattara
|
|
High
|
Low
|
||||||
|
||||||||
Fiscal Year Ended December 31, 2016
|
||||||||
|
||||||||
First Quarter
|
$
|
0.24
|
$
|
0.15
|
||||
Second Quarter
|
$
|
0.19
|
$
|
0.15
|
||||
Third Quarter
|
$
|
0.40
|
$
|
0.14
|
||||
Fiscal Year Ended December 31, 2015
|
||||||||
|
||||||||
First Quarter
|
$
|
0.58
|
$
|
0.10
|
||||
Second Quarter
|
$
|
0.28
|
$
|
0.15
|
||||
Third Quarter
|
$
|
0.15
|
$
|
0.15
|
||||
Fourth Quarter
|
$
|
0.22
|
$
|
0.14
|
Fiscal Year Ended December 31, 2014
|
||||||||
|
||||||||
First Quarter
|
$
|
0.50
|
$
|
0.12
|
||||
Second Quarter
|
$
|
0.37
|
$
|
0.37
|
||||
Third Quarter
|
$
|
0.39
|
$
|
0.31
|
||||
Fourth Quarter
|
$
|
0.51
|
$
|
0.22
|
Plan Category
|
Number of
securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted
average exercise price of outstanding options, warrants and rights |
Number of securities
remaining available for future issuance under equity compensation plans (excluding securities reflected in First column) |
|||||||||
Equity compensation plans approved by stockholders
|
$ | $ | ||||||||||
Equity compensation plans not approved by stockholders
(1)
|
178,571
|
(2) |
0.16
|
-
|
||||||||
Total
|
178,571
|
$
|
0.16
|
-
|
(1) |
Represents equity compensation plans (including compensation arrangements) for employees or non-employees (such as directors, consultants, advisors, vendors, customers, suppliers or lenders).
|
(2) |
On November 24, 2015, Mr. Batchelor received as an inducement to accept employment with OrangeHook non-qualified stock options to purchase 178,571 shares of OrangeHook Common Stock at an exercise price of $0.16 per share. The options had an aggregate grant date fair value of $559,000 and were fully vested on the date of grant. On May 31, 2016, Mr. Batchelor's non-qualified stock options were rescinded and replaced with a seven-year non-qualified stock option to purchase up to 228,413 shares of OrangeHook Common Stock at an exercise price of $3.18 per share. The material terms of Mr. Batchelor's employment agreement are described under the heading "
Executive Compensation.
"
|
·
|
Options and Stock Appreciation Rights
. The maximum number of shares of OrangeHook Common Stock subject to Options granted and shares of OrangeHook Common Stock subject to Stock Appreciation Rights granted in any one calendar year to any one Participant is, in the aggregate, five hundred thousand (500,000) shares,
subject to adjustment for certain corporate events
.
|
·
|
Restricted Stock Awards and Restricted Stock Units
. The maximum grant with respect restricted stock awards and restricted stock units in any one calendar year to any one participant is, in the aggregate, five hundred thousand (500,000) shares,
subject to adjustment for certain corporate events
.
|
Note
No.
|
Issue Date
|
Interest Rate
|
Conversion
Price Per Share |
Original
Principal Amount
|
Maturity
Date |
Current Principal
Outstanding |
1
|
12/02/2014
|
5.00%
|
N/A
|
$1,300,000.00
|
12/31/2016
|
$1,208,330.40
|
2
|
12/02/2014
|
5.00%
|
N/A
|
$180,000.00
|
03/01/2016
|
$0.00
|
2a
|
06/04/2015
|
5.00%
|
N/A
|
$500,000.00
|
12/31/2016
|
$500,000.00
|
3
|
10/29/2015
|
6.00%
|
N/A
|
$450,000.00
|
10/29/2015
|
$350,000.00
|
4
|
01/20/2016
|
10.00%
|
N/A
|
$150,000.00
|
02/20/2016
|
$0.00
|
5
|
01/20/2016
|
10.00%
|
N/A
|
$150,000.00
|
03/30/2016
|
$150,000.00
|
6
|
01/20/2016
|
10.00%
|
N/A
|
$50,000.00
|
02/20/2016
|
$0.00
|
7
|
01/20/2016
|
10.00%
|
N/A
|
$50,000.00
|
03/20/2016
|
$50,000.00
|
8
|
01/25/2016
|
10.00%
|
$7.00
|
$100,000.00
|
07/25/2016
|
$0.00
|
9
|
01/26/2016
|
10.00%
|
$1,000.00
|
$100,000.00
|
02/25/2016
|
$0.00
|
10
|
01/26/2016
|
10.00%
|
$1,000.00
|
$100,000.00
|
03/26/2016
|
$0.00
|
11
|
01/26/2016
|
10.00%
|
$1,000.00
|
$100,000.00
|
04/26/2016
|
$0.00
|
12
|
01/29/2016
|
10.00%
|
$7.00
|
$500,000.00
|
07/29/2016
|
$0.00
|
13
|
02/08/2016
|
10.00%
|
N/A
|
$100,000.00
|
06/30/2016
|
$0.00
|
14
|
02/09/2016
|
10.00%
|
N/A
|
$60,000.00
|
03/09/2016
|
$60,000.00
|
15
|
02/16/2016
|
10.00%
|
$7.00
|
$300,000.00
|
08/16/2016
|
$0.00
|
16
|
02/26/2016
|
10.00%
|
N/A
|
$10,000.00
|
06/30/2016
|
$0.00
|
17
(1)
|
03/02/2016
|
0.00%
|
N/A
|
$50,000.00
|
10/02/2016
|
$50,000.00
|
18
|
03/09/2016
|
10.00%
|
N/A
|
$25,000.00
|
04/09/2016
|
$25,000.00
|
19
(2)
|
03/15/2016
|
0.00%
|
N/A
|
$300,000.00
|
04/15/2016
|
$300,000.00
|
20
|
05/03/2016
|
6.00%
|
N/A
|
$400,000.00
|
06/30/2016
|
$0.00
|
21
|
05/12/2016
|
10.00%
|
N/A
|
$200,000.00
|
06/30/2016
|
$200,000.00
|
22
|
05/25/2016
|
10.00%
|
$1.00
|
$1,000,000.00
|
10/31/2016
|
$0.00
|
·
|
changes in Nuvel's or OrangeHook's net assets between the pro forma balance sheet date of September 30, 2016 and the closing of the transactions;
|
·
|
the value of Nuvel as of the effective date of the transactions;
|
·
|
the timing of the completion of the transactions; and
|
·
|
other changes in net assets that may occur prior to completion of the transactions, which could cause material differences in the information presented.
|
Issued and Outstanding Shares
|
||||||||||||||||
Instrument
|
Historical –
September 30, 2016
|
Conversion
to common
|
1 for 1,200,000
Reverse stock split
|
Pro forma –
September 30, 2016
|
||||||||||||
Common stock
|
18,876,919
|
31,538,418
|
(50,415,296
|
)
|
41
|
|||||||||||
Series A preferred stock
|
-
|
-
|
-
|
-
|
||||||||||||
Series B preferred stock
|
408,484
|
(388,484
|
)
|
-
|
20,000
|
|||||||||||
Series C preferred stock
|
1,471,121
|
(1,100,069
|
)
|
-
|
371,052
|
|||||||||||
Series D preferred stock
|
1,767,358
|
(1,767,358
|
)
|
-
|
-
|
Debit
|
Credit
|
|||||
Series B preferred stock
|
$
|
388
|
||||
Series C preferred stock
|
1,
100
|
|||||
Series D preferred stock
|
1,767
|
|||||
Common stock
|
18,877
|
|||||
Additional paid-in capital
|
17,091,268
|
|||||
Accumulated deficit
|
$ |
17,113,400
|
Note 4 |
To reflect the cash payment of estimated legal, financial advisory, accounting, printing and other professional fees and expenses incurred in connection with the merger with Nuvel.
|
Debit
|
Credit
|
|||||||
Accumulated deficit
|
$
|
215,900
|
||||||
Cash
|
$
|
215,900
|
Note 5 |
To record (a) the
effective
exchange of OrangeHook common stock (at par value of $55,067) for the issuance of 5,506,704 shares of Nuvel common stock (par value $5,507)
(after giving effect to the exchange of OrangeHook common stock for Series OH-1 Convertible Preferred Stock in connection with the Merger and the subsequent conversion into Nuvel common stock upon the Reverse Stock Split)
; (b) the
conversion
of OrangeHook preferred stock (book value of $8,548,452) for 8,651 shares of Series OH-2 Preferred Stock (par value of $9) to the former shareholders of OrangeHook; and (c) the reversal of the derivative liability due to insufficient authorized shares.
|
Preferred stock, OrangeHook
|
$
|
8,548,452
|
||||||
Common stock, OrangeHook
|
55,067
|
|||||||
Derivative liability
|
632,758
|
|||||||
Preferred stock, Nuvel
|
$
|
9
|
||||||
Common stock, Nuvel
|
5,507
|
|||||||
Additional paid-in capital
|
8,548,452
|
Note 6 |
To eliminate the intercompany receivable and payable between OrangeHook and Nuvel.
|
Debit
|
Credit
|
|||||||
Note payable to related party
|
$
|
1,336,249
|
||||||
Due from Nuvel Holdings, Inc.
|
$
|
1,336,249
|
Note 7 |
To record the conversion of participating Nuvel convertible notes with face value of $1,439,899 and accrued and unpaid interest of $344,487, to an aggregate of 458,591 shares of common stock.
|
Debit
|
Credit
|
|||||||
Convertible notes
|
$
|
1,439,899
|
||||||
Accounts payable and accrued expenses
|
344,487
|
|||||||
Common stock
|
$
|
458
|
||||||
Additional paid-in capital
|
1,783,928
|
Note 8 |
To record the liability to the former stockholder of Nuvel for the 357,143 Earn-Out Shares at $3.18 per share, pursuant to OrangeHook merger with Nuvel.
|
Debit
|
Credit
|
|||||||
Additional paid-in capital
|
$
|
1,135,715
|
||||||
Other liabilities
|
$
|
1,135,715
|
Note A |
Derived from the unaudited statement of operations of OrangeHook for the nine months ended September 30, 2016, included elsewhere in this information statement.
|
Note B |
Derived from the unaudited statement of operations of LifeMed for the period of January 1, 2016 through July 20, 2016.
|
Note C |
Derived from the unaudited historical financial information of Agilivant for the period of January 1, 2016 through February 12, 2016.
|
Note D |
Derived from the unaudited statement of operations of Nuvel for the nine months ended September 30, 2016, as filed with the SEC on November 14, 2016.
|
Note E |
To record the increase in amortization expense for purchased identifiable intangible assets for the period of January 1, 2016 through February 12, 2016 of $32,000 related to the acquisition of Agilivant, as well as an increase in amortization expense for purchased identifiable intangible assets for the period of January 1, 2016 through July 20, 2016 of $412,000 related to the acquisition of LifeMed.
|
Note F |
To record the reduction of other operating expenses relating to the costs of the transactions (legal and other professional fees) previously included in the historical statements of operations for OrangeHook, Agilivant and LifeMed.
|
Note G |
To record the pro forma effect of the acquisitions on weighted average shares outstanding. As the transactions are being reflected as if they had occurred at the beginning of the period presented, the calculation of weighted average shares outstanding for basic and diluted net loss per share assumes that the shares issued relating to the acquisitions have been outstanding for the entire period presented. Weighted average common shares outstanding – basic and diluted are calculated as follows, on an as-converted, post recapitalization basis:
|
Outstanding –
Pro Forma
|
Weighted
Average
Shares –
Pro Forma
|
|||||||
Shares outstanding - OrangeHook
|
3,803,603
|
3,725,441
|
||||||
Shares issued to shareholders of LifeMed
|
1,454,261
|
1,454,261
|
||||||
Shares issued to shareholders of Agilivant
|
282,173
|
282,173
|
||||||
Weighted average shares outstanding, basic and diluted
|
5,540,037
|
5,461,875
|
||||||
Less: Weighted average shares - OrangeHook - historical
|
4,403,585
|
|||||||
Adjustment to weighted average shares outstanding
|
1,058,290
|
Note H |
To record the reduction of other operating expenses relating to the costs of the transactions previously included in the historical statements of operations for Nuvel and OrangeHook.
|
Note I |
To record the reduction of interest expense due to the conversion of the convertible notes.
|
Note J |
To record the reduction of historical preferred stock contractual dividends due to the cancellation of Nuvel preferred stock and the exchange of OrangeHook preferred stock for new series OH-2 preferred stock.
|
Note K |
To record the increase in preferred stock contractual dividends due to the 12% cumulative dividends on the OH-2 preferred stock.
|
Note L |
To record the adjustments to weighted average shares outstanding. As the merger is being reflected as if they had occurred at the beginning of the period presented, the calculation of weighted average shares outstanding for basic and diluted net loss per share assumes that the shares issued relating to the merger had been outstanding for the entire period presented. Weighted average common shares outstanding – basic and diluted are calculated as follows, on an as-converted, post recapitalization basis:
|
Outstanding –
Pro Forma
|
Weighted
Average Shares
– Pro Forma
|
|||||||
Public shares of Nuvel (See Note 3)
|
41
|
41
|
||||||
Shares issued from conversion of Nuvel convertible debt
|
458,591
|
458,591
|
||||||
Weighted average shares outstanding prior to Nuvel Merger
|
5,540,037
|
5,461,875
|
||||||
Weighted average shares outstanding, basic and diluted
|
5,998,669
|
5,920,507
|
||||||
Less: Weighted average shares - public shares of Nuvel
|
16,987,672
|
|||||||
Weighted average shares - prior to Nuvel Merger
|
5,461,875
|
|||||||
Adjustment to weighted average shares outstanding
|
(16,529,040
|
)
|
Outstanding –
Pro Forma
|
Weighted
Average
Shares –
Pro Forma
|
|||||||
Weighted average shares outstanding - OrangeHook
|
3,803,603
|
1,766,030
|
||||||
Shares issued to shareholders of LifeMed
|
1,454,261
|
1,454,261
|
||||||
Shares issued to shareholders of Agilivant
|
282,173
|
282,173
|
||||||
Weighted average shares outstanding, basic and diluted
|
5,540,037
|
3,502,464
|
||||||
Less: weighted average shares - OrangeHook - historical
|
1,766,030
|
|||||||
Adjustment to weighted average shares outstanding
|
1,736,434
|
Note MM |
To record the adjustments to weighted average shares outstanding. As the Merger is being reflected as if it had occurred at the beginning of the period presented, the calculation of weighted average shares outstanding for basic and diluted net loss per share assumes that the shares issued relating to the Merger had been outstanding for the entire period presented. In this calculation, the shares redeemed were retroactively adjusted to eliminate such shares for the entire period. Weighted average common shares outstanding – basic and diluted are calculated as follows, on an as-converted, post recapitalization basis:
|
Exhibit Number
|
Description
|
|
2.1
|
Plan of Merger between Nuvel Holdings, Inc. and HRMY Sub, Inc., dated March 20, 2012.
(1)
|
|
2.2
|
Agreement and Plan of Merger dated July 1, 2016 by and among Nuvel Holdings, Inc., OH Acquisition Corp., and OrangeHook, Inc.
(2)
|
|
2.3
|
Amendment No. 1 to Agreement and Plan of Merger dated October 14, 2016 by and among OrangeHook, Inc., Nuvel Holdings, Inc., and OH Acquisition Corp.
(3)
|
|
2.4
|
||
2.5
|
||
2.6
|
||
2.7
|
||
2.8
|
||
2.9
|
||
2.10
|
Share Exchange Agreement by and among Nuvel Holdings, Inc., certain former shareholders of Nuvel Holdings, Inc., Nuvel, Inc. and Stockholders of Nuvel, Inc., dated December 30, 2011.
(10)
|
|
2.11
|
||
3.1
|
Articles of Incorporation of Nuvel Holdings, Inc., dated June 15, 2010.
(4)
|
|
3.2
|
Articles of Merger of Nuvel Holdings, Inc. filed with the State of Florida on March 21, 2012.
(1)
|
|
3.3
|
Articles of Amendment to Articles of Incorporation, filed with the State of Florida on August 5, 2014.
(5)
|
|
3.4
|
Bylaws of Nuvel Holdings, Inc.
(4)
|
|
4.1
|
Certificate of Designations, Preferences and Rights of Series A Preferred Stock, filed with the State of Florida on August 10, 2012.
(6)
|
|
4.2
|
Certificate of Designations, Preferences and Rights of Series B Preferred Stock, filed with the State of Florida on May 19, 2014.
(5)
|
|
4.3
|
Certificate of Designations, Preferences and Rights of Series C Preferred Stock, filed with the State of Florida on May 22, 2014.
(5)
|
|
4.4
|
Certificate of Designations, Preferences and Rights of Series D Preferred Stock, filed with the State of Florida on May 2, 2014.
(5)
|
|
4.5
|
Certificate of Designation of Series OH-1 Convertible Preferred Stock of Nuvel Holdings, Inc.
(3)
|
|
4.6
|
Certificate of Designation of Series OH-2 Convertible Preferred Stock of Nuvel Holdings, Inc.
(3)
|
|
10.1
|
Form of Bridge Notes pursuant to an Amended and Restated Subscription Agreement, dated December 30, 2011.
(7)
|
|
10.2
|
Form of Bridge Warrants pursuant to an Amended and Restated Subscription Agreement, dated December 30, 2011.
(7)
|
|
10.3
|
Form of Paragon Note issued to Paragon Capital Offshore LP, dated December 30, 2011.
(7)
|
|
10.4
|
Form of Paragon Warrant issued to Paragon Capital LP, dated December 30, 2011.
(7)
|
|
10.5
|
Form of Series A Warrant issued to Series A Preferred Investors in August 2012.
(6)
|
|
10.6
|
Form of Note issued to Alpha Capital Anstalt in November 2012.
(8)
|
Exhibit
Number
|
Description | |
10.7
|
Form of Warrant issued to Alpha Capital Anstalt in November 2012.
(8)
|
|
10.8
|
Form of Extension Warrant issued to Bridge Note Investors in November 2012.
(5)
|
|
10.9
|
Form of New Bridge Note issued pursuant to the New Bridge Subscription Agreement.
(9)
|
|
10.10
|
Form of New Bridge Warrant issued pursuant to the New Bridge Subscription Agreement.
(9)
|
|
10.11
|
||
10.12
|
||
10.13
|
||
10.14
|
||
10.15*
|
||
10.16*
|
||
10.17*
|
||
10.18*
|
||
10.19*
|
||
10.20
|
||
10.21
|
||
10.22
|
||
10.23
|
||
10.24*
|
||
10.25*
|
||
10.26*
|
||
10.27*
|
||
10.28*
|
||
10.29*
|
||
10.30*
|
||
10.31*
|
||
10.32*
|
||
10.33*
|
||
10.34*
|
||
10.35*
|
||
10.36*
|
||
10.37
|
||
10.38
|
||
10.39
|
||
10.40
|
||
10.41
|
||
10.42
|
||
10.43
|
Exhibit
Number
|
Description | |
10.44
|
||
10.45
|
||
10.46
|
||
10.47
|
||
10.48*
|
||
10.49
|
Security Agreement between Nuvel, Inc. and Paragon Capital Offshore LP, dated December 30, 2011.
(7)
|
|
10.50
|
Form of Guaranty of Nuvel Holdings, Inc. for the Paragon Note, dated December 30, 2011.
(7)
|
|
10.51
|
Form of Lockup Agreement between certain shareholders and Nuvel Holdings, Inc., dated December 30, 2011.
(7)
|
|
10.52*
|
Form of Nuvel Holdings, Inc. Employment Agreement.
(7)
|
|
10.53
|
Form of Nuvel Holdings, Inc. Proprietary Information and Inventions Agreement.
(7)
|
|
10.54
|
Assignment and Assumption Agreement between Nuvel Holdings, Inc. and Sahej Holdings, Inc., dated February 1, 2012.
(7)
|
|
10.55
|
Third Amendment to the Subscription Agreement between Nuvel Holdings, Inc. and the investor named therein, dated December 30, 2011.
(1)
|
|
10.56
|
Subscription Agreement between Nuvel Holdings, Inc. and Alpha Capital Anstalt, dated November 21, 2012.
(8)
|
|
10.57
|
Security Agreement between Nuvel Holdings, Inc. and Alpha Capital Anstalt, dated November 21, 2012.
(8)
|
|
10.58
|
Lockup Agreement between Nuvel Holdings, Inc. and Alpha Capital Anstalt, dated November 21, 2012.
(8)
|
|
10.59
|
Form of Extension and Amendment Agreement, between Nuvel Holdings, Inc. and Bridge Investors, dated November 16, 2012.
(5)
|
|
10.60
|
First Amendment to Subscription Agreement, between Nuvel Holdings, Inc. and Alpha Capital Anstalt, dated April 8, 2014.
(5)
|
|
10.61
|
First Amendment to Secured Convertible Promissory Notes, among Nuvel Holdings, Inc., Alpha Capital Anstalt and Chi Squared Capital Inc., dated April 8, 2014.
(5)
|
|
10.62
|
First Amendment to Security Agreement, between Nuvel Holdings, Inc. and Alpha Capital Anstalt, dated April 8, 2014.
(5)
|
|
10.63
|
Note Waiver and Amendment Agreement, dated May 5, 2014.
(5)
|
|
10.64
|
New Bridge Agreement, dated May 5, 2014.
(9)
|
|
10.65
|
Contractor Agreement, dated March 11, 2014, between Nuvel Holdings, Inc. and Richard Resnick.
(11)
|
|
10.66
|
Separation Agreement between Nuvel Holdings Inc. and Jay Elliot.
(12)
|
|
10.67
|
ACA Note Conversion Agreement.
(13)
|
|
10.68
|
Chi Note Conversion Agreement.
(13)
|
|
10.69
|
Settlement Agreement with Apptology.
(13)
|
|
10.70
|
||
16.1
|
||
21.1
|
Consolidated Financial Statements
Including Independent Auditors’ Report
For the year ended December 31, 2015 and for the
period from October 17, 2014 (inception) through
December 31, 2014
Page(s) |
||||
|
||||
A - 2 |
||||
|
||||
Consolidated Financial Statements |
|
|||
|
||||
A - 3 - A - 4 |
||||
|
||||
A - 5 |
||||
|
||||
A - 6 |
||||
|
||||
A - 7 - A - 8 |
||||
|
||||
A - 9 - A - 38 |
Stockholders, Audit Committee and Board of Directors
OrangeHook, Inc.
Wayzata, Minnesota
We have audited the accompanying consolidated financial statements of OrangeHook, Inc. and its subsidiary, which comprise the consolidated balance sheets as of December 31, 2015 and 2014, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year ended December 31, 2015 and for the period from October 17, 2014 (inception) through December 31, 2014, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and with the auditing standards issued by the Public Company Accounting Oversight Board in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of OrangeHook, Inc. and its subsidiary as of December 31, 2015 and 2014 and the results of their operations and their cash flows for the year ended December 31, 2015 and for the period from October 17, 2014 (inception) through December 31, 2014 in accordance with accounting principles generally accepted in the United States of America.
Minneapolis, Minnesota
September 26, 2016
OrangeHook, Inc. and Subsidiary
As of December 31, 2015 and 2014
2015 |
2014 |
|||||||
Assets |
||||||||
Current assets |
||||||||
Cash |
$ | 281,906 | 181,631 | |||||
Restricted cash |
- | 137,045 | ||||||
Accounts receivable |
145,144 | - | ||||||
Inventory |
31,985 | - | ||||||
Due from: |
||||||||
Agilivant, LLC |
- | 220,313 | ||||||
Nuvel Holdings, Inc. |
- | 157,249 | ||||||
Salamander Technologies, Inc. |
- | 100,000 | ||||||
Other current assets |
105,930 | 40,400 | ||||||
Total current assets |
564,965 | 836,638 | ||||||
Furniture, equipment and leasehold improvements, net: |
||||||||
Furniture and equipment |
87,564 | 12,184 | ||||||
Computer software |
21,646 | - | ||||||
Leasehold improvements |
35,258 | 20,256 | ||||||
|
144,468 | 32,440 | ||||||
Less: Accumulated depreciation and amortization |
(17,623 | ) | - | |||||
|
126,845 | 32,440 | ||||||
Other assets: |
||||||||
Due from: |
||||||||
Agilivant, LLC |
1,225,488 | - | ||||||
Nuvel Holdings, Inc. |
856,249 | - | ||||||
LifeMed ID, Inc. |
1,045,000 | - | ||||||
|
3,126,737 | - | ||||||
Investment in LifeMed ID, Inc. |
4,425,000 | 2,500,000 | ||||||
Goodwill |
1,566,531 | - | ||||||
Intangible asset, net of amortization |
868,725 | - | ||||||
|
9,986,993 | 2,500,000 | ||||||
Total assets |
$ | 10,678,803 | $ | 3,369,078 | ||||
Liabilities and Stockholders’ Equity |
||||||||
Current liabilities |
||||||||
Notes payable to directors |
$ | 218,000 | ||||||
Convertible debentures, net of discount |
383,557 | - | ||||||
Accounts payable |
607,253 | 132,396 | ||||||
Accrued expenses |
1,007,172 | 57,009 | ||||||
Deferred revenue- short-term |
290,938 | - | ||||||
Total current liabilities |
2,506,920 | 189,405 | ||||||
Long-term liabilities |
||||||||
Convertible debentures, net of discount |
2,378,562 | - | ||||||
Notes payable to directors |
2,058,330 | 1,480,000 | ||||||
Deferred revenue- long-term |
32,533 | - | ||||||
Total liabilities |
6,976,345 | 1,669,405 | ||||||
Commitments and contingencies |
The accompanying notes are an integral part of these consolidated financial statements.
OrangeHook, Inc. and Subsidiary
Consolidated Balance Sheets
As of December 31, 2015 and 2014
|
2015 |
2014 |
||||||
Stockholders’ equity |
||||||||
Cumulative convertible redeemable preferred stock; authorized 9,000 and 6,000 shares; 6,188 and 1,990 shares issued and outstanding; liquidation preference of $6,188,000 and $1,990,000 |
5,984,574 | 1,888,222 | ||||||
Common stock - Voting; $0.01 par value; authorized 10,000,000 shares; 3,620,726 and 1,750,000 shares issued as of December 31, 2015 and 2014, respectively; 3,420,726 and 1,450,000 shares outstanding as of December 31, 2015 and 2014, respectively |
34,207 | 14,500 | ||||||
Additional paid-in capital |
2,126,164 | 3,778 | ||||||
Preferred stock subscription receivable |
(150,000 | ) | - | |||||
Accumulated deficit |
(4,292,487 | ) | (206,827 | ) | ||||
Total stockholders' equity |
3,702,458 | 1,699,673 | ||||||
Total liabilities and stockholders' equity |
$ | 10,678,803 | $ | 3,369,078 |
The accompanying notes are an integral part of these consolidated financial statements.
OrangeHook, Inc. and Subsidiary
Consolidated Statements of Operations
For the year ended December 31, 2015 and for the period from October 17, 2014
(inception) through December 31, 2014
|
2015 |
2014 |
||||||
Revenue |
$ | 244,902 | $ | - | ||||
Cost of sales |
31,863 | - | ||||||
Gross profit |
213,039 | - | ||||||
Operating expenses: |
||||||||
Product development |
140,730 | - | ||||||
Sales and marketing |
122,944 | - | ||||||
General and administrative |
3,538,957 | 172,864 | ||||||
Total operating expenses |
3,802,631 | 172,864 | ||||||
Loss from operations |
(3,589,592 | ) | (172,864 | ) | ||||
Other income (expense): |
||||||||
Gain on debt extinguishment |
403,553 | - | ||||||
Interest expense, net of interest income |
(494,332 | ) | (6,036 | ) | ||||
Loss before income taxes |
(3,680,371 | ) | (178,900 | ) | ||||
Income tax expense |
- | - | ||||||
Net loss |
(3,680,371 | ) | (178,900 | ) | ||||
Preferred stock dividends |
(405,289 | ) | (27,927 | ) | ||||
Net loss attributable to common stockholders |
$ | (4,085,660 | ) | $ | (206,827 | ) | ||
Loss per common share- basic and diluted |
$ | (2.31 | ) | $ | (0.72 | ) | ||
Weighted average shares outstanding- basic and diluted |
1,766,030 | 285,753 |
The accompanying notes are an integral part of these consolidated financial statements.
OrangeHook, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders’ Equity
For the year ended December 31, 2015 and for the period From October 17, 2014 (inception) through
December 31, 2014
|
Convertible Preferred Stock |
Common stock |
Paid-In |
Stock Subscription |
Accumulated |
|||||||||||||||||||||||||||
|
# shares |
Amount |
# shares |
Amount |
Capital |
Receivable |
Deficit |
Total |
||||||||||||||||||||||||
Balances as of October 17, 2014 |
- | $ | - | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||
Common stock issued to CEO |
- | - | 1,350,000 | 13,500 | (13,500 | ) | - | - | - | |||||||||||||||||||||||
Sales of Series A preferred stock, net of expenses |
1,990 | 1,888,222 | - | - | 2,278 | - | - | 1,890,500 | ||||||||||||||||||||||||
Common stock issued to directors for services |
- | - | 100,000 | 1,000 | 15,000 | - | - | 16,000 | ||||||||||||||||||||||||
Net loss |
- | - | - | - | - | - | (178,900 | ) | (178,900 | ) | ||||||||||||||||||||||
Dividends on Series A preferred stock |
- | - | - | - | - | - | (27,927 | ) | (27,927 | ) | ||||||||||||||||||||||
Balances as of December 31, 2014 |
1,990 | 1,888,222 | 1,450,000 | 14,500 | 3,778 | - | (206,827 | ) | 1,699,673 | |||||||||||||||||||||||
Sales of Series A preferred stock, net of financing |
||||||||||||||||||||||||||||||||
costs |
4,198 | 4,096,352 | - | - | 1,818 | - | - | 4,098,170 | ||||||||||||||||||||||||
Preferred stock subscription receivable |
- | - | - | - | - | (150,000 | ) | - | (150,000 | ) | ||||||||||||||||||||||
Common stock and options issued to directors for |
||||||||||||||||||||||||||||||||
services |
- | - | 100,000 | 1,000 | 631,701 | - | - | 632,701 | ||||||||||||||||||||||||
Stock warrants issued for services |
- | - | - | - | 73,200 | - | - | 73,200 | ||||||||||||||||||||||||
Common stock issued to officers and employees for |
||||||||||||||||||||||||||||||||
services |
- | - | 1,500,000 | 15,000 | 225,000 | - | - | 240,000 | ||||||||||||||||||||||||
Convertible debenture conversion feature and warrants |
- | - | - | - | 413,864 | - | - | 413,864 | ||||||||||||||||||||||||
Common stock issued for payment of dividends |
- | - | 28,583 | 286 | 199,410 | - | - | 199,696 | ||||||||||||||||||||||||
Common stock warrants exercised |
- | - | 160,000 | 1,600 | - | - | - | 1,600 | ||||||||||||||||||||||||
Common stock issued for acquisition of Salamander |
||||||||||||||||||||||||||||||||
Technologies, Inc. |
- | - | 144,846 | 1,448 | 459,162 | - | - | 460,610 | ||||||||||||||||||||||||
Common stock issued for debt extinguishment |
- | - | 37,297 | 373 | 118,231 | - | - | 118,604 | ||||||||||||||||||||||||
Net loss |
- | - | - | - | - | - | (3,680,371 | ) | (3,680,371 | ) | ||||||||||||||||||||||
Dividends on Series A preferred stock |
- | - | - | - | - | - | (405,289 | ) | (405,289 | ) | ||||||||||||||||||||||
Balances as of December 31, 2015 |
6,188 | $ | 5,984,574 | 3,420,726 | $ | 34,207 | $ | 2,126,164 | $ | (150,000 | ) | $ | (4,292,487 | ) | $ | 3,702,458 |
The accompanying notes are an integral part of these consolidated financial statements.
OrangeHook, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the year ended December 31, 2015 and for the period from October 17, 2014
(inception) through December 31, 2014
2015 |
2014 |
|||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | (3,680,371 | ) | $ | (178,900 | ) | ||
Adjustments to reconcile net loss to net cash from operating activities: |
915,901 | 16,000 | ||||||
Stock and options issued for services |
||||||||
Value of cash conversion feature and warrants on convertible debentures |
215,031 | - | ||||||
Amortization of debt issuance costs |
93,915 | - | ||||||
Gain on debt extinguishment |
(403,553 | ) | - | |||||
Depreciation and amortization |
39,898 | - | ||||||
Interest earned on due from receivables |
(62,134 | ) | - | |||||
Changes in operating assets and liabilities: |
- | |||||||
Accounts receivable |
100,034 | |||||||
Inventory |
(9,887 | ) | ||||||
Other current assets |
7,919 | (40,400 | ) | |||||
Accounts payable |
265,578 | 132,396 | ||||||
Accrued expenses |
585,673 | - | ||||||
Deferred revenue |
(8,142 | ) | 38,860 | |||||
Net cash flows from operating activities |
(1,940,138 | ) | (32,044 | ) | ||||
Cash flows from investing activities |
(1,006,014 | ) | (220,313 | ) | ||||
Advances to Agilivant, LLC |
||||||||
Advances to Nuvel Holdings, Inc. |
(699,000 | ) | (157,249 | ) | ||||
Advances to Salamander Technologies, Inc. |
(491,933 | ) | (100,000 | ) | ||||
Advances to LifeMed ID, Inc. |
(1,045,000 | ) | - | |||||
Payments from Salamander Technologies, Inc. |
230,000 | - | ||||||
Payments from Agilivant, LLC |
839 | - | ||||||
Decrease (Increase) in restricted cash |
137,045 | (137,045 | ) | |||||
Purchase of Salamander Technologies, Inc.stock for cash, net of cash received of $5,519 |
(443,494 | ) | ||||||
Purchase of LifeMed ID, Inc. preferred and common stock |
(1,925,000 | ) | (2,500,000 | ) | ||||
Purchases of fixed assets |
(77,684 | ) | (32,440 | ) | ||||
Net cash flows from investing activities |
(5,320,241 | ) | (3,147,047 | ) | ||||
Cash flows from financing activities |
||||||||
Proceeds from director loans |
950,000 | 1,480,000 | ||||||
Payments on director loans |
(153,670 | ) | - | |||||
Proceeds from sale of preferred stock, net of expenses |
3,948,170 | 1,888,222 | ||||||
Proceeds from sale of convertible debentures |
3,050,000 | - | ||||||
Debt issuance costs |
(152,963 | ) | - | |||||
Payments on line of credit |
(200,000 | ) | - | |||||
Exercise of stock warrants |
1,600 | - | ||||||
Payments of preferred stock dividends |
(82,483 | ) | (7,500 | ) | ||||
Net cash flows from financing activities |
7,360,654 | 3,360,722 | ||||||
Net increase in cash |
100,275 | 181,631 |
The accompanying notes are an integral part of these consolidated financial statements.
OrangeHook, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the year ended December 31, 2015 and for the period from October 17, 2014
(inception) through December 31, 2014
|
2015 |
2014 |
||||||
Cash |
||||||||
Beginning of period |
181,631 | - | ||||||
End of period |
$ | 281,906 | $ | 181,631 | ||||
Supplemental noncash financing activities |
||||||||
Common stock issued to CEO |
$ | - | $ | 13,500 | ||||
Financing fees accrued for issuance of warrants |
1,818 | 2,278 | ||||||
Preferred stock dividends paid in stock |
199,696 | - | ||||||
Common stock issued for acquisition |
460,610 | - | ||||||
Common stock issued to retire debt |
118,604 | - | ||||||
Original issue discount for warrants and BCF |
413,864 | - | ||||||
Preferred stock receivable for issuance of preferred stock |
150,000 | - | ||||||
Director options for debt issuance costs |
30,000 | - | ||||||
Accrued dividends in accrued expenses |
143,537 | 20,427 |
The accompanying notes are an integral part of these consolidated financial statements.
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
1. Nature of Business
OrangeHook, Inc. (the “Company” or “we”), a Minnesota corporation, was formed on October 17, 2014 as a holding company to acquire selective and unique consumer, business and governmental software applications. The Company is identifying and evaluating potential acquisition target companies that have developed proprietary software applications and services which are unique to their particular industries.
On October 1, 2015, the Company acquired 100% of the outstanding stock of Salamander Technologies, Inc. (“STI”) in exchange for 144,846 shares of common stock and $500,000 in cash by merging STI into Salamander Technologies, LLC. (“Salamander”), a wholly-owned Minnesota limited liability company. See Note 5 for further discussion of this transaction.
Subsequent to December 31, 2015, the Company completed three additional acquisitions (Note 20). See Note 6 for a discussion of the pending merger with Nuvel Holdings, Inc.
All intercompany transactions and balances have been eliminated in consolidation.
2. Liquidity
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern that contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred a loss from operations of approximately $3.6 million and negative cash flows from operations of approximately $1.9 million for the year ended December 31, 2015. As a result, its ability to continue as a going concern is dependent on raising the additional capital necessary to fund its current operating losses until it begins to produce meaningful revenues and to eventually attain profitability. However, there can be no assurance that the sources of capital will be available or available on terms favorable to the Company. Management anticipates that the impact of one or more of the actions listed below will generate sufficient cash flows to pay current liabilities, long-term debt and fund the Company's operations for the next twelve months:
|
· | Raise additional debt or equity capital on terms favorable to the Company, |
|
|
|
|
· | Generate revenues in amounts sufficient to attain profitability, |
|
|
|
|
· | Control general and administrative expenses based on available cash flow from operations and the amount of capital available. |
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
3. Summary of Significant Accounting Policies
Cash
The Company maintains cash deposits with major banks, which from time to time, may exceed federally insured limits. The Company periodically assesses the financial institutions and believes the risk of any loss is minimal.
Restricted Cash
As of December 31, 2014, the Company maintained an escrow account which was under the joint control of both the Company and an independent third party. To release any of the funds in the account, the escrow agent required the written approval of both parties. During 2015, the funds held in the escrow account were released to the Company.
Accounts Receivable
The carrying value of the Company’s accounts receivable represents their estimated net realizable value. No collateral or other security is required to support accounts receivable, which are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts (90 to 120 days outstanding) are written off through a charge to the valuation allowance and a credit to accounts receivable. The Company does not charge interest on past due accounts receivable balances. In management’s opinion, no allowance for doubtful accounts was considered necessary as of December 31, 2015.
Inventory
Inventory, which consists primarily of supplies purchased in bulk to support the Company’s manual tracking system, is recorded at the lower of cost or market. Cost is determined using the first-in, first-out method. Charges are made to current operations to reduce inventory costs to net realizable value when total costs are estimated to exceed the selling price. There were no such charges made during 2015.
Furniture, Equipment and Leasehold Improvements
Furniture, fixtures and equipment, computer software and leasehold improvements are stated at cost. Depreciation is computed by using the straight-line method over the estimated remaining useful lives of the assets ranging from three to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset, which generally ranges from three to five years. The estimated useful lives used for computing depreciation are as follows:
Furniture and equipment |
5 years |
Computer software |
3 years |
Leasehold improvements |
3 years |
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
Expenditures for maintenance and repairs and minor renewals and betterments which do not improve or extend the life of the respective assets are expensed as incurred. All other expenditures for renewals and betterments are capitalized. The assets and related depreciation and amortization accounts are adjusted for equipment and leasehold improvement retirements and disposals with the resulting gain or loss included in operations.
Revenue Recognition
Revenue from tracking systems sales is recognized in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 605, Revenue Arrangements with Multiple Deliverables . When elements such as the product (e.g., hardware,software and other components) installation and training are contained in a single arrangement, or in related arrangements with the same customer, revenue is allocated to each element based upon its relative fair value. Management believes the individual elements within its contracts meet the ASC Topic 605 criteria for treatment as separate units of accounting. The price charged when the element is sold separately generally determines fair value. Revenue from product sales is recognized when the related goods are shipped whereas revenue from installation and training activities is recognized when the services are performed. Discounts in multiple elements sold as a single arrangement are allocated proportionately to the individual elements based on the fair value charged when the element is sold separately.
Revenue from service contracts and subscription agreements is recorded on a straight-line basis over the terms of the related agreements.
Revenue from software licensing arrangements is recognized when all of the following conditions exist: (1) the licensing agreement has been executed, (2) the license period has begun and the licensee can begin its use of the software, (3) the fee is fixed or determinable, (4) collection of the license fee is reasonably assured, and (5) there are no significant on-going obligations of the Company relating to the licensing arrangement.
Advance payments received from customers are deferred until all revenue recognition criteria are satisfied.
Income Taxes
The Company accounts for deferred tax assets and liabilities under the liability method. Deferred tax liabilities are recognized for temporary differences that will result in taxable amounts in future years. Deferred tax assets are recognized for deductible temporary differences and tax operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. The Company regularly assesses the likelihood that the deferred tax assets will be recovered from future taxable income. We account for uncertainty in income taxes recognized in our consolidated in accordance with ASC 740 (formerly FIN 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109,”). ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Only tax positions that meet the more-likely-than-not recognition threshold may be recognized.
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
Stock Issued for Services
The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. During 2015 and 2014, the Company granted common stock to certain employees and outside directors in exchange for their services. In connection with those awards, the fair value of the award was measured on the grant date. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period.
Fair Value of Financial Instruments
Financial instruments include accounts receivable, accrued liabilities, accounts payable and long– term debt. Management believes that fair value of its financial instruments approximate their carrying value. The fair value of current financial instruments is estimated to approximate carrying value due to the short–term nature of these instruments and other market factors. The fair value of long–term debt is estimated to approximate carrying value given the debt’s variable interest rates and other market factors.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Investments
Investments are carried at the lower of cost or market, and consists of equity investments in LifeMed ID, Inc. (See Note 20). There is not a quoted market price for this investment. The valuation is based on all available financial information related to the investee. The investment is reviewed on a periodic basis to determine whether the cost of the investment is in excess of the fair value and if an impairment loss should be recorded. The Company noted there was not an indicator of impairment as of December 31, 2015 and 2014.
Software Development Costs
As of December 31, 2015 and 2014, the Company had not capitalized any of the costs incurred related to the development of its software products being marketed as the period of time between achieving technological feasibility and the general availability of the Company’s software products has been very short and any costs incurred subsequent to achieving technological feasibility have not been significant. These costs are expensed and included in product development expenses in the accompanying consolidated statements of operations.
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
Long-lived Assets
The Company reviews its long-lived assets for events or changes in circumstances that may indicate that the carrying amount of a long-lived asset may not be recoverable or exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company's long-lived assets include property, equipment, leasehold improvements and definite-lived intangibles.
There was no impairment recorded to long-lived assets as of December 31, 2015 and 2014.
Goodwill and Intangible Assets
In accordance with ASC Topic No. 350, Intangibles-Goodwill and Other , goodwill and intangible assets without a defined life shall not be amortized over a defined period, but instead must be tested for impairment at least annually. Additionally, goodwill is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The goodwill impairment test is a two-step impairment test. In the first step, the Company compares the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of that reporting unit, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step in order to determine the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill. The activities in the second step include valuing the tangible and intangible assets and liabilities of the impaired reporting unit and determining the implied fair value of the impaired reporting unit’s goodwill based upon the residual of the fair value of the net assets.
Goodwill was $1,566,531 as of December 31, 2015 and the Company concluded there was no goodwill impairment as of December 31, 2015.
Intangible assets consist of the fair value of the Salamander trade name acquired in the acquisition of Salamander technologies, Inc. (see Note 5). The trade name intangible, which was valued at $891,000 on the acquisition date, is being amortized at a rate of $89,100 per year over a period of ten years, its estimated useful life. Amortization of intangible assets was $22,275 for the year ended December 31, 2015, which is included in general and administrative expenses in the accompanying consolidated statements of operations. Accumulated amortization as of December 31, 2015 was $22,275 which is included in the accompanying consolidated balance sheets as intangible asset, net of amortization.
Annual amortization expense of this intangible asset will equal $89,100 per year for each of the years ending December 31, 2016 through 2024 and $66,825 for the year ending December 31, 2025.
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising costs were $2,039 and $0, for the year ended December 31, 2015 and for the period from October 17, 2014 (inception) through December 31, 2014, respectively, and are included in sales and marketing expenses in the accompanying consolidated statements of operations.
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
Debt Issuance Costs
The Company amortizes the debt issuance costs under the effective method over the life of the related debt instrument and reflects the unamortized costs as a reduction of the related debt in the accompanying consolidated balance sheets.
Loss per Common Share
Basic loss per common share is computed by using loss attributable to common stockholders and the weighted average number of common shares outstanding. Diluted loss per common share reflects the weighted average number of common shares outstanding plus all potentially dilutive common shares outstanding during the period. Potentially dilutive shares consist of shares issuable upon the exercise of stock options, stock warrants and unvested restricted stock (using treasury stock method) and conversion of preferred shares (using the as converted method). For the year ended December 31, 2015 and for the period from October 17, 2014 (inception) through December 31, 2014, a total of 2,573,660 and 741,094, respectively, of common equivalent shares have been excluded from diluted loss per common share as they were anti-dilutive.
Recent Accounting Pronouncements
During May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU No. 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. ASU No. 2014-09 is effective for fiscal years beginning after December 15, 2018 and interim periods within annual periods. The Company may elect to apply the guidance earlier, but no earlier than fiscal years beginning after December 15, 2016. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company is currently assessing the effect that ASU No. 2014-09 will have on its results of operations, financial position and cash flows.
During April 2015, the FASB issued guidance creating ASC Subtopic 835-30, “Interest--Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs”. The update modifies the presentation of costs of debt issuance as a direct reduction to the face amount of the related reported debt. The updated guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years, with early adoption allowed. The Company adopted the guidance as of December 31, 2015. The adoption did not have a material impact on the consolidated financial statements.
During July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330), Simplifying the Measurement of Inventory.” ASU No. 2015-11 applies to all inventory except that which is measured using last-in, first out (LIFO) or the retail inventory method. Inventory within the scope of the new guidance should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments will take effect for fiscal years beginning after December 15, 2016. The new guidance should be applied prospectively, and earlier application is permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the effect that ASU 2015-11 will have on its results of operations, financial position and cash flows.
During February 2016, the FASB issued ASU No. 2016-02, “Leases.” ASU No. 2016-02 was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020, with earlier application permitted. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The Company is currently assessing the effect that ASU No. 2016-02 will have on its results of operations, financial position and cash flows.
In March 2016, the FASB issued ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323) - Simplifying the Transition to the Equity Method of Accounting which eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by- step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendment is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. The Company will adopt the guidance in the first quarter of 2016 and will apply the equity method for its investment in LifeMed ID, Inc. prospectively beginning with the three months ended June 30, 2016.
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
4. Fair Value Measurement
We measure certain financial assets, including cash equivalents, at fair value on a recurring basis. In accordance with ASC 820-10-30, fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820-10-35 establishes a three-level hierarchy that prioritizes the inputs used in measuring fair value. The three hierarchy levels are defined as follows:
· | Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets. | |
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· | Level 2 — Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. | |
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· | Level 3 — Valuations based on inputs that are unobservable and involve management judgment and the reporting entity’s own assumptions about market participants and pricing. |
The Company does not have any assets or liabilities being measured under ASC 820 as of December 31, 2015 and 2014.
5. Acquisition of Salamander Technologies, Inc. (“STI”)
STI is a homeland security leader addressing a national imperative – the situational awareness of all resources (first responders, assets, volunteers, and civilian victims) during field events ranging from routine or planned events to mass disasters such as hurricanes, tornados, and public health emergencies.
On October 1, 2015, the Company acquired 100% of the outstanding stock of Salamander Technologies, Inc. (“STI”) in exchange for 144,846 shares of common stock of the Company, which it valued at a price of $3.18 per share, and $500,000 in cash by merging STI into Salamander Technologies, LLC. (“Salamander”), a wholly-owned Minnesota limited liability company. The Company allocated the purchase price, at the estimated fair value of the shares exchanged of $3.18 per share, based on the fair value of assets acquired and liabilities assumed. The evaluation of the Company’s common stock requires the Company to make assumptions about future cash flows of the Company that include, among others, growth in revenues, margins realized, level of operating expenses and cost of capital. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. The Company engaged an independent specialist to assist the Company in evaluating the fair value of the Company’s common stock and ultimately concluded on the fair value of the Company’s common stock.
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
A summary of the transaction is as follows:
Cash |
|
$ | 5,519 |
|
Accounts receivable |
|
|
242,927 |
|
Other current assets |
|
|
35,664 |
|
Fixed assets |
|
|
34,344 |
|
Intangible assets- Trade name |
|
|
891,000 |
|
Goodwill |
|
|
1,566,531 |
|
Accounts payable |
|
|
(209,648 | ) |
Accrued expenses |
|
|
(148,991 | ) |
Deferred revenue |
|
|
(331,613 | ) |
Line of credit |
|
|
(200,000 | ) |
Other debt |
|
|
(925,123 | ) |
Value of net assets acquired |
|
$ | 960,610 |
|
Transaction costs of $335,982 were expensed as incurred and are included in general and administrative expenses in the accompanying consolidated statements of operations for the year ended December 31, 2015. The value assigned to goodwill is not deductible for income tax purposes. The goodwill recognized as a result of the merger is attributable primarily to the strategic and synergistic opportunities across the marketing technology spectrum, expected corporate synergies and the assembled workforce.
Gain on Debt Extinguishment
Subsequent to the acquisition, the Company issued 37,297 shares of common stock in exchange for the extinguishment of certain assumed debt and accrued interest with a value of $522,158. In accordance with Accounting Standards Codification 470-50-40 “Debt- Modifications and Extinguishments”, the Company recorded the reacquisition price at the fair value of the securities issued to extinguish the debt which it estimated to be $3.18 per share. Accordingly, the difference between the reacquisition price and the carrying amount of the debt and accrued interest was recorded as a gain on debt extinguishment of $403,553, which is included in other income (expense) in the accompanying consolidated statements of operations for the year ended December 31, 2015.
Short-term bank borrowings
Short- term bank borrowings consisted of an outstanding balance on a $200,000 revolving line-of-credit that was assumed as part of the acquisition of STI on October 1, 2015. Interest was charged at the bank’s prime rate plus 1%, with a floor of 6%. Borrowings were collateralized by the assets of STI which included inventory, accounts receivable, equipment, and intangibles. On October 29, 2015, this line of credit was repaid and cancelled using proceeds from a director loan (see Note 7).
Royalty Obligation
As part of the acquisition of STI, the Company assumed an obligation to pay up to $3.5 million to former shareholders of STI based on gross revenue generated beginning in 2014. Royalties are to be paid based on the following calculation: gross revenue from fiscal years 2014 through 2017, five percent of gross revenue, fiscal years 2018 through 2019, three percent of gross revenue and two percent of gross revenue from fiscal year 2020 and thereafter until a total of $3.5 million is paid. Royalty payments will be made quarterly on or before two months after the end of each calendar quarter, beginning on or before May 31, 2016. The royalty payments for the years ended December 31, 2014 and 2015 will be paid, without interest, in twenty equal quarterly installments, on or before two months after the end of each calendar quarter, beginning on May 31, 2016 and ending on February 28, 2021. Accrued royalties as of October 1, 2015 totaled $125,178, which are included in accrued expenses in the transaction listed above. Royalty expense for the year ended December 31, 2015, which covered the period of October 1, 2015 through December 31, 2015, was $12,245, which is included in general and administrative expenses in the accompanying consolidated statements of operations. Accrued royalties as of December 31, 2015 were $137,423, which are included in accrued expenses in the accompanying consolidated balance sheets.
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
6. Merger with Nuvel Holdings, Inc. (“Nuvel”)
Nuvel designs, develops and markets data acceleration solutions that are built for the purpose of accelerating and optimizing the flow of information across enterprise networks. Nuvel’s products are deployed by its customers throughout their network infrastructures to improve the performance of their networks and reduce network costs, while enhancing network speed and optimization.
On July 1, 2016, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Nuvel, a publicly-held Florida corporation, and its wholly owned subsidiary, OH Acquisition Corp, a Minnesota corporation ("Merger Sub"). Pursuant to the Merger Agreement, Merger Sub will merge with and into the Company, with the Company remaining as the surviving company and a wholly-owned subsidiary of the Nuvel, and the Merger Sub will cease to exist.
Also under the terms of the Merger Agreement, (i) outstanding shares of the Company’s common stock and other outstanding securities convertible into the Company’s common stock will be exchanged for a pro rata portion of 500,000 shares (or a corresponding security convertible into shares) of a new series of preferred stock, par value $0.001 per share, of Nuvel (the “Series OH-1 Convertible Preferred Stock”) and (ii) each outstanding share of the Company’s preferred stock and other outstanding securities convertible into the Company’s preferred stock will be exchanged for one share (or a corresponding security convertible into one share) of a new series of preferred stock, par value $0.001 per share, of Nuvel (the “Series OH-2 Convertible Preferred Stock”).
Following closing of the Merger, Nuvel is expected to perform a One-for-One Million Two Hundred Thousand (1-for-1,200,000) reverse split (the “Reverse Stock Split”) of the common stock of Nuvel, (“Nuvel Common Stock”), and will amend their Articles of Incorporation (the “Amendment”) increasing the number of shares of authorized Nuvel Common Stock to 100,000,000 (the Reverse Stock Split and the Amendment, collectively, “Recapitalization”). Upon the Recapitalization, all outstanding shares of Series OH-1 Convertible Preferred Stock will convert into Nuvel Common Stock equal to (i) the number of shares of the Company’s common stock issued and outstanding at the Effective Time of the Merger, on a fully diluted basis, divided by (ii) 500,000. Nuvel also expects to perform a parent-subsidiary merger of the Company with and into Nuvel following the Closing of the Merger, after which Nuvel is expected to change its name to “OrangeHook, Inc.,” after which the Company will become a publicly-held Florida corporation.
The transaction, which is expected to close in the fourth quarter of 2016, is subject to customary closing conditions including shareholder approval.
During 2015 and 2014, the Company provided Nuvel with unsecured loans to fund their current operating losses which included expenses incurred to complete all the required SEC filings such that it will be current in its reporting. The amounts advanced, which are included in Due from Nuvel Holdings, Inc. in the accompanying consolidated balance sheets, totaled $856,249 and $157,249 as of December 31, 2015 and 2014, respectively. The notes are due on demand and carry an annual interest rate of 2%. Interest earned under these notes totaled $9,569 and $0 as of December 31, 2015 and 2014, respectively, which is included in the accompanying consolidated balance sheets. Subsequent to December 31, 2015, the Company has provided an additional $460,000 of unsecured loans to Nuvel to further assist them with their working capital needs. The advances are due on demand but are classified as a long-term asset in the accompanying consolidated balance sheets since the intent is to apply these advances as part of the pending business combination.
Based on the relationship between the Company and Nuvel, the Company has evaluated the requirements of ASC 810-10 Consolidation and has determined that Nuvel qualifies as a variable interest entity (“VIE”). Once a reporting entity determines that it has an interest in a VIE, it must determine if it qualifies as the primary beneficiary. If it determines that it meets the definition of a primary beneficiary, it must consolidate the results of the VIE with its own and report them as if it owned that entity as of the reporting period. A primary beneficiary is defined as an entity that meets both of the following criteria: a) Power Criterion- power to direct activities of the VIE that most significantly impact the economic performance, b) Loss/Benefits Criterion- obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE. Because the Company does not meet the definition of the primary beneficiary due to lack of power to direct activities of Nuvel and lack of obligation to absorb Nuvel losses, the financial results of Nuvel have not been consolidated with those of the Company for the periods presented.
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
7. Notes payable to Directors
During 2015 and 2014, the Company received advances from certain directors as follows:
· | In December 2014, the Company received a total of $1,480,000 from two directors, which are evidenced by unsecured promissory notes that were due on December 31, 2016. The notes carry an annual interest rate of 5%. During the year ended December 31, 2015, the Company has made principal payments totaling $153,670 under these notes. The amounts outstanding under these notes totaled $1,326,330 and $1,480,000 as of December 31, 2015 and December 31, 2014, respectively. In June 2016, one of the notes with a balance due of $1,208,330 was extended to mature on December 31, 2017, which has been included in long-term liabilities in the accompanying consolidated balance sheets. | |
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Subsequent to December 31, 2015, in March 2016, one of the notes with a balance due of $118,000 was converted into 118 units of Series A-1 Convertible Preferred Stock (see Note 9) at a price of $1,000 per unit. | ||
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· | In June 2015, the Company received an advance of $500,000 from a director which is evidenced by an unsecured promissory note that is due December 31, 2016. The note carries an annual interest rate of 5%. Subsequent to year-end, the due date on this note was extended to January 4, 2017. |
· | In October 2015, the Company received an advance of $450,000 from two directors evidenced by an unsecured promissory note that was due on January 28, 2016, which date has subsequently been extended to September 30, 2016. The note carries an annual interest rate of 6%. Of the amount received, $200,000 was used to repay the line of credit assumed in connection with the acquisition of Salamander discussed in Note 5. In connection with this financing, the Company paid one of the directors a fee of $5,000 and granted him a five-year warrant to purchase up to 12,500 shares of the Company’s common stock at a price of $7.00 share. The fair value of stock warrant was determined to be $27,700, which represents the estimated present value at grant date using the Black Scholes pricing model with the following weighted-average assumptions: risk-free interest rate- 2.1%, expected life- 7 years, expected volatility- 100% and expected dividend rate-0%. The expense associated with the fee paid and the warrant granted is included in interest expense, net of interest income in the accompanying consolidated statements of operations for the year ended December 31, 2015. On June 30, 2016, the Company made a principal payment of $100,000 on this note and received an extension to January 15, 2017.The amounts outstanding under all notes payable to directors of $2,276,300 and $1,480,000, are included in the accompanying consolidated balance sheets as of December 31, 2015 and December 31, 2014, respectively. Accrued interest payable of $83,999 and $6,082 as of December 31, 2015 and 2014, respectively, is included in accrued expenses in the accompanying consolidated balance sheets. The Company made interest payments on notes payable to directors of $10,250 and $0 in 2015 and 2014, respectively. Interest expense on notes payable to directors, which is included in interest expense, net of interest income, in the accompanying consolidated statements of operations was $88,167 and $6,082 for the year ended December 31, 2015 and for the period from October 17, 2014 (inception) to December 31, 2014, respectively. |
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
Subsequent to December 31, 2015, the Company received the following additional advances from directors:
· | On January 20, 2016, the Company received $150,000 from a company controlled by an officer and director under an unsecured promissory note that was due on February 20, 2016. The note carries an annual interest rate of 10%. The Company is currently discussing an extension of the maturity date with the director. |
· |
On January 20, 2016, the Company received $50,000 from a trust controlled by a director under an unsecured promissory note that was due on February 20, 2016. The note carries an annual interest rate of 10%. The Company is currently discussing an extension of the maturity date with the director. |
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· | On January 25, 2016, the Company received $100,000 from a director under an unsecured promissory note that was due on July 25, 2016. The note carries an annual interest rate of 10%. The note is convertible into shares of common stock at a price of $7.00 per share. In addition, the director received a seven-year warrant to purchase up to 50,000 shares of the Company’s common stock at an exercise price of $7.00 per share. The fair value of stock warrant was determined to be $22,000, which represents the estimated present value at grant date using the Black Scholes pricing model with the following weighted-average assumptions: risk-free interest rate- 1.7%, expected life- 7 years, expected volatility- 36.1% and expected dividend rate- 0%. The Company is currently discussing an extension of the maturity date with the director. | |
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· | On January 29, 2016, the Company received $500,000 from a director under unsecured promissory note that was due on July 29, 2016. The note carries an annual interest rate of 10%. The note is convertible into shares of common stock at a price of $7.00 per share. In addition, the director received a seven-year warrant to purchase up to 250,000 shares of the Company’s common stock at an exercise price of $7.00 per share. The fair value of stock warrant was determined to be $110,000, which represents the estimated present value at grant date using the Black Scholes pricing model with the following weighted-average assumptions: risk-free interest rate- 1.7%, expected life- 7 years, expected volatility- 36.1% and expected dividend rate- 0%. The Company is currently discussing an extension of the maturity date with the director. | |
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· | On February 8, 2016, the Company received $100,000 from a director under an unsecured promissory note that was due on June 30, 2016. The note carried an annual interest rate of 10%. On June 30, 2016, the Company paid this note in full. | |
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|
· | On February 9, 2016, the Company received $60,000 from a company controlled by an officer and director under an unsecured promissory note that was due on March 9, 2016. The note carries an annual interest rate of 10%. The Company is currently discussing an extension of the maturity date with the director. | |
|
|
|
· |
On February 16, 2016, the Company received $300,000 from a director under unsecured promissory note that was due on August 16, 2016. The note carries an annual interest rate of 10%. The note is convertible into shares of common stock at a price of $7.00 per share. In addition, the director received a seven-year warrant to purchase up to 150,000 shares of the Company’s common stock at an exercise price of $7.00 per share. The fair value of stock warrant was determined to be $66,000, which represents the estimated present value at grant date using the Black Scholes pricing model with the following weighted-average assumptions: risk-free interest rate- 1.7%, expected life- 7 years, expected volatility- 36.1% and expected dividend rate- 0%. The Company is currently discussing an extension of the maturity date with the director. |
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
· | On February 26, 2016, the Company received $10,000 from a trust controlled by a director under an unsecured promissory note that was due on June 30, 2016. The note carried an annual interest rate of 10%. This note was subsequently repaid on May 31, 2016. | |
|
|
|
· | On March 9, 2016, the Company received $25,000 from a director under an unsecured promissory note that was due on April 9, 2016. The note carries an annual interest rate of 10%. The Company is currently discussing an extension of the maturity date with the director. | |
|
|
|
· | On May 3, 2016, the Company received $400,000 from a director under an unsecured promissory note that was due on June 30, 2016. The note carries an annual interest rate of 6%. On June 30, 2016, the Company made a principal payment equal to $210,000 and the note was extended to January 15, 2017. | |
|
|
|
· | On May 12, 2016, the Company received $200,000 from a trust controlled by a director under an unsecured promissory note that was due on June 30, 2016. The note carries an annual interest rate of 10%. The Company is currently discussing an extension of the maturity date with the director. |
8. Convertible Debentures
During 2015, the Board of Directors authorized the sale of up to $3.05 million of convertible debentures. Under the terms of this offering, the debentures are scheduled to mature twelve months from the issuance date and include interest payable at maturity at a rate of 10% per year. The debentures are convertible, at the option of the holder, into shares of common stock at a rate of $7.00 per share. In addition, the debentures include an attached three-year warrant equal to 10% of the principal amount of the note, such warrant being exercisable at a rate of $0.01 per share.
As of December 31, 2015, a total of $3,050,000 of this offering was sold, including $1,075,000 from certain of the Company’s board members, officers and their affiliates, which is included in convertible debentures in the accompanying consolidated balance sheets as of December 31, 2015, net of debt issuance costs and original issue discount. The convertible debentures are due in varying amounts from April to October of 2016.
In accordance with Accounting Standards Codification 470 “Debt with Conversion and Other Options” (“ASC 470”), the Company has separately accounted for the value of the embedded equity features within this debenture by allocating a total of $411,750 as original issue discount and additional paid-in capital reflecting the estimated value of the underlying cash conversion feature and the attached warrants, using the Black Scholes pricing model with the following weighted-average assumptions: risk-free interest rate- 2.3%, expected life- 3 years, expected volatility- 100% and expected dividend rate- 0%. In addition, the Company incurred $182,964 of additional costs related to this offering, which are being reported as debt issuance costs. The amount of original issue discount and debt issuance costs are being amortized to interest expense over the term of the debentures.
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
Following are the components of convertible debentures, net of original issue discount and debt issuance costs as shown in the accompanying consolidated balance sheets as of December 31, 2015:
Face amount of debentures Less unamortized amount of: |
|
$ | 3,050,000 |
|
|
|
|
|
|
Original Issue Discount |
|
|
(198,832 | ) |
Debt Issuance Costs |
|
|
(89,049 | ) |
|
|
|
2,762,119 |
|
Less: short-term portion |
|
|
(383,557 | ) |
|
|
|
|
|
Convertible debentures, net of original issue discount and debt issuance costs, long-term |
|
$ | 2,378,562 |
|
Following are the amounts related to this offering charged to interest expense for the year ended December 31, 2015:
Accrued interest payable in cash |
|
$ | 144,336 |
|
Amortization of: |
|
|
|
|
Original Issue Discount |
|
$ | 212,918 |
|
Debt Issuance Costs |
|
$ | 93,915 |
|
|
|
$ | 451,169 |
|
The estimated effective interest rate of this debenture, which includes interest payable in cash and the non-cash interest related to the amortization of original issue discount and debt issuance costs, is 29% for the year ended December 31, 2015.
As additional security under this offering, certain of the Company’s directors have provided a joint and several personal guaranty to certain lenders. The total amount covered by these guaranties as of December 31, 2015 is $1,875,000.
In connection with this offering, the Company has retained a placement agent whereby the agent receives a cash fee of 5% of any proceeds generated by this offering. The Company has recorded placement fees of $105,000 in 2015 which are included in debt issuance costs in the accompanying consolidated balance sheets as of December 31, 2015. Additionally, the placement agent received a five-year warrant equal to 5% of the common shares issuable upon the conversion of the convertible debenture to common stock exercisable at a price of $7.00 per share. The Company has recorded an amount equal to $2,114 representing the estimated value of the 13,214 warrants as of December 31, 2015, using an estimated fair value of $0.16 per share which is included in interest expense, net of interest income in the accompanying consolidated statements of operations for the year ended December 31, 2015.
In connection with this offering, the Company has issued three- year warrants to purchase up to 305,000 shares of common stock at a price of $0.01 per share. During the year ended December 31, 2015, warrants to purchase a total of 160,000 shares were exercised for proceeds totaling $1,600.
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
The fair value of stock warrants is the estimated present value at grant date using the Black Scholes pricing model with the following weighted-average assumptions:
|
|
2015 |
|
|
2014 |
|
|
Risk-free interest rate |
|
|
2.3 | % |
|
* |
|
Expected life |
|
3 years |
|
|
* |
||
Expected volatility |
|
|
100 | % |
|
* |
|
Expected dividend rate |
|
|
0 |
% |
|
* |
|
______
*there were no warrants issued in connection with this offering until 2015.
Subsequent to December 31, 2015, the Company completed the following transactions related to these debentures:
· | Entered into extended and amended agreements with lenders holding debentures with principal amounts totaling $2.65 million which extended the maturity dates of the debentures to October 15, 2017. In addition, interest accrued on the original debentures totaling $226,054 was added to the principal balance of the amended debentures. The amended agreements include interest at an annual rate of 10%. | |
|
|
|
· | Entered into new agreements for amounts totaling $600,000 on the same terms and conditions as the amended agreements. Proceeds of the new debentures were primarily used to retire two debentures with principal and accrued interest totaling $440,945. | |
|
|
|
· | As part of these amended agreements, the Company has issued five-year warrants to the lenders for a total of 464,299 shares of common stock at a weighted average exercise price of $8.29 per share. |
The Company has analyzed the provisions of ASC 470 to determine if these extensions meet the criteria of a substantial modification which would require treatment as a debt extinguishment. Based on this analysis, it has been determined that a substantial modification did not occur. Accordingly, in accordance with ASC 470, the Company has separately accounted for the value of the embedded equity features within this debenture by allocating a total of $165,097 as original issue discount and additional paid-in capital reflecting the estimated value of the underlying cash conversion feature and the attached warrants, using the Black Scholes pricing model with the following weighted- average assumptions: risk-free interest rate- 1.7%, expected life- 5 years, expected volatility- 36.1% and expected dividend rate- 0%.
In addition, the amended agreements contained a provision whereby the Company would issue an additional two-year warrant, at an exercise price of $7.00 per share, if the debenture is paid off in cash at any time prior to the maturity date. If this would occur, the Company would include the value of the warrants issued in its extinguishment accounting for the debentures.
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
9. Preferred Stock
In 2014, the Board of Directors authorized the sale of up to 6,000 units of Series A Convertible Preferred Stock at a price of $1,000 per unit. Each unit consists of one share of preferred stock plus a warrant to purchase up to 71.5 shares of common stock at a price of $7.00 per share. The preferred stock has a cumulative dividend equal to 12% per year which is payable in cash or, at the option of the holder, into shares of common stock at a rate of $7.00 per share. The preferred stock has a preference in liquidation equal to $1,000 per share. Additionally, the preferred stock is convertible, at the option of the holder, into shares of common stock at a rate of 1:143. The preferred stock also contains an automatic conversion feature whereby the Company may elect to force conversion under certain circumstances. The Company has the right to redeem the shares of preferred stock at a price of $1,000 per share plus any accrued but unpaid dividends. In January 2016, the Board of Directors authorized the sale of up to 3,000 units of Series A-1 Convertible Preferred Stock under the same terms and conditions as the Series A Convertible Preferred Stock.
As of December 31, 2015 and 2014, the Company has issued a total of 6,188 and 1,990 shares of Series A and Series A-1 Convertible Preferred Stock in exchange for proceeds of $6,188,000 and $1,990,000, which is included in preferred stock in the accompanying consolidated balance sheets as of December 31, 2015 and 2014, respectively. Dividends totaling $405,289 and $27,927 have been accrued for the year ended December 31, 2015 and for the period from October 17, 2014 (inception) through December 31, 2014, respectively, which are included in accumulated deficit in the accompanying consolidated balance sheets. Dividends paid during 2015 and 2014 totaled $282,179 and $7,500, which includes dividends paid in shares of common stock, as elected by the holders, valued at $7.00 per share. The Company issued a total of 28,583 shares of common stock as payment of dividends in 2015. There were no shares of common stock issued in 2014 as payment for dividends. As of December 31, 2015, there have been no redemptions of the preferred stock.
As part of this offering, warrants to purchase up to 442,442 and 142,285 shares of common stock at an exercise price of $7.00 per share have been issued and are outstanding as of December 31, 2015 and 2014, respectively. The warrants are vested immediately and have a term of seven years. There is no intrinsic value for warrants outstanding and vested as of December 31, 2015 and 2014.
In connection with this offering, the Company has signed an agreement with a placement agent whereby the agent receives a cash fee of 5% of any proceeds generated by this offering. Additionally, the placement agent will receive a five-year warrant equal to 5% of the common shares issuable upon the conversion of the preferred stock to common stock. The Company has recorded an amount equal to $1,818 and $2,278 representing the estimated value of the 18,522 warrants as of December 31, 2015 and 2014, respectively, using an estimated fair value of $0.16 per share which is included in additional paid-in capital in the accompanying consolidated balance sheets as of December 31, 2015 and 2014, respectively. Accordingly, the Company has incurred placement fees of $101,648 and $101,778 in 2015 and 2014, respectively, which are netted against preferred stock in the accompanying consolidated balance sheets as of December 31, 2015 and 2014, respectively.
Subsequent to December 31, 2015, the Company has sold an additional 2,540 units of Series A-1 Convertible Preferred Stock which generated proceeds of $2,540,000. In addition, a director converted a director loan with an outstanding balance of $118,000 into 118 units of Series A-1 Convertible Preferred Stock on March 1, 2016 (see Note 7) . In connection with these investments, the Company granted seven-year warrants covering a total of 190,047 shares of the Company’s common stock at an exercise price of $7.00 per share.
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
10. Accrued Expenses
Accrued expenses in the accompanying consolidated balance sheets consists of the following as of December 31, 2015 and 2014, respectively:
|
2015 |
2014 |
||||||
Accrued legal, accounting and other services $ |
235,949 | $ | 30,500 | |||||
Accrued salaries, wages and benefits |
209,604 | - | ||||||
Accrued interest |
228,336 | 6,082 | ||||||
Accrued preferred stock dividends |
143,537 | 20,427 | ||||||
Accrued royalty payments |
137,424 | - | ||||||
Accrued other |
52,322 | - | ||||||
|
$ | 1,007,172 | $ | 57,009 |
In December 2015, the Company sold 400 units of Series A Convertible Preferred Stock (see Note 9) in exchange for proceeds of $400,000. Under a separate agreement with the shareholder, 150 units representing $150,000 of the proceeds, are being held in escrow pending the completion of the transaction between the Company and Nuvel Holdings, Inc. (see Note 6). During the period of time that these shares are held in escrow, the holder receives all rights and privileges as a holder of this security. The amount held in escrow is included in shareholders’ equity in the accompanying consolidated balance sheets as of December 31, 2015. On August 15, 2016, the funds held in escrow were released to the Company.
12. Common Stock Issued to CEO
In October 2014, the Company issued a total of 1,350,000 shares of its common stock to the CEO as founders’ stock. At the time these shares were issued, there were no business activities. As a result, the Company has issued the stock at par value ($0.01 per share or $13,500) in the accompanying consolidated balance sheets as of December 31, 2014.
13. Commitments and Contingencies
Leases
The Company subleases office space in Wayzata, Minnesota from a company controlled by family members of the Company’s Chief Executive Officer and director under an operating lease dated December 15, 2014. Lease payments, covering 2,100 square feet, are approximately $5,300 per month through September 30, 2017.
On September 1, 2015 and December 1, 2015, the Company entered into two additional operating leases for approximately 5,100 square feet in the same location in Wayzata, Minnesota. The term of both leases is 60 months with lease payments totaling approximately $9,800 per month. One of the leases (covering 850 square feet) has been subleased to an independent party in exchange for a lease payment of $900 per month. The leases are personally guaranteed by the Company’s Chief Executive Officer.
On October 1, 2015, in connection with the acquisition of Salamander Technologies, Inc. (see Note 5), the Company entered into a 12 month operating lease for 5,500 square feet of office space in Traverse City, Michigan. Monthly lease payments are equal to $6,700.
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
As of December 31, 2015, minimum future rental commitments under the leases are as follows:
For the year ended December 31, |
Amount |
|||
2016 |
$ | 241,569 | ||
2017 |
165,316 | |||
2018 |
117,580 | |||
2019 |
117,580 | |||
Thereafter |
105,062 | |||
|
$ | 747,107 |
Rent expense for the year ended December 31, 2015 and for the period from October 17, 2014 (inception) through December 31, 2014 was $114,279 and $2,800, respectively.
Subsequent to December 31, 2015, the Company entered into an operating lease for approximately 9,800 square feet in Roseville, California which will be the future office location for LifeMed ID, Inc., which was acquired by the Company in July, 2016 (see Note 20). The lease term is 120 months and is expected to begin in October 2016. For the first 12 months of the lease, the monthly lease payment is equal to approximately $19,100 with increases of 3% per year through the end of the term. The lease includes an abatement during the first six months of the lease equal to approximately $115,000. Total lease payments over the lease term are equal to $2,518,823.
14. Stock-based Compensation
During 2015, the Company granted a total of 1,500,000 shares of common stock to certain employees and consultants in exchange for their services. One such employee is also a director of the Company. The shares vested immediately and have been recorded based on the fair value of the Company’s common stock at the date of grant using a value of $0.16 per share. Non-cash compensation expense of $240,000 has been recorded for the year ended December 31, 2015 and is included in general and administrative expenses in the accompanying consolidated statements of operations.
15. Income Taxes
Income tax computed at the federal statutory rate reconciled to the effective tax rate is as follows for the year ended December 31, 2015 and for the period from October 17, 2014 (inception) through December 31, 2014:
|
2015 |
2014 |
||||||
Federal statutory tax benefit rate |
(34.0 | )% | (34.0 | )% | ||||
State tax, net of federal benefit |
(2.1 | ) | (8.3 | ) | ||||
Permanent differences |
8.5 | - | ||||||
Other |
(11.6 | ) | 2.3 | |||||
Change in valuation allowance |
39.2 | 40.0 | ||||||
|
- |
% |
- |
% |
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
The Company assesses the potential realization of net deferred tax assets on an annual basis, or on an interim basis if the circumstances warrant. If the Company’s actual results and updated projections vary significantly from the projections used as a basis for this determination, the Company may need to increase or decrease the valuation allowance against the gross deferred tax assets. The Company would adjust its valuation allowance in the period the determination was made. The Company considers projected future taxable income and ongoing tax planning strategies and then records a valuation allowance to reduce the carrying value of the net deferred taxes for amounts that are unable to be realized. For the year ended December 31, 2015 and for the period from October 17, 2014 (inception) through December 31, 2014, the Company recorded a change in the valuation allowance of $1,445,700 and $71,600, respectively, as the Company believes it is not more-likely-than-not to realize the benefit of the deferred tax asset.
During 2015, the Company recorded additional deferred tax assets primarily related to the acquisition of Salamander Technologies, Inc. The net increase was $381,600 which includes a research and development (“R&D”) credit carryforward, a net operating loss (“NOL”) carryforward and amortization of intangibles.
Components of net deferred income taxes are as follows as of December 31, 2015 and 2014:
2015 |
2014 |
|||||||||
Deferred income tax assets: |
||||||||||
Net operating loss carryforwards |
$ | 1,106,100 | $ | 72,900 | ||||||
R&D credit carryforwards |
394,500 | - | ||||||||
Start-up costs |
14,900 | 17,800 | ||||||||
Accrued expenses |
292,300 | 300 | ||||||||
Depreciation |
17,000 | - | ||||||||
1,824,800 | 91,000 | |||||||||
Deferred income tax liabilities: |
||||||||||
Amortization |
(285,700 | ) | - | |||||||
Non-cash compensation costs |
(11,600 | ) | (19,400 | ) | ||||||
Deferred revenue |
(10,200 | ) | - | |||||||
(307,500 | ) | (19,400 | ) | |||||||
Net deferred income tax assets |
1,517,300 | 71,600 | ||||||||
Less: Valuation allowance |
(1,517,300 | ) | (71,600 | ) | ||||||
Net deferred income tax assets |
$ | - | $ | - |
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
As of December 31, 2015, the Company has the following federal and state net operating losses and research and development credit carryforwards:
|
|
Net Operating Losses |
|
|
Research and Development |
|
||||||
Year of Expiration |
|
Federal |
|
|
State |
|
|
Credits |
|
|||
2025 |
|
|
173,000 |
|
|
|
- |
|
|
|
24,000 |
|
2026 |
|
|
- |
|
|
|
- |
|
|
|
39,000 |
|
2027 |
|
|
352,000 |
|
|
|
- |
|
|
|
51,000 |
|
2028 |
|
|
40,000 |
|
|
|
- |
|
|
|
44,000 |
|
2029 |
|
|
40,000 |
|
|
|
180,000 |
|
|
|
45,000 |
|
2030 |
|
|
40,000 |
|
|
|
664,000 |
|
|
|
39,000 |
|
2031 |
|
|
40,000 |
|
|
|
- |
|
|
|
16,000 |
|
2032 |
|
|
- |
|
|
|
- |
|
|
|
21,000 |
|
2033 |
|
|
40,000 |
|
|
|
- |
|
|
|
27,000 |
|
2034 |
|
|
220,000 |
|
|
|
- |
|
|
|
44,000 |
|
2035 |
|
|
2,067,000 |
|
|
|
- |
|
|
|
44,000 |
|
|
|
$ | 3,012,000 |
|
|
$ | 844,000 |
|
|
$ | 394,000 |
|
We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant tax authority. As of December 31, 2015 and 2014, we did not have any material uncertain tax positions.
It is our practice to recognize interest and penalties related to income tax matters as a component of income tax expense in the consolidated statements of operations. There have been no interest or penalties incurred for the year ended December 31, 2015 and for the period from October 17, 2014 (inception) through December 31, 2014.
16. Restricted Stock Grants
In December 2014, the Company granted a total of 100,000 shares of common stock to each of its four outside directors in exchange for their services. The shares vest as follows: 25% immediately with the remaining 75% vesting equally over the next three years, assuming the director remains in their position on the anniversary date. The Company has recorded the fair value of the shares granted using an estimate of fair value of $0.16 per share. Non-cash compensation of $16,000 for both periods, based on the value of the shares vested in that period, has been recorded in the accompanying consolidated statements of operations for the year ended December 31, 2015 and for the period from October 17, 2014 (inception) through December 31, 2014, respectively.
The following table sets forth a summary of restricted stock activity for the year ended December 31, 2015 and or the period from October 17, 2014 (inception) through December 31, 2014:
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
17. Non-qualified Stock Options
During 2015, the Company granted non-qualified stock options to certain directors in exchange for services they provided during the year. These instruments were immediately vested and were valued at the fair value on the date of grant which was estimated to be $0.15 per share, using the Black Scholes pricing model with the following weighted-average assumptions: risk-free interest rate- 2.3%, expected life- 10 years, expected volatility- 100% and expected dividend rate- 0%. Using an estimated fair value per share of $3.18 on December 31, 2015, the number of options outstanding with an intrinsic value was 378,571, with an intrinsic value of $1,143,284.
Non-qualified stock option activity is as follows for the year ended December 31, 2015 and for the period from October 17, 2014 (inception) through December 31, 2014:
|
Weighted Average |
|||||||||||||||
|
Number of Shares |
Exercise Price |
||||||||||||||
|
2015 |
2014 |
2015 |
2014 |
||||||||||||
Outstanding, January 1 |
- | - | $ | - | $ | - | ||||||||||
Granted |
378,571 | - | 0.16 | - | ||||||||||||
Exercised |
- | - | - | - | ||||||||||||
Cancelled |
- | - | - | - | ||||||||||||
Expired |
- | - | - | - | ||||||||||||
Outstanding, December 31 |
378,571 | - | $ | 0.16 | $ | - |
The weighted average grant date fair value of non-qualified options granted during the year ended December 31, 2015 and for the period from October 17, 2014 (inception) through December 31, 2014 was $1.56 and $0, respectively. Options exercisable as of December 31, 2015 and 2014 were 378,571 and 0, respectively. The weighted average price of exercisable options for the year ended December 31, 2015 and for the period from October 17, 2014 (inception) through December 31, 2014 was $0.16 and $0, respectively. The total fair value of stock options vested as of December 31, 2015 and 2014 was $589,727 and $0, respectively. The Company issues new shares when non-qualified stock options are exercised. The remaining contractual life of the non-qualified options outstanding as of December 31, 2015 and 2014 is 8.6 and 0 years, respectively.
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
18. Stock Warrants
Warrants to purchase shares of the Company’s common stock have been issued in connection with issuances of preferred stock (See Note 9) and convertible debentures (See Note 8).
Stock warrant activity is as follows for the year ended December 31, 2015 and for the period from October 17, 2014 (inception) through December 31, 2014:
Using an estimated fair value per share of $3.18 on December 31, 2015 and 2014, the number of options outstanding with an intrinsic value was 145,000 and 0, respectively, with an intrinsic value of $459,650 and $0, respectively.
Warrants outstanding and exercisable as of December 31, 2015, are as follows:
Weighted |
||||||||||
Average |
||||||||||
Remaining |
||||||||||
Number of |
Contractual |
|||||||||
Exercise Price |
Shares |
Life (Years) |
||||||||
$ | 0.01 | 145,000 | 2.5 | |||||||
$ | 7.00 | 529,491 | 6.3 | |||||||
674,491 | 5.6 |
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
19. Business Segments
A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. The Company has two operating segments: (1) SalTech, which includes the results of the business operation within Salamander Technologies, LLC, which provides an asset tagging and tracking software solution used to manage incidents or events and (2) OH, which includes corporate expenses (e.g. corporate administrative costs) and interest expense. Segment disclosures are provided to the extent practicable under the Company's accounting system. Transactions within and between the segments are generally made on a basis to reflect the market value of the services and have been eliminated in consolidation.
The SalTech segment was created as a result of the Company’s acquisition of Salamander Technologies, Inc. which occurred on October 1, 2015 (see Note 5). Accordingly, the results of that segment reflect only the period of October 1, 2015 through December 31, 2015.
Segment disclosures are as follows:
|
For the Year Ended December 31, 2015 |
|||||||||||
|
Sal-Tech | OH |
Total |
|||||||||
Revenue |
$ | 244,902 | $ | - | $ | 244,902 | ||||||
Loss from operations |
(337,311 | ) | (3,252,281 | ) | (3,589,592 | ) | ||||||
Net income (loss) |
64,775 | (3,745,146 | ) | (3,680,371 | ) | |||||||
Identifiable assets |
2,698,033 | 7,980,770 | 10,678,803 | |||||||||
Depreciation and amortization |
25,662 | 14,236 | 39,898 | |||||||||
Capital expenditures |
(2,799 | ) | (74,885 | ) | (77,684 | ) | ||||||
Interest expense, net of interest income |
(1,467 | ) | (492,865 | ) | (494,332 | ) | ||||||
Income tax provision (benefit) |
- | - | - |
|
For the Period From October 17, 2014 |
|||||||||||
|
(inception) through December 31, 2014 |
|||||||||||
|
Sal-Tech |
OH |
Total |
|||||||||
Revenue |
$ | - | $ | - | $ | - | ||||||
Loss from operations |
- | (172,864 | ) | (172,864 | ) | |||||||
Net loss |
- | (178,900 | ) | (178,900 | ) | |||||||
Identifiable assets |
- | 3,369,078 | 3,369,078 | |||||||||
Depreciation and amortization |
- | - | - | |||||||||
Capital expenditures |
- | 32,440 | 32,440 | |||||||||
Interest expense, net of interest income |
- | (6,036 | ) | (6,036 | ) | |||||||
Income tax provision (benefit) |
- | - | - |
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
20. Subsequent Events
The Company has evaluated subsequent events occurring through September 26, 2016, the date the consolidated financial statements were available to be issued, for events requiring recording or disclosure in the Company’s consolidated financial statements.
Acquisition of Agilivant LLC (“AGL”)
AGL, a Washington limited liability company, offers a real-time debit based banking and payment system. Certain of the Company’s directors are shareholders and directors of AGL. As of December 31, 2015 and 2014, the Company provided a total of $1,225,488 and $220,313, respectively, to AGL to fund current operating losses, which are included in notes receivable in the accompanying consolidated balance sheets as of December 31, 2015 and 2014, respectively. The advances are due on demand but are classified as a long-term asset in the accompanying consolidated balance sheet since the intent is to apply these advances as part of the pending business combination. The amounts advanced are covered by a revolving promissory note which provided for advances up to $750,000. The revolving note is unsecured, due on demand and carries an annual interest rate of 6%. Interest earned under these notes totaled $48,975 and $0 as of December 31, 2015 and 2014, respectively, which is included in the accompanying consolidated balance sheets. For the period from January 1 to February 12, 2016 (the date the Company acquired a controlling interest in AGL), the Company has provided an additional $85,000 to further assist AGL with their working capital needs.
Based on the relationship which existed between the Company and AGL, the Company has evaluated the requirements of ASC 810-10 Consolidation and has determined that AGL qualifies as a variable interest entity (“VIE”). Once a reporting entity determines that it has an interest in a VIE, it must determine if it qualifies as the primary beneficiary. If it determines that it meets the definition of a primary beneficiary, it must consolidate the results of the VIE with its own and report them as if it owned that entity as of the reporting period. A primary beneficiary is defined as an entity that meets both of the following criteria: a) Power Criterion- power to direct activities of the VIE that most significantly impact the economic performance, b) Loss/Benefits Criterion- obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE. Because the Company does not meet the definition of the primary beneficiary due to lack of power to direct activities of AGL and lack of obligation to absorb AGL losses, the financial results of AGL have not been consolidated with those of the Company for the periods presented.
On February 12, 2016, the Company and AGL signed a Membership Unit Purchase Agreement (“MUPA”) that provided for the exchange of the Company’s common stock for AGL membership units. As of the closing date, the Company received 82% of the membership units in exchange for a total of 433,551 shares of its common stock. The remaining 18% of AGL’s membership units will be reflected as a minority interest until the time that the Company acquires the remaining membership units. If that occurs, the Company would issue an additional 95,170 shares of its common stock to acquire those membership units. Under the terms of the MUPA, the Company has held 57,400 shares of the common stock issuable to all sellers in escrow for certain defined indemnification events. These shares will be released to the sellers in June 2017. In addition, the Company has held an additional 50,000 shares of common stock issuable to two sellers pending a final accounting of the amount of liabilities assumed.
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
Under a separate agreement with Rene Babi, AGL’s founder and Executive Chairman, the Company has agreed to distribute his shares of Company common stock over a three- year period. Accordingly, as of the closing date, the Company has held a total of 151,378 shares of its common stock that are due to Mr. Babi. These shares will be released based on the following schedule: 50,460 shares on April 17, 2017, 50,459 shares on April 17, 2018 and 50,459 shares on April 17, 2019. During the period of time that these shares are held, Mr. Babi has no rights of ownership. Accordingly, the Company will record the fair value of these held shares as a liability as of the close date. On July 1, 2016, under a separate agreement, the Company agreed to purchase 1,000 shares per month of the Company’s common stock owned by Mr. Babi at a price of $14.00 per share for a period of 24 months.
During the first quarter of 2016, the Company allocated the purchase price, which was calculated based on the number of shares of common stock issued at a value of $3.18 per share, based on the fair value of assets acquired and liabilities assumed. The evaluation of the Company’s common stock requires the Company to make assumptions about future cash flows of the Company that include, among others, growth in revenues, margins realized, level of operating expenses and cost of capital. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. The Company engaged an independent specialist to assist the Company in evaluating the fair value of the Company’s common stock and ultimately concluded on the fair value of the Company’s common stock.
A summary of the assets acquired and liabilities assumed as of the closing date is as follows:
Current assets |
$ | 35,839 | ||
Intangible assets: |
||||
Trademarks |
188,736 | |||
Software technology |
1,038,047 | |||
Customer relationships |
44,909 | |||
Goodwill |
3,185,565 | |||
Current liabilities |
(593,738 | ) | ||
Assumed debt |
(2,218,025 | ) | ||
|
1,681,333 | |||
Noncontrolling interest |
(302,641 | ) | ||
Value of net assets acquired |
$ | 1,378,692 |
Transaction costs of $206,517 were expensed as incurred. Because AGL was a limited liability company, the fair value of the assets acquired will be stepped up and the value assigned to goodwill will be deductible for income tax purposes. The goodwill recognized as a result of the merger is attributable primarily to the strategic and synergistic opportunities across the marketing technology spectrum, expected corporate synergies and the assembled workforce.
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
Gain on Debt Extinguishment
Subsequent to the acquisition, on June 30, 2016, the Company issued 67,603 shares of common stock in exchange for the extinguishment of certain assumed debt and accrued interest with a value of $795,174. In accordance with Accounting Standards Codification 470-50-40 “Debt-Modifications and Extinguishments”, the Company recorded the reacquisition price at the fair value of the securities issued to extinguish the debt which it estimated to be $3.18 per share. Accordingly, the difference between the reacquisition price and the carrying amount of the debt and accrued interest was recorded as a gain on debt extinguishment of $569,406, which is included in other income (expense) in the accompanying consolidated statements of operations for the six months ended June 30, 2016.
Acquisition of LifeMed ID, Inc. (“LMID”)
LMID, a California corporation, offers a suite of software solutions that overlays with existing systems and equipment which automates patient identity validation, record matching, insurance and payment requirements and access to information.
During 2015 and 2014, the Company purchased a total of 1,750,000 shares of Series B Convertible Preferred Stock from LMID for a price of $3,500,000. Dividends, when declared by the issuer’s board of directors, are payable at a rate of $0.10 per share, or 5% per year. The dividends are not cumulative. The shares have a preference in liquidation equal to $2.00 per share. The stock is convertible into an equivalent number of shares of common stock and have voting rights on an as-converted basis. In addition, during 2015, the Company purchased a total of 462,500 shares of common stock from LMID for a price of $2.00 per share or, $925,000. Based on the number of shares of these securities that are held, the Company had an effective ownership position of 17% and 11%, as of December 31, 2015 and 2014, respectively. The amounts invested of $4,425,000 and $2,500,000 are reported as Investment in LMID in the accompanying consolidated balance sheets as of December 31, 2015 and 2014, respectively.
Beginning in 2015, to provide additional working capital to LMID, the Company has made non-interest bearing advances to LMID totaling $1,045,000. The non-interest bearing advances are included in Due from LMID in the accompanying consolidated balance sheets as of December 31, 2015. The advances are due on demand but are classified as a long-term asset in the accompanying consolidated balance sheet since the intent is to apply these advances as part of the pending business combination.
Subsequent to December 31, 2015 and through July 20, 2016, the Company has made additional non-interest bearing advances to LMID equal to $2,508,000. On March 31, 2016, the Company converted a portion of these advances, totaling $2,195,000, into 1,097,500 shares of LMID common stock. In addition, on February 9, 2016, the Company acquired 80,000 shares of LMID common stock previously held by David Batchelor, a member of its Board of Directors and the current CEO of LMID, at a price of $2.00 per share, or $160,000. As a result of these transactions, the Company owned a total of 1,640,000 shares of LMID common stock at a price of $2.00 per share.
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
Based on the number of shares of these securities that are held, on an as-converted basis, the Company had an effective ownership position of 24% and 17%, as of March 31, 2016 and December 31, 2015, respectively. Through March 31, 2016, the Company’s investment in LifeMed ID, Inc. was carried on the cost basis. Based on the Company’s acquisition of additional shares of LifeMed ID, Inc. common stock on March 31, 2016, the Company began to account for this investment using the equity method of accounting as of April 1, 2016. The Company adopted the guidance of ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323) - Simplifying the Transition to the Equity Method of Accounting during the first quarter of 2016 and has applied the equity method for its investment in LifeMed ID, Inc. prospectively beginning with the three months ended June 30, 2016.
Based on the relationship which existed between the Company and LMID, the Company has evaluated the requirements of ASC 810-10 Consolidation and has determined that LMID qualifies as a variable interest entity (“VIE”). Once a reporting entity determines that it has an interest in a VIE, it must determine if it qualifies as the primary beneficiary. If it determines that it meets the definition of a primary beneficiary, it must consolidate the results of the VIE with its own and report them as if it owned that entity as of the reporting period. A primary beneficiary is defined as an entity that meets both of the following criteria: a) Power Criterion- power to direct activities of the VIE that most significantly impact the economic performance, b) Loss/Benefits Criterion- obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE. Because the Company does not meet the definition of the primary beneficiary due to lack of power to direct activities of LMID and lack of obligation to absorb LMID losses, the financial results of LMID have not been consolidated with those of the Company for the periods presented.
Certain of the Company’s directors are also directors and shareholders in LMID. One such director is an officer of LMID, serving as its CEO.
On July 20, 2016, the Company completed a stock-for-stock exchange with LMID and acquired an additional 76% of the outstanding shares of LMID in exchange for 1,489,261 shares of the Company’s common stock with an implied value of $3.18 per share and an aggregate value of $4,735,850. The evaluation of the Company’s common stock requires the Company to make assumptions about future cash flows of the Company that include, among others, growth in revenues, margins realized, level of operating expenses and cost of capital. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. The Company engaged an independent specialist to assist the Company in evaluating the fair value of the Company’s common stock and ultimately concluded on the fair value of the Company’s common stock. The Company currently owns 100% of LMID; one shareholder did dissent to the merger and we anticipate settling this claim before December 31, 2016 for $195,678, a corresponding liability will be recorded in the consolidated financial statements. The transaction costs of $354,522 were expensed as incurred.
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
A preliminary estimate of the fair value of the assets acquired and liabilities assumed are as follows:
Purchase Consideration: |
||||
Company Common Stock |
$ | 4,735,850 | ||
Cash paid prior to merger |
6,620,000 | |||
Due to dissenter |
195,678 | |||
Assumed Obligation to OrangeHook |
1,358,000 | |||
Debt-Free Liabilities |
2,082,488 | |||
Assumed Debt |
93,141 | |||
Total Purchase Consideration |
$ | 15,085,157 | ||
Preliminary allocation of Fair Value: |
||||
Current Assets |
$ | 826,917 | ||
Property and Equipment |
51,101 | |||
Other Assets |
110,466 | |||
Trademarks and Trade Names |
597,000 | |||
Software/Technology |
3,283,000 | |||
Customer Relationships |
142,000 | |||
Goodwill |
10,074,673 | |||
Total Purchase Consideration |
$ | 15,085,157 |
The Company will finalize the purchase price based on the fair value of assets acquired and liabilities assumed by December 31, 2016. The value that will be assigned to goodwill will not be deductible for tax purposes. The goodwill recognized as a result of the merger is attributable primarily to the strategic and synergistic opportunities across the marketing technology spectrum, expected corporate synergies and the assembled workforce.
Included in current assets as of the acquisition date is a balance due David Batchelor, the current LMID CEO, director and majority shareholder of LMID. Mr. Batchelor is also a member of the Company’s Board of Directors. The balance due as of the acquisition date is $493,092, which is due upon the completion of the sale to the Company of common shares held by Mr. Batchelor in connection with the Registration Rights and Put Agreement held by Mr. Batchelor as discussed below.
In connection with this transaction, the Company has entered into a six-year employment agreement with Mr. Batchelor. Under the terms of this agreement, Mr. Batchelor will receive a base salary of $321,000 per year. In addition, he will be eligible to receive quarterly incentive payments based on LMID gross revenue equal to 5% for 2016, 3% for 2017- 2018 and 0.5% for 2019-2022. In connection with this agreement, in November 2015, the Company granted a seven-year non-qualified stock option to Mr. Batchelor to purchase up to 178,561 shares of common stock at an exercise price of $0.16 per share. The fair value of stock option was determined to be $559,000, which represents the estimated present value at grant date using the Black Scholes pricing model with the following weighted-average assumptions: risk-free interest rate- 2.1%, expected life- 7 years, expected volatility- 100% and expected dividend rate- 0%, which is included in general and administrative expenses in the accompanying consolidated statements of operations for the year ended December 31, 2015.
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
Subsequent to December 31, 2015, this option was rescinded and replaced with a seven-year non-qualified stock option to purchase up to 228,413 shares of common stock at an exercise price of $3.18 per share. In accordance with Accounting Standards Codification 718 “Compensation- Stock Compensation”, the Company has calculated the relative fair value of the revised stock option award using the Black Scholes pricing model with the following weighted-average assumptions: risk-free interest rate- 2.0%, expected life- 7 years, expected volatility- 36.1% and expected dividend rate- 0%. Based on that calculation, it was determined that the relative fair value of the replacement options was lower than the value of the options that were issued in 2015. As a result, no additional compensation expense will be recorded in relation to the replacement options.
In addition, in March 2016, the Company has entered into a Registration Rights and Put Agreement with Mr. Batchelor which allows him to require the Company to repurchase up to 142,857 shares of his common stock at $14 per share up to a maximum of $1,550,000. The Put Option is exercisable as follows: $550,000 during June 2016 and $1.0 million during October 2016. Mr. Batchelor has been granted piggyback registration rights under this agreement which allow him to include his shares in any registration agreement filed by the Company. The agreement contains certain provisions which relieve the Company from its obligation under this agreement. In accordance with ASC 480 “Distinguishing Liabilities from Equity”, the Put Option represents a financial obligation of the Company which must be accrued in the consolidated financial statements. Upon the completion of the acquisition of LMID, at which time Mr. Batchelor becomes a shareholder of the Company, a liability in the amount of $1,550,000 will be recorded in the consolidated financial statements. On May 18, 2016, the Company received a Put Option Notice from Mr. Batchelor whereby he requested that the Company purchase a total of 39,825 shares of his common stock at a price of $14 per share, an aggregate purchase price of $549,990. At that date, Mr. Batchelor held no shares of the Company’s common stock to redeem. As a result of the merger transaction discussed above, Mr. Batchelor currently owns a total of 712,436 shares of common stock. As of September 26, 2016, the Company has yet to redeem the shares held by Mr. Batchelor due to limitations included in the Registration Right and Put Agreement.
Short-term loans
On January 26, 2016, the Company received a short-term loan from a lender in the amount of $100,000. The term of the loan was initially due on February 25, 2016 and included up to five additional thirty day extensions, all of which have occurred. Subsequently, the lender provided three additional thirty day extensions. If all extensions were exercised, the loan would be due on October 22, 2016. Under the terms of the financing, for each and every thirty-day period of this loan, the Company (1) paid an up-front origination fee equal to $2,000 (2) paid interest at maturity at a rate of 10% per year and (3) issued a seven-year warrant to purchase up to 10,000 shares of the Company’s common stock at an exercise price of $7.00 per share. The fair value of each warrant was calculated to be $5,000, using the Black Scholes pricing model with the following weighted-average assumptions: risk-free interest rate- 1.7%, expected life- 7 years, expected volatility- 36.1% and expected dividend rate- 0%. The loan is convertible into shares of the Company’s common stock at the lender’s option at a price of $7.00 per share. In addition, the lender has the right to purchase up to 100 units of the Series A-1 Convertible Preferred Stock being offered by the Company for a period of up to thirty days subsequent to this loan being repaid.
On March 2, 2016, the Company received a short-term loan from a lender in the amount of $50,000. The note was scheduled to mature on April 2, 2016. In addition, at maturity, the lender will receive a payment equal to $2,500 in lieu of interest. In August 2016, the lender agreed to extend the due date of the note to October 2, 2016 in exchange for interest at an annual rate of 10% for as long as the note remains unpaid.
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
On March 15, 2016, the Company received a short-term loan from a lender in the amount of $300,000. The note was scheduled to mature on April 15, 2016. In addition, the lender received a seven-year warrant to purchase up to 15,000 shares of common stock at an exercise price of $0.01 per share. The fair value of this warrant was calculated to be $42,000, using the Black Scholes pricing model with the following weighted- average assumptions: risk-free interest rate- 1.7%, expected life- 7 years, expected volatility- 36.1% and expected dividend rate- 0%. The lender exercised this warrant on April 25, 2016. On August 30, 2016, the lender converted the principal amount of the note plus accrued interest of $16,000 into 45,143 shares of the Company’s common stock at a value of $7.00 per share plus seven-year warrants to purchase up to 286,667 shares at an exercise price of $7.00 per share.
On July 26, 2016, the Company issued a promissory note to a lender in the amount of $500,000. Proceeds received at closing totaled $471,299 representing the amount of the loan net of a loan discount of $25,000 plus additional closing expenses of $3,701. The maturity date of the promissory note is sixty days from the date of issuance (September 23, 2016). At maturity, the entire amount of the note plus interest of $30,000 is due and payable. The promissory note can be extended at the Company’s option for two additional forty-five day periods. If exercised, the Company would be obligated to pay additional interest at the end of each extension period equal to $22,500. The promissory note is secured by an officer and certain directors.
On August 23, 2016, the Company issued an unsecured short-term loan to a lender in the amount of $78,000 in exchange for proceeds of $75,000. Interest is payable at maturity at a rate of 10% per annum. The note matures on September 30, 2016. The original issue discount ($3,000) will be recognized as an expense over the term of the note.
On August 30, 2016, the Company issued an unsecured short-term loan to a lender in the amount of $52,000 in exchange for proceeds of $50,000. Interest is payable at maturity at a rate of 10% per annum. The note matures on September 30, 2016. The original issue discount ($2,000) will be recognized as an expense over the term of the note.
On August 31, 2016, the Company received an unsecured loan from a lender in the amount of $150,000. The loan matures September 30, 2016. Interest is fixed at a rate of $7,500 and is due upon maturity. In addition, if the Company does not pay the principal and interest on the maturity date, the lender would receive seven-year warrants to purchase up to 36,000 shares of the Company’s common stock at a price of $0.01 per share.
Bank Line of Credit
On March 30, 2016, the Company entered into an unsecured revolving line of credit with a bank which provides for borrowings up to $350,000. The line of credit is for general working capital purposes and borrowings are subject to an interest charge of 4.5% per annum. Amounts borrowed under this line of credit have been personally guaranteed by four of the Company’s directors. This revolving line of credit originally was to expire on June 30, 2016 but has since been extended to September 30, 2016. The balance outstanding under this line of credit is $350,000 as of August 31, 2016.
OrangeHook, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015 and
for the period from October 17, 2014 (inception) through December 31, 2014
Convertible Revolving Promissory Note
On May 25, 2016, the Company entered into an unsecured convertible revolving promissory note which provides for borrowings up to $1 million. Borrowings under this note carry an interest rate of 10% per annum. Any balance outstanding together with all accrued and unpaid interest is due on October 31, 2016. Subsequently, the lender agreed to extend the maturity date to January 15, 2017. At the option of the lender, the note is convertible into shares of convertible preferred stock at a price of $1,000 per share. If converted, the lender would also receive a seven-year warrant to purchase up to 71.5 shares of common stock for each share of convertible preferred stock. In addition, upon a change in control, as defined in the agreement, the lender has the option to receive either cash or shares of the Company’s common stock based on a value of $7.00 per share, subject to certain adjustments. In the event that this note is not paid in full on or before the maturity date, the Company will be required to issue to the lender a seven-year warrant to purchase up to 240,000 shares of common stock at a price of $1.00 per share. The balance outstanding under this note as of August 31, 2016 is $1.0 million.
Acquisition of Assets
On June 2, 2016, the Company purchased certain intellectual property, furniture, fixtures, computers, equipment and other assets of LifeNexus, Inc. (“LifeNexus”). LifeNexus filed a bankruptcy petition under Chapter 7 of the United States Bankruptcy Code in February 2016. Under the bankruptcy petition, Spring Grove Finance, S.A. purchased the assets from the Chapter 7 bankruptcy estate of LifeNexus, and then sold the assets to the Company in exchange for 178,571 shares of common stock with an implied value of $3.18 per share and an aggregate value of $567,856. The evaluation of the Company’s common stock requires the Company to make assumptions about future cash flows of the Company that include, among others, growth in revenues, margins realized, level of operating expenses and cost of capital. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. The Company engaged an independent specialist to assist the Company in evaluating the fair value of the Company’s common stock and ultimately concluded on the fair value of the Company’s common stock. The purchase will be recorded as an asset purchase and transaction costs of $19,412 were capitalized.
A preliminary estimate of the fair value of the assets acquired assumed are as follows:
Tangible assets |
$ | - | ||
Intangible assets |
587,268 | |||
|
$ | 587,268 |
During the fourth quarter of 2016, the Company will allocate the purchase price based on the relative fair value of the assets acquired.
Formation of Joint Venture
On September 23, 2016, the Company executed a term sheet with a group of outside investors which contemplates the formation of a joint venture to promote, market, sell and distribute technology products in China and other Asian markets to be defined. Under the terms of this agreement, the outside investors would purchase no less than $40 million of the Company’s common stock at a valuation equal to $200 million.
OrangeHook, Inc. and Subsidiaries
Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015
(audited) and for the Three and Nine Months ended
September 30, 2016 and 2015 (unaudited)
OrangeHook, Inc. and Subsidiaries
As of September 30, 2016 (unaudited) and December 31, 2015 (audited)
|
September 30, 2016 |
December 31, 2015 |
||||||
Assets |
||||||||
Current assets: |
||||||||
Cash |
$ | 285,776 | $ | 281,906 | ||||
Restricted cash |
2,503 | - | ||||||
Accounts receivable |
889,076 | 145,144 | ||||||
Inventory |
24,062 | 31,985 | ||||||
Other current assets |
324,869 | 105,930 | ||||||
Total current assets |
1,526,286 | 564,965 | ||||||
|
||||||||
Furniture, equipment and leasehold improvements, net: |
||||||||
Furniture and equipment |
161,064 | 87,564 | ||||||
Computer software |
43,559 | 21,646 | ||||||
Leasehold improvements |
38,448 | 35,258 | ||||||
|
243,071 | 144,468 | ||||||
Less: Accumulated depreciation and amortization |
(61,886 | ) | (17,623 | ) | ||||
|
181,185 | 126,845 | ||||||
Other assets: |
||||||||
Due from: |
||||||||
Agilivant, LLC |
- | 1,225,488 | ||||||
Nuvel Holdings, Inc. |
1,336,249 | 856,249 | ||||||
LifeMed ID, Inc. |
- | 1,045,000 | ||||||
|
1,336,249 | 3,126,737 | ||||||
Investment in LifeMed ID, Inc. |
- | 4,425,000 | ||||||
Goodwill |
14,841,409 | 1,566,531 | ||||||
Intangible assets, net of amortization |
6,387,179 | 868,725 | ||||||
Other |
104,347 | - | ||||||
|
22,669,184 | 9,986,993 | ||||||
Total assets |
$ | 24,376,655 | $ | 10,678,803 | ||||
|
||||||||
Liabilities and Stockholders’ Equity |
||||||||
Current liabilities: |
||||||||
Notes payable to directors, net of discount- short-term |
$ | 1,575,000 | $ | 218,000 | ||||
Line of credit |
350,000 | - | ||||||
Short-term debt, net of discount |
2,538,447 | - | ||||||
Convertible debentures, net of discount- short-term |
- | 383,557 | ||||||
Capital lease obligation- short-term |
1,078 | - | ||||||
Accounts payable |
2,114,583 | 607,253 | ||||||
Accrued expenses |
4,932,993 | 1,007,172 | ||||||
Deferred revenue- short-term |
2,716,060 | 290,938 | ||||||
Total current liabilities |
14,228,161 | 2,506,920 |
The accompanying notes are an integral part of these consolidated financial statements.
OrangeHook, Inc. and Subsidiaries
Consolidated Balance Sheets
As of September 30, 2016 (unaudited) and December 31, 2015 (audited)
|
September 30, 2016 |
December 31, 2015 |
||||||
Long-term liabilities |
||||||||
Convertible debentures, net of discount- long-term |
3,296,417 | 2,378,562 | ||||||
Notes payable to directors, net of discount- long-term |
2,168,330 | 2,058,330 | ||||||
Capital lease obligation- long-term |
2,124 | - | ||||||
Derivative liability (See Note 19) |
632,758 | - | ||||||
Installment payable to related party |
481,382 | - | ||||||
Deferred revenue- long-term |
38,764 | 32,533 | ||||||
Total liabilities |
20,847,936 | 6,976,345 | ||||||
|
||||||||
Commitments and contingencies |
||||||||
Stockholders’ equity |
||||||||
Cumulative convertible redeemable preferred stock; authorized 9,000 and 6,000 shares; 8,846 and 6,188 shares issued and outstanding; liquidation preference of $8,846,000 and $6,188,000 |
8,548,452 | 5,984,574 | ||||||
Common stock - Voting; $0.01 par value; authorized 10,000,000 shares; 5,891,415 and 3,620,726 shares issued as of September 30, 2016 and December 31, 2015, respectively; 5,540,037 and 3,420,726 shares outstanding as of September 30, 2016 and December 31, 2015, respectively |
55,067 | 34,207 | ||||||
Additional paid-in capital |
8,445,688 | 2,126,164 | ||||||
Preferred stock subscription receivable |
- | (150,000 | ) | |||||
Accumulated deficit |
(13,770,019 | ) | (4,292,487 | ) | ||||
Total stockholders' equity |
3,279,188 | 3,702,458 | ||||||
Noncontrolling interest |
249,531 | - | ||||||
|
3,528,719 | 3,702,458 | ||||||
Total liabilities and stockholders' equity |
$ | 24,376,655 | $ | 10,678,803 |
The accompanying notes are an integral part of these consolidated financial statements.
OrangeHook, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
|
Three months ended September 30 |
Nine months ended September 30 |
||||||||||||||
|
2016 | 2015 | 2016 | 2015 | ||||||||||||
|
||||||||||||||||
Revenue |
$ | 321,479 | $ | - | $ | 784,187 | $ | - | ||||||||
Cost of sales |
95,585 | - | 191,095 | - | ||||||||||||
|
||||||||||||||||
Gross profit |
225,894 | - | 593,092 | - | ||||||||||||
|
||||||||||||||||
Operating expenses: |
||||||||||||||||
Product development |
838,950 | - | 1,329,462 | - | ||||||||||||
Sales and marketing |
308,225 | - | 554,908 | - | ||||||||||||
General and administrative |
2,403,942 | 704,509 | 5,448,048 | 1,472,604 | ||||||||||||
|
||||||||||||||||
Total operating expenses |
3,551,117 | 704,509 | 7,332,418 | 1,472,604 | ||||||||||||
|
||||||||||||||||
Loss from operations |
(3,325,223 | ) | (704,509 | ) | (6,739,326 | ) | (1,472,604 |
) |
||||||||
|
||||||||||||||||
Other income (expense): |
||||||||||||||||
Gain on debt extinguishment |
172,446 | - | 741,852 | - | ||||||||||||
Net loss on Investment in LifeMed ID, Inc. |
(46,280 | ) | - | (404,310 | ) | - | ||||||||||
Interest expense, net of interest income |
(1,616,364 | ) | (171,842 | ) | (2,451,259 | ) | (226,278 |
) |
||||||||
|
||||||||||||||||
Loss before income taxes |
(4,815,421 | ) | (876,351 | ) | (8,853,043 | ) | (1,698,882 |
) |
||||||||
|
||||||||||||||||
Income tax expense |
- | - | - | - | ||||||||||||
|
||||||||||||||||
Net loss before non-controlling interest in subsidiary |
(4,815,421 | ) | (876,351 | ) | (8,853,043 | ) | (1,698,882 |
) |
||||||||
|
||||||||||||||||
Non-controlling interest in subsidiary |
(67,357 | ) | - | (53,110 | ) | - | ||||||||||
|
||||||||||||||||
Net loss |
(4,748,064 | ) | (876,351 | ) | (8,799,933 | ) | (1,698,882 |
) |
||||||||
|
||||||||||||||||
Preferred stock dividends |
(264,606 | ) | (98,091 | ) | (677,599 | ) | (261,752 |
) |
||||||||
|
||||||||||||||||
Net loss attributable to common stockholders |
$ | (5,012,670 | ) | $ | (974,442 | ) | $ | (9,477,532 | ) | $ | (1,960,634 |
) |
||||
|
||||||||||||||||
Loss per common share- basic and diluted |
$ | (0.97 | ) | $ | (0.54 | ) | $ | (2.15 | ) | $ | (1.22 |
) |
||||
|
||||||||||||||||
Weighted average shares outstanding- basic and diluted |
5,187,211 | 1,794,843 | 4,403,585 | 1,608,324 |
The accompanying notes are an integral part of these consolidated financial statements.
OrangeHook, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2016 and 2015 (unaudited)
|
Nine months ended September 30 |
|||||||
|
2016 |
2015 |
||||||
Cash flows used for operating activities |
||||||||
Net loss |
$ | (8,799,933 | ) | $ | (1,698,882 | ) | ||
Adjustments to reconcile net loss to net cash from operating activities: |
||||||||
Interest accredited on forward purchase contract |
1,197,929 | - | ||||||
Stock and options issued for services |
436,264 | 87,314 | ||||||
Amortization of cash conversion feature and warrants on convertible debentures |
216,059 | 109,975 | ||||||
Amortization of original issue discount on short-term debt |
82,833 | - | ||||||
Amortization of original issue discount on director loans |
198,000 | - | ||||||
Amortization of debt issuance costs |
95,922 | 48,168 | ||||||
Net loss from investment in LifeMed ID, Inc. |
404,310 | - | ||||||
Gain on debt extinguishment |
(741,852 | ) | - | |||||
Non-controlling interest in subsidiary |
(53,110 | ) | - | |||||
Depreciation and amortization |
407,543 | 7,768 | ||||||
Interest earned on due from receivables |
(16,215 | ) | (37,959 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(715,992 | ) | - | |||||
Inventory |
7,923 | - | ||||||
Other current assets |
(92,995 | ) | 31,711 | |||||
Accounts payable |
737,990 | 207,145 | ||||||
Accrued expenses |
1,043,195 | 311,554 | ||||||
Deferred revenue |
1,309,100 | - | ||||||
Net cash flows used for operating activities |
(4,283,029 | ) | (933,206 | ) | ||||
Cash flows used for investing activities |
||||||||
Advances to Agilivant, LLC |
(85,000 | ) | (783,654 | ) | ||||
Advances to Nuvel Holdings, Inc. |
(480,000 | ) | (469,000 | ) | ||||
Advances to Salamander Technologies, Inc. |
- | (491,933 | ) | |||||
Advances to LifeMed ID, Inc. |
(1,358,000 | ) | - | |||||
Payments from Salamander Technologies, Inc. |
- | 230,000 | ||||||
Payments from Agilivant, LLC |
- | 839 | ||||||
Decrease (increase) in restricted cash |
(2,503 | ) | 126,989 | |||||
Purchase of Agilivant, LLC member units for stock, net of cash received of $9,223 |
9,223 | - | ||||||
Purchase of LifeMed ID, Inc. net of cash received of $179,207 |
179,207 | - | ||||||
Purchase of LifeMed ID, Inc. preferred and common stock |
(1,310,000 | ) | (1,925,000 | ) | ||||
Costs incurred in acquisition of LifeNexus assets |
(19,412 | ) | - | |||||
Purchases of fixed assets |
(38,359 | ) | (29,113 | ) | ||||
Net cash flows used for investing activities |
(3,104,844 | ) | (3,340,872 | ) |
The accompanying notes are an integral part of these consolidated financial statements
OrangeHook, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2016 and 2015 (unaudited)
|
Nine months ended September 30 |
|||||||
|
2016 |
2015 |
||||||
Cash flows provided by financing activities | ||||||||
Proceeds from director loans | 2,005,000 | 500,000 | ||||||
Payments on director loans | (420,000 | ) | (153,670 | ) | ||||
Proceeds from sale of preferred stock, net of expenses | 2,482,257 | 2,023,815 | ||||||
Proceeds from sale of convertible debentures | 600,000 | 2,800,000 | ||||||
Proceeds from short-term debt | 3,184,000 | - | ||||||
Proceeds from stock subscription receivable | 150,000 | - | ||||||
Debt issuance costs | (27,500 | ) | (167,160 | ) | ||||
Borrowings on line of credit | 350,000 | - | ||||||
Exercise of stock warrants | 550 | 700 | ||||||
Payments of convertible debentures | (448,494 | ) | - | |||||
Payments of notes payable | (19,025 | ) | - | |||||
Payments on short-term debt | (462,652 | ) | - | |||||
Payments of capital lease obligations | (2,393 | ) | - | |||||
Payments of preferred stock dividends | - | (56,773 | ) | |||||
Net cash flows provided by financing activities |
7,391,743 | 4,946,912 | ||||||
Net increase (decrease) in cash |
3,870 | 672,834 | ||||||
|
||||||||
Cash | ||||||||
Beginning of period | 281,906 | 181,631 | ||||||
End of period | $ | 285,776 | $ | 854,465 | ||||
|
||||||||
Supplemental disclosure of cashflow information: | ||||||||
Interest paid | $ | 172,243 | $ | - | ||||
Taxes paid | 491 | - | ||||||
|
||||||||
Supplemental disclosure of noncash financing activities: | ||||||||
Financing fees accrued for issuance of warrants | $ | - | $ | 1,246 | ||||
Preferred stock dividends paid in stock | - | 127,315 | ||||||
Common stock issued for acquisition of Agilivant, LLC | 897,310 | - | ||||||
Common stock issued for acquisition of LifeNexus assets | 567,856 | - | ||||||
Common stock issued for acquisition of LifeMed ID, Inc. | 4,624,550 | - | ||||||
Common stock issued to retire debt | 369,321 | - | ||||||
Common stock cancelled in exchange for receivable | 19,760 | - | ||||||
Original issue discount for warrants and beneficial conversion feature | 412,743 | 378,000 | ||||||
Accrued dividends on preferred stock | 677,599 | 98,091 | ||||||
Conversion of director loan into preferred stock | 118,000 | - | ||||||
Put option obligation to related party- fair value of common stock | 352,071 | - | ||||||
Accrued interest converted to convertible debentures | 226,054 | - |
The accompanying notes are an integral part of these consolidated financial statement.
-
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
1. Business Organization and Nature of Business
OrangeHook, Inc. (the “Company” or “we”), a Minnesota corporation, was formed on October 17, 2014 as a holding company to acquire selective and unique consumer, business and governmental software applications. The Company is identifying and evaluating potential acquisition target companies that have developed proprietary software applications and services which are unique to their particular industries.
The accompanying consolidated financial statements include those of the Company as well as those of its subsidiaries, Salamander Technologies, LLC, Agilivant, LLC and LifeMed ID, Inc. All intercompany transactions and balances have been eliminated in consolidation.
Subsequent to September 30, 2016, the Company expects to be acquired by Nuvel Holdings, Inc. (see Note 4).
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and disclosures required by GAAP for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the financial position of the Company as of September 30, 2016 and the results of operations for the three and nine months ended September 30, 2016 and 2015 and cash flows for the nine months ended September 30, 2016 and 2015. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the operating results for the year ending December 31, 2016.
These consolidated unaudited financial statements should be read in conjunction with the consolidated financial statements and related disclosures of the Company as of December 31, 2015 and for the year then ended.
2. Liquidity
The accompanying financial statements have been prepared assuming the Company will continue as a going concern that contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Because the Company has incurred operating losses to date and negative cash flows from operations, its ability to continue as a going concern is dependent on raising the additional capital necessary to fund its current operating losses until it begins to produce meaningful revenues and to eventually attain profitability. However, there can be no assurance that the sources of capital will be available or available on terms favorable to the Company. Management anticipates that the impact of one or more of the actions listed below will generate sufficient cash flows to pay current liabilities, long-term debt and fund the Company's operations through September 30, 2017:
|
1. | Raise additional debt or equity capital on terms favorable to the Company, |
|
2. | Generate revenues in amounts sufficient to attain profitability, |
|
3. | Control general and administrative expenses based on available cash flow from operations and the amount of capital available. |
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
3. Summary of Significant Accounting Policies
Cash
The Company maintains cash deposits with major banks, which from time to time, may exceed federally insured limits. The Company periodically assesses the financial institutions and believes the risk of any loss is minimal.
Restricted Cash
The Company maintains an escrow account which is under the joint control of both the Company and an independent third party. To release any of the funds in the account, the escrow agent requires the written approval of both parties.
Accounts Receivable
The carrying value of the Company’s accounts receivable represents their estimated net realizable value. No collateral or other security is required to support accounts receivable, which are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts (90 to 120 days outstanding) are written off through a charge to the valuation allowance and a credit to accounts receivable. The Company does not charge interest on past due accounts receivable balances. In management’s opinion, no allowance for doubtful accounts was considered necessary as of September 30, 2016 and December 31, 2015.
As of September 30, 2016 and December 31, 2015, one customer accounted for approximately 81% and two customers accounted for 49%, respectively, of total accounts receivable. During the three and nine months ended September 30, 2016, two customers accounted for 37% and one customer accounted for 24%, respectively, of revenues. There were no reported revenues for the three and nine months ended September 30, 2015.
Inventory
Inventory, which consists primarily of supplies purchased in bulk to support the Company’s manual tracking system, is recorded at the lower of cost or market. Cost is determined using the first-in, first-out method. Charges are made to current operations to reduce inventory costs to net realizable value when total costs are estimated to exceed the selling price. There were no such charges made during the three and nine months ended September 30, 2016 and 2015.
Furniture, Equipment and Leasehold Improvements
Furniture, fixtures and equipment, computer software and leasehold improvements are stated at cost. Depreciation is computed by using the straight-line method over the estimated remaining useful lives of the assets ranging from three to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset, which generally ranges from three to five years. The estimated useful lives used for computing depreciation are as follows:
Furniture and equipment |
5 years |
|
|
Computer software |
3 years |
|
|
Leasehold improvements |
3 years |
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
Expenditures for maintenance and repairs and minor renewals and betterments which do not improve or extend the life of the respective assets are expensed as incurred. All other expenditures for renewals and betterments are capitalized. The assets and related depreciation and amortization accounts are adjusted for equipment and leasehold improvement retirements and disposals with the resulting gain or loss included in operations.
Revenue Recognition
Revenue from tracking systems sales is recognized in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 605, Revenue Arrangements with Multiple Deliverables . When elements such as the product (e.g., hardware, software and other components) installation and training are contained in a single arrangement, or in related arrangements with the same customer, revenue is allocated to each element based upon its relative fair value. Management believes the individual elements within its contracts meet the ASC Topic 605 criteria for treatment as separate units of accounting. The price charged when the element is sold separately generally determines fair value. Revenue from product sales is recognized when the related goods are shipped whereas revenue from installation and training activities is recognized when the services are performed. Discounts in multiple elements sold as a single arrangement are allocated proportionately to the individual elements based on the fair value charged when the element is sold separately.
Revenue from service contracts and subscription agreements is recorded on a straight-line basis over the terms of the related agreements.
Revenue from software licensing arrangements is recognized when all of the following conditions exist: (1) the licensing agreement has been executed, (2) the license period has begun and the licensee can begin its use of the software, (3) the fee is fixed or determinable, (4) collection of the license fee is reasonably assured, and (5) there are no significant on-going obligations of the Company relating to the licensing arrangement.
Advance payments received from customers, as well as unpaid amounts that customers are contractually obligated to pay, are deferred until all revenue recognition criteria are satisfied.
Income Taxes
The Company accounts for deferred tax assets and liabilities under the liability method. Deferred tax liabilities are recognized for temporary differences that will result in taxable amounts in future years. Deferred tax assets are recognized for deductible temporary differences and tax operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. The Company regularly assesses the likelihood that the deferred tax assets will be recovered from future taxable income. Realization of net operating loss carry-forward and other deferred tax temporary differences are contingent upon future taxable earnings. The Company’s deferred tax assets were reviewed for expected utilization by assessing the available positive and negative factors surrounding its recoverability. We account for uncertainty in income taxes recognized in financial statements in accordance with ASC 740 (formerly FIN 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109,”). ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Only tax positions that meet the more-likely-than-not recognition threshold may be recognized.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
Stock Issued for Services
The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. In connection with these awards, the fair value of the award is measured on the grant date. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period.
In August 2016, the Company adopted the 2016 Equity Incentive Plan which authorized one million shares of common stock to be used for the granting of incentive awards to employees, directors or consultants. For the three and nine months ended September 30, 2016, the Company granted ten-year non-qualified stock options covering 488,475 shares of common stock to various employees at exercise prices ranging from $3.18-$14.00 per share. Accordingly, for the three and nine months ended September 30, 2016, the Company recorded non-cash compensation expense of $187,825 using the Black Scholes pricing model with the following weighted-average assumptions: risk-free interest rate- 1.6%, expected life- 10 years, expected volatility- 36.1% and expected dividend rate- 0%.
Fair Value of Financial Instruments
Financial instruments include accounts receivable, accrued liabilities, accounts payable and long–term debt. Management believes that fair value of its financial instruments approximate their carrying value. The fair value of current financial instruments is estimated to approximate carrying value due to the short–term nature of these instruments and other market factors. The fair value of long–term debt is estimated to approximate carrying value given the debt’s variable interest rates and other market factors.
Use of Estimates
The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Investment in LifeMed ID, Inc.
Through March 31, 2016, the Company’s investment in LifeMed ID, Inc. was carried on the cost basis. Based on the Company’s acquisition of additional shares of LifeMed ID, Inc. common stock on March 31, 2016, the Company’s ownership percentage totaled 24%. As a result, the Company began to account for this investment using the equity method of accounting as of April 1, 2016. On July 20, 2016, the Company completed its acquisition of LifeMed ID, Inc. Accordingly, for the three and nine months ended September 30, 2016, the Company recorded a loss of $46,280 and $404,310, respectively, which represented its proportionate share of the net loss incurred by LifeMed ID, Inc. for that period. Effective July 20, 2016, the Company began to consolidate the results of LifeMed ID, Inc. (See Note 16). As of December 31, 2015, the Company’s investment in LifeMed ID, Inc. was carried at the lower of cost or market. There was not a quoted market price for this investment. The valuation was based on all available financial information related to the investee. The investment was reviewed on a periodic basis to determine whether the cost of the investment is in excess of the fair value and if an impairment loss should be recorded. The Company noted there was not an indicator of impairment as of December 31, 2015.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
Software Development Costs
For the three and nine months ended September 30, 2016 and 2015, the Company had not capitalized any of the costs incurred related to the development of its software products being marketed as the period of time between achieving technological feasibility and the general availability of the Company’s software products has been very short and any costs incurred subsequent to achieving technological feasibility have not been significant. These costs are expensed and included in product development expenses in the accompanying consolidated statements of operations.
Long-lived Assets
The Company reviews its long-lived assets for events or changes in circumstances that may indicate that the carrying amount of a long-lived asset may not be recoverable or exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company's long-lived assets include property, equipment, leasehold improvements and definite-lived intangibles. There was no impairment recorded to long-lived assets as of September 30, 2016 and December 31, 2015.
Goodwill and Intangible Assets
In accordance with ASC Topic No. 350, Intangibles-Goodwill and Other , goodwill and intangible assets without a defined life shall not be amortized over a defined period, but instead must be tested for impairment at least annually. Additionally, goodwill is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The goodwill impairment test is a two-step impairment test. In the first step, the Company compares the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of that reporting unit, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step in order to determine the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill. The activities in the second step include valuing the tangible and intangible assets and liabilities of the impaired reporting unit and determining the implied fair value of the impaired reporting unit’s goodwill based upon the residual of the fair value of the net assets.
Goodwill was $14,841,409 and $1,566,531 as of September 30, 2016 and December 31, 2015, respectively, and the Company concluded there was no goodwill impairment as of either of those dates. The increase in goodwill of $13,274,878 relates to goodwill associated with the acquisition of Agilivant, LLC. of $3,158,829 (see Note 14) and goodwill associated with the acquisition of LifeMed ID, Inc. of $10,116,049 (See Note 16).
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
Intangible assets consist of:
· | The fair value of the Salamander trade name acquired in the acquisition of Salamander Technologies, Inc. in 2015, which was valued at $891,000 on the acquisition date and is being amortized over a period of ten years, its estimated useful life. | |
|
|
|
· | The fair value of the intangible assets (software technology, customer relationships and trademarks) acquired in the acquisition of Agilivant, LLC. in February 2016 (see Note 14), which were valued at $1,271,692 on the acquisition date and are being amortized over a period of 5-10 years, their estimated useful lives. | |
|
|
|
· | The fair value of the intangible assets (software technology, patents, copyrights and trademarks) acquired in the acquisition of the assets of LifeNexus, Inc. in June 2016 (see Note 15), which were valued at $587,268 on the acquisition date and are being amortized over a period of 5-10 years, their estimated useful lives. | |
|
|
|
· | The fair value of the intangible assets (software technology, customer relationships and trademarks) acquired in the acquisition of LifeMed ID, Inc. in July 2016 (see Note 16), which were valued at $4,022,000 on the acquisition date and are being amortized over a period of 5-10 years, their estimated useful lives. The allocation is preliminary and is expected to be finalized in the fourth quarter of 2016. |
Amortization of intangible assets was $227,289 and $362,506 for the three and nine months ended September 30, 2016, respectively, which is included in general and administrative expenses in the accompanying consolidated statements of operations. There was no amortization expense for the three and nine months ended September 30, 2015. Accumulated amortization as of September 30, 2016 and December 31, 2015 was $384,781 and $22,275, respectively, which is included in the accompanying consolidated balance sheets as intangible assets, net of amortization. Following is a summary of the annual amortization amounts expected in future periods:
Year Ending December 31 |
Amount |
|||
2016 | $ | 334,343 | ||
2017 | 1,184,172 | |||
2018 | 1,184,172 | |||
2019 | 1,184,172 | |||
2020 | 1,184,172 | |||
2021 | 621,226 | |||
2022 | 170,244 | |||
2023 | 170,244 | |||
2024 | 170,244 | |||
2025 | 147,969 | |||
2026 | 36,221 |
Debt Issuance Costs
The Company amortizes the debt issuance costs under the effective method over the life of the related debt instrument and reflects the unamortized costs as a reduction of the related debt in the accompanying consolidated balance sheets.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
Loss per Common Share
Basic loss per common share is computed by using loss attributable to common stockholders and the weighted average number of common shares outstanding. Diluted loss per common share reflects the weighted average number of common shares outstanding plus all potentially dilutive common shares outstanding during the period. Potentially dilutive shares consist of shares issuable upon the exercise of stock options, stock warrants and unvested restricted stock (using treasury stock method) and conversion of preferred shares (using the as converted method). For the three and nine months ended September 30, 2016, a total of 5,209,797 of common equivalent shares have been excluded from diluted loss per common share as they were anti-dilutive. For the three and nine months ended September 30, 2015, a total of 1,913,160 of common equivalent shares have been excluded from diluted loss per common share as they were anti-dilutive.
Recent Accounting Pronouncements
During May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers.” ASU No. 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. During August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09. ASU No. 2014-09 is effective for fiscal years beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The Company may elect to apply the guidance earlier, but no earlier than fiscal years beginning after December 15, 2016. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company is currently assessing the effect that ASU Nos. 2014-09 and 2015-14 will have on its results of operations, financial position and cash flows.
During April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” ASU No. 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in balance sheet as a direct deduction from the carrying amount of that debt liability instead of an asset. The recognition and measurement guidance for debt issuance costs are not affected by this update. ASU No. 2015-03 is effective for annual periods beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company adopted the guidance for the year ended December 31, 2015 and debt issuance costs are presented as a reduction of long-term debt. The adoption did not have a material impact on the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-2, Leases, under which lessees will recognize most leases on-balance sheet. This will generally increase reported assets and liabilities. For public entities, this ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2018, and for private entities for annual reporting periods beginning after December 31, 2019. The Company will begin the process of determining the impact this ASU will have on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which relates to the accounting for employee share-based payments. This standard addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal years beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The Company is evaluating the impact the adoption of this ASU will have on our financial statements.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
In March 2016, the FASB issued ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323) - Simplifying the Transition to the Equity Method of Accounting which eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by- step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendment is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. The Company will adopt the guidance in the first quarter of 2016 and applied the equity method for its investment in LifeMed ID, Inc. prospectively beginning with the three months ended June 30, 2016.
4. Potential Merger with Nuvel Holdings, Inc. (“Nuvel”)
Nuvel designs, develops and markets data acceleration solutions that are built for the purpose of accelerating and optimizing the flow of information across enterprise networks. Nuvel’s products are deployed by its customers throughout their network infrastructures to improve the performance of their networks and reduce network costs, while enhancing network speed and optimization.
On July 1, 2016, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Nuvel, a publicly-held Florida corporation, and its wholly owned subsidiary, OH Acquisition Corp, a Minnesota corporation ("Merger Sub"). Pursuant to the Merger Agreement, Merger Sub will merge with and into the Company, with the Company remaining as the surviving company and a wholly-owned subsidiary of the Nuvel, and the Merger Sub will cease to exist.
Also under the terms of the Merger Agreement, (i) outstanding shares of the Company’s common stock and other outstanding securities convertible into the Company’s common stock will be exchanged for a pro rata portion of 500,000 shares (or a corresponding security convertible into shares) of a new series of preferred stock, par value $0.001 per share, of Nuvel (the “Series OH-1 Convertible Preferred Stock”) and (ii) each outstanding share of the Company’s preferred stock and other outstanding securities convertible into the Company’s preferred stock will be exchanged for one share (or a corresponding security convertible into one share) of a new series of preferred stock, par value $0.001 per share, of Nuvel (the “Series OH-2 Convertible Preferred Stock”).
Following closing of the Merger, Nuvel is expected to perform a One-for-One Million Two Hundred Thousand (1-for-1,200,000) reverse split (the “Reverse Stock Split”) of the common stock of Nuvel, (“Nuvel Common Stock”), and will amend their Articles of Incorporation (the “Amendment”) increasing the number of shares of authorized Nuvel Common Stock to 100,000,000 (the Reverse Stock Split and the Amendment, collectively, “Recapitalization”). Upon the Recapitalization, all outstanding shares of Series OH-1 Convertible Preferred Stock will convert into Nuvel Common Stock equal to (i) the number of shares of the Company’s common stock issued and outstanding at the Effective Time of the Merger, on a fully diluted basis, divided by (ii) 500,000. Nuvel also expects to perform a parent-subsidiary merger of the Company with and into Nuvel following the Closing of the Merger, after which Nuvel is expected to change its name to “OrangeHook, Inc.,” after which the Company will become a publicly-held Florida corporation.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
The transaction, which is expected to close in the fourth quarter of 2016, is subject to customary closing conditions including shareholder approval and cannot be guaranteed to close.
Since 2014, the Company has provided Nuvel with unsecured loans to fund their operating losses which included expenses incurred to complete all the required SEC filings such that it will be current in its reporting. The amounts advanced, which are included in Due from Nuvel Holdings, Inc. in the accompanying consolidated balance sheets, totaled $1,336,249 and $856,249 as of September 30, 2016 and December 31, 2015, respectively. The notes are due on demand and carry an annual interest rate of 2%. Interest earned under these notes totaled $25,784 and $9,569 as of September 30, 2016 and December 31, 2015, respectively, which is included in the accompanying consolidated balance sheets. Subsequent to September 30, 2016, through November 28, 2016, the Company has provided an additional $195,000 of unsecured loans to Nuvel to further assist them with their working capital needs. The advances are due on demand but are classified as a long-term asset in the accompanying consolidated balance sheets since the intent is to apply these advances as part of the pending business combination.
Based on the relationship between the Company and Nuvel, the Company has evaluated the requirements of ASC 810-10 Consolidation and has determined that Nuvel qualifies as a variable interest entity (“VIE”). Once a reporting entity determines that it has an interest in a VIE, it must determine if it qualifies as the primary beneficiary. If it determines that it meets the definition of a primary beneficiary, it must consolidate the results of the VIE with its own and report them as if it owned that entity as of the reporting period. A primary beneficiary is defined as an entity that meets both of the following criteria: a) Power Criterion- power to direct activities of the VIE that most significantly impact the economic performance, b) Loss/Benefits Criterion- obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE. Because the Company does not meet the definition of the primary beneficiary due to lack of power to direct activities of Nuvel and lack of obligation to absorb Nuvel losses, the financial results of Nuvel have not been consolidated with those of the Company for the periods presented.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
5. Notes payable to Directors
Since inception, the Company has received interest-bearing advances from various directors and their affiliates. Following is a summary of the terms of those advances along with the balances outstanding as of September 30, 2016 and December 31, 2015, respectively:
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As of |
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September 30, 2016 |
December 31, 2015 |
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Promissory note, unsecured, 5% interest, due December 2017 | $ | 1,208,330 | $ | 1,208,330 | ||||
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Promissory notes, unsecured, 10% interest, convertible into 128,571 shares of common stock ($7.00 per share), due in varying amounts from July-August 2016 | 900,000 | - | ||||||
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Promissory notes, unsecured, interest rates vary from 0-10%, due in varying amounts from February 2016 through January 2017 | 1,635,000 | 1,068,000 | ||||||
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3,743,330 | 2,276,330 | ||||||
Less: short-term portion | (1,575,000 | ) | (218,000 | ) | ||||
Notes payable to directors, long-term | $ | 2,168,330 | $ | 2,058,330 |
The promissory notes that are convertible into common stock also include attached seven-year warrants to purchase up to 450,000 shares of the Company’s common stock at an exercise price of $7.00 per share. In accordance with Accounting Standards Codification 470 “Debt with Conversion and Other Options” (“ASC 470”), the Company has separately accounted for the value of the embedded equity features within this debenture by allocating a total of $198,000 as original issue discount and additional paid-in capital reflecting the estimated value of the underlying cash conversion feature and the attached warrants, using the Black Scholes pricing model with the following weighted-average assumptions: risk-free interest rate- 1.7%, expected life- 7 years, expected volatility- 36.1% and expected dividend rate- 0%. For the three and nine months ended September 30, 2016, a total of $35,224 and $198,000, respectively, of original issue discount has been amortized and is included in interest expense, net of interest income, in the accompanying consolidated statements of operations.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
The amounts outstanding under all notes payable to directors of $3,743,330 and $2,276,330 are included in the accompanying consolidated balance sheets as of September 30, 2016 and December 31, 2015, respectively. Accrued interest payable of $223,431 and $84,000 as of September 30, 2016 and December 31, 2015, respectively, is included in accrued expenses in the accompanying consolidated balance sheets. The Company made interest payments on notes payable to directors of $44,715 and $0 for the nine months ended September 30, 2016 and 2015, respectively. Interest expense on notes payable to directors, which is included in interest expense, net of interest income, in the accompanying consolidated statements of operations was $68,368 and $184,146 for the three and nine months ended September 30, 2016, respectively, and was $23,158 and $60,417 for the three and nine months ended September 30, 2015, respectively.
Subsequent to September 30, 2016, the following transactions occurred:
· | On October 26, 2016, convertible promissory notes in the amount of $900,000 plus a non-interest bearing advance of $60,000, plus accrued interest of $62,000, were converted into 1,022 units of Series A-1 Convertible Preferred Stock. | |
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· | On October 27, 2016, the Company made a principal payment of $190,000 plus accrued interest of $150,000 to a director under certain promissory notes. | |
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· | On November 11, 2016, the Company issued a one-year promissory note in the amount of $250,000 to a director which carries an interest rate of 5.5%. | |
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· | Through November 28, 2016, the Company has made principal payments totaling $30,000 on these notes. |
6. Convertible Debentures
In 2015, the Company sold $3,050,000 million of convertible debentures which were scheduled to mature twelve months from the issuance date and included interest payable at maturity at a rate of 10% per year. The debentures are convertible, at the option of the holder, into shares of common stock at a rate of $7.00 per share. In addition, the debentures include an attached three-year warrant equal to 10% of the principal amount of the note, such warrant being exercisable at a rate of $0.01 per share. The debentures were due in varying amounts from April to October of 2016.
In connection with this offering, the Company has issued three-year warrants to purchase up to 305,000 shares of common stock at a price of $0.01 per share. Through September 30, 2016, warrants to purchase a total of 200,000 shares have been exercised which generated proceeds of $2,000.
In accordance with Accounting Standards Codification 470 “Debt with Conversion and Other Options” (“ASC 470”), the Company has separately accounted for the value of the embedded equity features within this debenture by allocating a total of $411,750 as original issue discount and additional paid-in capital reflecting the estimated value of the underlying cash conversion feature and the attached warrants, using the Black Scholes pricing model with the following weighted-average assumptions: risk-free interest rate- 2.3%, expected life- 3 years, expected volatility- 100% and expected dividend rate- 0%. In addition, the Company incurred $182,964 of additional costs related to this offering, which are being reported as debt issuance costs. The amount of original issue discount and debt issuance costs are being amortized to interest expense over the term of the debentures.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
During the nine months ended September 30, 2016, the Company completed the following transactions related to these debentures:
· | Entered into extended and amended agreements with lenders holding debentures with principal amounts totaling $2,650,000 which extended the maturity dates of the debentures to October 15, 2017. In addition, interest accrued on the original debentures totaling $226,054 was added to the principal balance of the amended debentures. The amended agreements include interest at an annual rate of 10%. | |
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· | Entered into a new agreement for $550,000 on the same terms and conditions as the amended agreements. Proceeds of the new debentures were primarily used to retire two debentures with principal and accrued interest totaling $440,945. | |
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· | As part of these amended agreements, the Company has issued five-year warrants to the lenders for a total of 464,301 shares of common stock at a weighted average exercise price of $8.29 per share. |
The Company has analyzed the provisions of ASC 470 to determine if these extensions meet the criteria of a substantial modification which would require treatment as a debt extinguishment. Based on this analysis, it has been determined that a substantial modification did not occur. Accordingly, in accordance with ASC 470, the Company has separately accounted for the value of the embedded equity features within this debenture by allocating a total of $127,742 as original issue discount and additional paid-in capital reflecting the estimated value of the underlying cash conversion feature and the attached warrants, using the Black Scholes pricing model with the following weighted-average assumptions: risk-free interest rate- 1.7%, expected life- 5 years, expected volatility- 36.1% and expected dividend rate- 0%. In addition, the amended agreements contained a provision whereby the Company would issue an additional two-year warrant, at an exercise price of $7.00 per share, if the debenture is paid off in cash at any time prior to the maturity date. If this would occur, the Company would include the value of the warrants issued in its extinguishment accounting for the debentures.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
Following are the components of convertible debentures, net of original issue discount and debt issuance costs as shown in the accompanying consolidated balance sheets as of September 30, 2016 and December 31, 2015, respectively:
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As of |
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September 30, 2016 |
December 31, 2015 |
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Face amount of debentures | $ | 3,427,560 | $ | 3,050,000 | ||||
Less unamortized amount of: | ||||||||
Original Issue Discount |
(110,518 | ) | (198,832 | ) | ||||
Debt Issuance Costs |
(20,625 | ) | (89,049 | ) | ||||
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3,296,417 | 2,762,119 | ||||||
Less: short-term portion | - | (383,557 | ) | |||||
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Convertible debentures, net of original issue discount and debt issuance costs, long-term | $ | 3,296,417 | $ | 2,378,562 |
As additional security under this offering, certain of the Company’s directors have provided a joint and several personal guaranty to certain lenders. The total amount covered by these guaranties as of September 30, 2016 and December 31, 2015 is $2,379,259 and $1,875,000, respectively.
The face amount of debentures sold includes $1,192,685 and $1,075,000 sold to board members, officers and their affiliates as of September 30, 2016 and December 31, 2015, respectively.
Amounts related to these debentures charged to interest expense, which are included in interest expense, net of interest income in the accompanying consolidated statements of operations, for the three and nine months ended September 30, 2016 were $134,765 and $550,804, respectively, which includes the amortization of original issue discount and debt issuance costs of $49,517 and $311,983, respectively. The amounts related to these debentures charged to interest expense for the three and nine months ended September 30, 2015 were $197,222 and $245,607, respectively, which includes the amortization of original issue discount and debt issuance costs of $141,605 and $177,189, respectively. During the nine months ended September 30, 2016 and 2015, the Company made interest payments totaling $80,985 and $0, respectively.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
7. Short-term debt
Following are the components of convertible debentures, net of original issue discount and debt issuance costs as shown in the accompanying consolidated balance sheets as of September 30, 2016 and December 31, 2015, respectively:
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As of |
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September 30, 2016 |
December 31, 2015 |
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Convertible revolving promissory note (a) | $ | 1,000,000 | $ | - | ||||
Promissory note (b) | 500,000 | - | ||||||
Promissory note (c) | 250,000 | - | ||||||
Promissory notes (d) | 130,000 | |||||||
Convertible promissory note (e) | 100,000 | - | ||||||
Other notes (f) | 562,614 | - | ||||||
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2,542,614 | - | ||||||
Less: unamortized portion of original issue discount | (4,167 | ) | - | |||||
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Short-term debt, net of original issue discount | $ | 2,538,447 | $ | - |
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(a) | On May 25, 2016, the Company entered into an unsecured, convertible revolving promissory note which provides for borrowings up to $1 million. Borrowings under this note carry an interest rate of 10% per annum. Any balance outstanding together with all accrued and unpaid interest was due on October 31, 2016. Subsequently, the lender agreed to extend the maturity date to January 15, 2017. At the option of the lender, the note is convertible into shares of convertible preferred stock at a price of $1,000 per share. If converted, the lender would also receive a seven-year warrant to purchase up to 71.5 shares of common stock for each share of convertible preferred stock. In addition, upon a change in control, as defined in the agreement, the lender has the option to receive either cash or shares of the Company’s common stock based on a value of $7.00 per share, subject to certain adjustments. In the event that this note is not paid in full on or before the maturity date, the Company will be required to issue to the lender a seven-year warrant to purchase up to 240,000 shares of common stock at a price of $1.00 per share. The balance outstanding under this note as of September 30, 2016 is $1,000,000. Subsequent to September 30, 2016, on October 31, 2016, the Company entered into an agreement with this lender whereby the Company issued 390,000 shares of common stock plus seven-year warrants for an additional 78,000 shares of common stock at an exercise price of $7.00 per share in exchange for the cancellation of this note plus accrued interest of $40,411 and a cash payment of $250,000, which the Company received on November 1, 2016. |
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(b) | On July 26, 2016, the Company issued a promissory note to a lender in the amount of $500,000. Proceeds received at closing totaled $471,299 representing the amount of the loan net of a loan discount of $25,000 plus additional closing expenses of $3,701. The maturity date of the promissory note is sixty days from the date of issuance (September 23, 2016). The promissory note can be extended at the Company’s option for two additional forty-five day periods. At maturity, the entire amount of the note plus interest of $30,000 is due and payable. If the maturity date is extended, the Company would be obligated to pay additional interest at the end of each extension period equal to $22,500. The promissory note is personally guaranteed by an officer and certain directors. As of November 28, 2016, the Company has exercised two extension periods, which means the face amount of $500,000 together with accumulated interest equal to $75,000 is due and payable on December 23, 2016. |
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
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(c) | On September 30, 2016, the Company received an unsecured loan from a lender in the amount of $250,000. Interest is fixed at a rate of $500 per day for a minimum of thirty-one days. The minimum amount of interest due on this loan is $15,500 and the loan was scheduled to be repaid within thirty-one days. On October 26, 2016, the Company paid the principal balance of this loan together with the amount due for accrued interest. |
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(d) | In August 2016, the Company issued certain unsecured short-term loans to various lenders in the amount of $130,000 in exchange for proceeds of $125,000. Interest is payable at maturity at a rate of 10% per annum. The notes were scheduled to mature on September 30, 2016. The original issue discount of $5,000 will be recognized as an expense over the term of the note. The Company is currently discussing an extension of the maturity date with these lenders. |
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(e) | On January 26, 2016, the Company received an unsecured, short-term loan from a lender in the amount of $100,000. The term of the loan was initially due on February 25, 2016 and included up to five additional thirty day extensions, all of which were exercised. Subsequently, the lender provided three additional thirty day extensions. If all extensions are exercised, the loan would be due on October 22, 2016. Under the terms of the financing, for each and every thirty-day period of this loan, the Company (1) paid an up-front origination fee equal to $2,000 (2) paid interest at maturity at a rate of 10% per year and (3) issued a seven-year warrant to purchase up to 10,000 shares of the Company’s common stock at an exercise price of $7.00 per share. The fair value of each warrant was calculated to be $5,000, using the Black Scholes pricing model with the following weighted-average assumptions: risk-free interest rate- 1.7%, expected life- 7 years, expected volatility- 36.1% and expected dividend rate- 0%. The loan is convertible into shares of the Company’s common stock at the lender’s option at a price of $7.00 per share. In addition, the lender has the right to purchase up to 100 units of the Series A-1 Convertible Preferred Stock being offered by the Company for a period of up to thirty days subsequent to this loan being repaid. Subsequent to September 30, 2016, on November 10, 2016, the lender converted the principal amount of this note into 30,769 shares of the Company’s common stock. |
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(f) | Other notes consist of various demand notes payable and other advances. The notes are unsecured and include interest payable at rates that vary from 0-150%. Included in this amount are short-term advances from officers and directors totaling $29,000. Subsequent to September 30, 2016, payments totaling $69,000 were made against these advances. |
Other short-term debt transactions:
On March 15, 2016, the Company received an unsecured, short-term loan from a lender in the amount of $300,000. The note was scheduled to mature on April 15, 2016. In addition, the lender received a seven-year warrant to purchase up to 15,000 shares of common stock at an exercise price of $0.01 per share. The fair value of this warrant was calculated to be $42,000, using the Black Scholes pricing model with the following weighted-average assumptions: risk-free interest rate- 1.7%, expected life- 7 years, expected volatility- 36.1% and expected dividend rate- 0%. The lender exercised this warrant on April 25, 2016. On August 30, 2016, the lender converted the principal amount of the note plus accrued interest of $16,000 into 45,143 shares of the Company’s common stock at a value of $7.00 per share plus seven-year warrants to purchase up to 286,667 shares at an exercise price of $7.00 per share. In accordance with Accounting Standards Codification 470-50-40 “Debt- Modifications and Extinguishments”, the Company recorded the reacquisition price at the fair value of the securities issued to extinguish the debt which it estimated to be $3.18 per share. Accordingly, the difference between the reacquisition price and the carrying amount of the debt and accrued interest was recorded as a gain on debt extinguishment of $172,446, which is included in other income (expense) in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2016.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
On August 31, 2016, the Company received an unsecured loan from a lender in the amount of $150,000. The loan matured September 30, 2016. Interest was fixed at a rate of $7,500 and was due upon maturity. In addition, if the Company did not pay the principal and interest on the maturity date, the lender would receive seven-year warrants to purchase up to 36,000 shares of the Company’s common stock at a price of $0.01 per share. On September 30, 2016, the Company repaid all amounts due under this loan.
Amounts related to short-term debt charged to interest expense, which are included in interest expense, net of interest income in the accompanying consolidated statements of operations, for the three and nine months ended September 30, 2016 were $157,068 and $294,900, respectively, which includes the amortization of original issue discount of $45,000 and $112,883, respectively. During the nine months ended September 30, 2016, the Company made interest payments totaling $39,336.
Subsequent to September 30, 2016, the following transactions occurred:
· | On October 3, 2016, the Company received a non-interest bearing advance of $50,000 from a lender. The Company is currently negotiating the maturity date with this lender. | |
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· | On October 14, 2016, the Company issued two promissory notes to lenders covering advances totaling $150,000. Interest on these advances accrue interest at a rate of 2% per week for any full or partial week. The promissory notes are due no later than thirty days from the date of the notes. On November 17, 2016, the Company repaid one note in the amount of $100,000 plus accrued interest of $12,000. |
8. Bank Line of Credit
On March 30, 2016, the Company entered into an unsecured revolving line of credit with a bank which provides for borrowings up to $350,000. The line of credit is for general working capital purposes and borrowings are subject to an interest charge of 4.5% per annum. Amounts borrowed under this line of credit have been personally guaranteed by four of the Company’s directors. This revolving line of credit originally was to expire on September 30, 2016 but has since been extended to September 30, 2017. The balance outstanding under this line of credit is $350,000 as of September 30, 2016. Interest expense, which is included in interest expense, net of interest income, in the accompanying consolidated statements of operations was $3,572 and $7,247 for the three and nine months ended September 30, 2016, respectively. During the nine months ended September 30, 2016, the Company made interest payments totaling $7,247.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
9. Accrued Expenses
Accrued expenses in the accompanying consolidated balance sheets consists of the following as of September 30, 2016 and December 31, 2015, respectively:
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September 30, 2016 |
December 31, 2015 |
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Accrued legal, accounting and other services | $ | 513,242 | $ | 235,949 | ||||
Accrued salaries, wages and benefits | 699,814 | 209,604 | ||||||
Accrued interest | 469,240 | 228,336 | ||||||
Accrued preferred stock dividends | 821,136 | 143,537 | ||||||
Accrued put obligation to related party | 1,550,000 | - | ||||||
Accrued royalty payments | 204,168 | 137,424 | ||||||
Accrued other | 675,393 | 52,322 | ||||||
|
$ | 4,932,993 | $ | 1,007,172 |
Beginning in 2014, the Company has sold two separate offerings of preferred stock, Series A Convertible Preferred Stock and Series A-1 Convertible Preferred Stock, at a price of $1,000 per unit. Each unit consists of one share of preferred stock plus a warrant to purchase up to 71.5 shares of common stock at a price of $7.00 per share. The preferred stock has a cumulative dividend equal to 12% per year which is payable in cash or, at the option of the holder, into shares of common stock at a rate of $7.00 per share. The preferred stock has a preference in liquidation equal to $1,000 per share. Additionally, the preferred stock is convertible, at the option of the holder, into shares of common stock at a rate of 1:143. The preferred stock also contains an automatic conversion feature whereby the Company may elect to force conversion under certain circumstances. The Company has the right to redeem the shares of preferred stock at a price of $1,000 per share plus any accrued but unpaid dividends.
As of September 30, 2016 and December 31, 2015, the Company has issued a total of 8,846 and 6,188 units of Series A and Series A-1 Convertible Preferred Stock in exchange for proceeds of $8,846,000 and $6,188,000, which is included in preferred stock in the accompanying consolidated balance sheets as of September 30, 2016 and December 31, 2015, respectively. Dividends totaling $1,110,815 and $433,216 have been accrued as of September 30, 2016 and December 31, 2015, respectively, which are included in accumulated deficit in the accompanying consolidated balance sheets. There have been no payments of dividends during the nine months ended September 30, 2016. Dividends paid during 2015 totaled $282,179, which includes dividends paid in shares of common stock, as elected by the holders, valued at $7.00 per share. The Company issued a total of 28,583 shares of common stock as payment of dividends in 2015. As of September 30, 2016 and December 31, 2015, there have been no redemptions of the preferred stock.
As part of this offering, warrants to purchase up to 632,489 and 442,442 shares of common stock at an exercise price of $7.00 per share have been issued and are outstanding as of September 30, 2016 and December 31, 2015, respectively. The warrants are vested immediately and have a term of seven years. There is no intrinsic value for warrants outstanding and vested as of September 30, 2016 and December 31, 2015.
Subsequent to September 30, 2016, the Company has sold an additional 25 units of Series A-1 Convertible Preferred Stock which generated proceeds of $25,000. In connection with these investments, the Company granted seven-year warrants covering a total of 1,787 shares of the Company’s common stock at an exercise price of $7.00 per share. In addition, on October 26, 2016, the Company’s Chairman of the Board converted $960,000 of loans plus accrued interest of $62,000 in exchange for 1,022 units of Series A-1 Convertible Preferred Stock which included seven-year warrants covering a total of 73,073 shares of the Company’s common stock at an exercise price of $7.00 per share.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
11. Royalty Obligation
As part of the acquisition of Salamander Technologies, the Company assumed an obligation to pay a total of $3,500,000 to former shareholders of Salamander based on gross revenue generated beginning in 2014. Royalties are to be paid based on the following calculation: gross revenue from fiscal years 2014 through 2017, five percent of gross revenue, fiscal years 2018 through 2019, three percent of gross revenue and two percent of gross revenue from fiscal year 2020 and thereafter. Royalty payments will be made quarterly on or before two months after the end of each calendar quarter, beginning on or before May 31, 2016. The royalty payments for the years ended December 31, 2014 and 2015 will be paid, without interest, in twenty equal quarterly installments, on or before two months after the end of each calendar quarter, beginning on May 31, 2016 and ending on February 28, 2021. Royalty expense, which is included in general and administrative expenses in the accompanying consolidated statements of operations, was $11,181 and $0 for the three months ended September 30, 2016 and 2015, respectively, and was $34,216 and $0 for the nine months ended September 30, 2016 and 2015, respectively. Accrued royalties as of September 30, 2016 and December 31, 2015 were $154,168 and $137,424, respectively, which are included in accrued expenses in the accompanying consolidated balance sheets.
12. Stock Subscription Receivable
In December 2015, the Company sold 400 units of Series A Convertible Preferred Stock in exchange for proceeds of $400,000. Under a separate agreement with the shareholder, 150 units representing $150,000 of the proceeds, are being held in escrow pending the completion of the transaction between the Company and Nuvel Holdings, Inc. (see Note 4). During the period of time that these shares are held in escrow, the holder receives all rights and privileges as a holder of this security. The amount held in escrow is included in stockholders’ equity in the accompanying consolidated balance sheets as of September 30, 2016 and December 31, 2015. On August 15, 2016, the funds held in escrow were released to the Company.
13. Income Taxes
The Company’s cumulative net operating loss available to offset future income for federal reporting purposes was $9,200,000 and for state reporting purposes was $2,870,000 as of September 30, 2016 and was $3,012,000 for federal and was $844,000 for state reporting purposes as of December 31, 2015. The Company's federal and state net operating loss carry forwards expire in various calendar years from 2025 through 2036 and the tax credit carry forwards expire in calendar years 2025 through 2035. There was no income tax expense recorded in 2016 or 2015.
The Company’s policies with respect to the recording of deferred tax assets and liabilities have not changed in 2016. All balances and valuation allowances as of December 31, 2015 were evaluated and no changes were deemed necessary as of September 30, 2016.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
14. Acquisition of Agilivant LLC (“AGL”)
AGL, a Washington limited liability company, offers a real-time debit based banking and payment system. On February 12, 2016, the Company and AGL signed a Membership Unit Purchase Agreement (“MUPA”) that provided for the exchange of the Company’s common stock for AGL membership units. As of the closing date, the Company received 82% of the membership units in exchange for a total of 433,551 shares of its common stock. The remaining 18% of AGL’s membership units are reflected as a minority interest until the time that the Company acquires the remaining membership units. If that occurs, the Company would issue an additional 95,170 shares of its common stock to acquire those membership units. Under the terms of the MUPA, the Company has held 57,400 shares of the common stock issuable to all sellers in escrow for certain defined indemnification events. These shares will be released to the sellers in September 2017. In addition, the Company has held an additional 50,000 shares of common stock issuable to two sellers pending a final accounting of the amount of liabilities assumed. In October, the shares held pending the final accounting of liabilities have been released to the sellers.
Under a separate agreement with Rene Babi, AGL’s founder and Executive Chairman, the Company has agreed to distribute his shares of Company common stock over a three-year period. Accordingly, as of the closing date, the Company has held a total of 151,378 shares of its common stock that are due to Mr. Babi. These shares will be released based on the following schedule: 50,460 shares on April 17, 2017, 50,459 shares on April 17, 2018 and 50,459 shares on April 17, 2019. During the period of time that these shares are held, Mr. Babi has no rights of ownership. Accordingly, the Company will record the fair value of these held shares as a liability as of the close date.
During the first quarter of 2016, the Company allocated the purchase price, which was calculated based on the number of shares of common stock issued at a value of $3.18 per share, based on the fair value of assets acquired and liabilities assumed. The evaluation of the Company’s common stock requires the Company to make assumptions about future cash flows of the Company that include, among others, growth in revenues, margins realized, level of operating expenses and cost of capital. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. The Company engaged an independent specialist to assist the Company in evaluating the fair value of the Company’s common stock and ultimately concluded on the fair value of the Company’s common stock.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
A summary of the assets acquired and liabilities assumed as of the closing date is as follows:
Current assets | $ | 55,600 | ||
Intangible assets: | ||||
Trademarks | 188,736 | |||
Software technology | 1,038,047 | |||
Customer relationships | 44,909 | |||
Goodwill | 3,158,829 | |||
Current liabilities | (586,763 | ) | ||
Assumed debt | (2,218,025 | ) | ||
|
1,681,333 | |||
Noncontrolling interest | (302,641 | ) | ||
Value of net assets acquired | $ | 1,378,692 |
Transaction costs of $206,517 were expensed as incurred. The value assigned to goodwill is not deductible for income tax purposes. The goodwill recognized as a result of the merger is attributable primarily to the strategic and synergistic opportunities across the marketing technology spectrum, expected corporate synergies and the assembled workforce.
See Note 20 for a presentation of the unaudited proforma combined financial information as if the acquisition of AGL had occurred on January 1, 2015.
On July 1, 2016, the Company entered into an agreement with Mr. Babi whereby he agreed to resign from his role as Chief Executive Officer of Agilivant. Under the terms of this agreement, Mr. Babi is entitled to certain payments including a contract fees of $12,500 per month for a period of six months, a one-time payment equal to $75,000 plus certain commissions that could be earned based on the achievement of pre-established revenue targets. As of June 30, 2016, the Company has recorded an expense equal to the contract fees and the one-time payment of $75,000, which is included in general and administrative expenses in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2016. To date, there have been no commissions earned by Mr. Babi. In addition, the Company agreed to redeem a total of 6,214 shares of its common stock held by Mr. Babi in exchange for the extinguishment of an amount due to AGL by Mr. Babi. The Company also agreed to purchase 1,000 shares per month of the Company’s common stock owned by Mr. Babi at a price of $14.00 per share for a period of 24 months beginning in January 2017.
Prior to the acquisition, the Company provided a total of $1,225,438 to AGL to fund their operating losses, which were included in notes receivable in the accompanying consolidated balance sheets as of December 31, 2015.The advances were due on demand but were classified as a long-term asset in the accompanying consolidated balance sheet since the intent is to apply these advances as part of the pending business combination. For the period from January 1 to February 12, 2016 (the date the Company acquired a controlling interest in AGL), the Company provided an additional $85,000 to further assist AGL with their working capital needs.
Based on the relationship which existed between the Company and AGL, the Company evaluated the requirements of ASC 810-10 Consolidation and has determined that AGL qualifies as a variable interest entity (“VIE”). Once a reporting entity determines that it has an interest in a VIE, it must determine if it qualifies as the primary beneficiary. If it determines that it meets the definition of a primary beneficiary, it must consolidate the results of the VIE with its own and report them as if it owned that entity as of the reporting period. A primary beneficiary is defined as an entity that meets both of the following criteria: a) Power Criterion- power to direct activities of the VIE that most significantly impact the economic performance, b) Loss/Benefits Criterion- obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE. Because the Company did not meet the definition of the primary beneficiary due to lack of power to direct activities of AGL and lack of obligation to absorb AGL losses, the financial results of AGL were not consolidated with those of the Company for the year ended December 31, 2015.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
Gain on Debt Extinguishment
Subsequent to the acquisition, on September 30, 2016, the Company issued 70,996 shares of common stock in exchange for the extinguishment of certain assumed debt and accrued interest with a value of $795,174. In accordance with Accounting Standards Codification 470-50-40 “Debt- Modifications and Extinguishments”, the Company recorded the reacquisition price at the fair value of the securities issued to extinguish the debt which it estimated to be $3.18 per share. Accordingly, the difference between the reacquisition price and the carrying amount of the debt and accrued interest was recorded as a gain on debt extinguishment of $569,406, which is included in other income (expense) in the accompanying consolidated statements of operations for the nine months ended September 30, 2016.
15. Acquisition of Assets
On June 2, 2016, the Company purchased certain intellectual property, furniture, fixtures, computers, equipment and other assets of LifeNexus, Inc. (“LifeNexus”). LifeNexus filed a bankruptcy petition under Chapter 7 of the United States Bankruptcy Code in February 2016. Under the bankruptcy petition, Spring Grove Finance, S.A. purchased the assets from the Chapter 7 bankruptcy estate of LifeNexus, and then sold the assets to the Company in exchange for 178,571 shares of common stock with an implied value of $3.18 per share and an aggregate value of $567,856. The evaluation of the Company’s common stock requires the Company to make assumptions about future cash flows of the Company that include, among others, growth in revenues, margins realized, level of operating expenses and cost of capital. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. The Company engaged an independent specialist to assist the Company in evaluating the fair value of the Company’s common stock and ultimately concluded on the fair value of the Company’s common stock. The purchase will be recorded as an asset purchase and transaction costs of $19,412 were capitalized.
Based on the results of an independent appraisal, the fair value of the assets acquired were determined to be as follows:
Tangible assets |
$ | - | ||
Intangible assets: |
||||
Software technology |
561,642 | |||
Trademarks and patents |
25,626 | |||
|
$ | 587,268 |
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
16. Acquisition of LifeMed ID, Inc. (“LMID”)
LMID, a California corporation, offers a suite of software solutions that overlays with existing systems and equipment which automates patient identity validation, record matching, insurance and payment requirements and access to information.
As of June 30, 2016, the Company owned a total of 1,750,000 shares of LMID Series B Convertible Preferred Stock at a price of $2.00 per share. Dividends, when declared by the issuer’s board of directors, were payable at a rate of $0.10 per share, or 5% per year. The dividends were not cumulative. The shares had a preference in liquidation equal to $2.00 per share. The stock was convertible into an equivalent number of shares of common stock and had voting rights on an as-converted basis. In addition, the Company owned a total of 1,640,000 shares of LMID common stock at a price of $2.00 per share, which included 80,000 shares acquired from David Batchelor, a member of its Board of Directors and the current CEO of LMID.
Through March 31, 2016, the Company’s investment in LifeMed ID, Inc. was carried on the cost basis. Based on the Company’s acquisition of additional shares of LifeMed ID, Inc. common stock on March 31, 2016, the Company’s ownership percentage totaled 24%. As a result, the Company began to account for this investment using the equity method of accounting as of April 1, 2016. The Company adopted the guidance of ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323) - Simplifying the Transition to the Equity Method of Accounting during the first quarter of 2016 and has applied the equity method for its investment in LifeMed ID, Inc. prospectively from April 1, 2016, until acquisition date of July 20, 2016. For this period, the Company recorded a loss representing its proportionate share of the net loss incurred by LMID of $46,280 and $404,310 for the three and nine months ended September 30, 2016. The amount invested of $4,425,000 was reported as Investment in LMID in the accompanying consolidated balance sheet as of December 31, 2015. Based on the number of shares of these securities that were held, on an as-converted basis, the Company had an effective ownership position of 24% and 17%, as of July 20, 2016, and December 31, 2015, respectively.
As of December 31, 2015, the Company had made non-interest bearing advances to LMID totaling $1,045,000, which are included in Due from LMID in the accompanying consolidated balance sheet. During 2016, through July 20, the Company made additional non-interest bearing advances totaling $1,358,000. The advances were due on demand but were classified as a long-term asset in the consolidated balance sheets since the advances were applied as part of the acquisition transaction that closed on July 20, 2016.
Amounts related to the investment held and advances made as of the acquisition date of July 20, 2016 have been included in purchase consideration in the preliminary estimate of the fair value of the assets acquired and liabilities as shown in the table below.
Based on the relationship which existed between the Company and LMID, the Company has evaluated the requirements of ASC 810-10 Consolidation and has determined that LMID qualifies as a variable interest entity (“VIE”). Once a reporting entity determines that it has an interest in a VIE, it must determine if it qualifies as the primary beneficiary. If it determines that it meets the definition of a primary beneficiary, it must consolidate the results of the VIE with its own and report them as if it owned that entity as of the reporting period. A primary beneficiary is defined as an entity that meets both of the following criteria: a) Power Criterion- power to direct activities of the VIE that most significantly impact the economic performance, b) Loss/Benefits Criterion- obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE. Because the Company does not meet the definition of the primary beneficiary due to lack of power to direct activities of LMID and lack of obligation to absorb LMID losses, the financial results of LMID were not consolidated with those of the Company for the periods prior to acquisition date of July 20, 2016.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
Prior to July 20, 2016, certain of the Company’s directors were also directors and shareholders in LMID. One such director is an officer of LMID, serving as its CEO.
On July 20, 2016, the Company completed a stock-for-stock exchange with LMID and acquired an additional 76% of the outstanding shares of LMID in exchange for 1,454,261 shares of the Company’s common stock with an implied value of $3.18 per share and an aggregate value of $4,624,550. The evaluation of the Company’s common stock requires the Company to make assumptions about future cash flows of the Company that include, among others, growth in revenues, margins realized, level of operating expenses and cost of capital. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. The Company engaged an independent specialist to assist the Company in evaluating the fair value of the Company’s common stock and ultimately concluded on the fair value of the Company’s common stock. The Company currently owns 100% of LMID; one shareholder did dissent to the merger and we anticipate settling this claim before December 31, 2016 for $195,678, a corresponding liability will be recorded in the consolidated financial statements. The transaction costs of $354,522 were expensed as incurred.
A preliminary estimate of the fair value of the assets acquired and liabilities assumed are as follows:
Purchase Consideration: |
||||
Company Common Stock |
4,624,550 | |||
Cash paid prior to merger |
6,375,690 | |||
Due to dissenter |
195,678 | |||
Assumed Obligation to OrangeHook |
1,358,000 | |||
Debt-Free Liabilities |
2,024,543 | |||
Assumed Debt |
12,550 | |||
Total Purchase Consideration |
14,591,011 | |||
|
||||
Preliminary allocation of Fair Value: |
||||
Current Assets |
287,274 | |||
Property and equipment |
57,382 | |||
Other Assets |
108,306 | |||
Trademarks and Trade Names |
597,000 | |||
Software/Technology |
3,283,000 | |||
Customer Relationships |
142,000 | |||
Goodwill |
10,116,049 | |||
Total Purchase Consideration |
14,591,011 |
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
The Company will finalize the purchase price based on the fair value of assets acquired and liabilities assumed by December 31, 2016. The value that will be assigned to goodwill will not be deductible for tax purposes. The goodwill recognized as a result of the merger is attributable primarily to the strategic and synergistic opportunities across the marketing technology spectrum, expected corporate synergies and the assembled workforce.
See Note 20 for a presentation of the unaudited proforma combined financial information as if the acquisition of LMID had occurred on January 1, 2015.
In connection with this transaction, the Company has entered into a six-year employment agreement with Mr. Batchelor. Under the terms of this agreement, Mr. Batchelor will receive a base salary of $321,000 per year. In addition, he will be eligible to receive quarterly incentive payments based on LMID gross revenue equal to 5% for 2016, 3% for 2017-2018 and 0.5% for 2019-2022. In connection with this agreement, in November 2015, the Company granted a seven-year non-qualified stock option to Mr. Batchelor to purchase up to 178,561 shares of common stock at an exercise price of $0.16 per share. The fair value of stock option was determined to be $559,000, which represents the estimated present value at grant date using the Black Scholes pricing model with the following weighted-average assumptions: risk-free interest rate- 2.1%, expected life- 7 years, expected volatility- 100% and expected dividend rate- 0%, which is included in general and administrative expenses in the accompanying consolidated statements of operations for the year ended December 31, 2015.
Subsequent to December 31, 2015, this option was rescinded and replaced with a seven-year non-qualified stock option to purchase up to 228,413 shares of common stock at an exercise price of $3.18 per share. In accordance with Accounting Standards Codification 718 “Compensation- Stock Compensation”, the Company has calculated the relative fair value of the revised stock option award using the Black Scholes pricing model with the following weighted-average assumptions: risk-free interest rate- 2.0%, expected life- 7 years, expected volatility- 36.1% and expected dividend rate- 0%. Based on that calculation, it was determined that the relative fair value of the replacement options was lower than the value of the options that were issued in 2015. As a result, no additional compensation expense will be recorded in relation to the replacement options.
In March 2016, the Company entered into a Registration Rights and Put Agreement with Mr. Batchelor which allows him to require the Company to repurchase up to 142,857 shares of his common stock. A subsequent amendment reduced this amount to 110,714 shares of his common stock. The Company is required to repurchase the shares at $14 per share up to a maximum of $1,550,000. The put option is exercisable as follows:
· | $550,000 during June 2016 and | |
· | $1.0 million during October 2016 |
The Company is temporarily relieved from fulfilling its obligation to repurchase under this agreement until certain settlement provisions are met. Additionally, Mr. Batchelor was granted piggyback registration rights under this agreement which allow him to include his shares in any registration agreement filed by the Company.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
On May 18, 2016, the Company received a Put Option Notice from Mr. Batchelor whereby he requested that the Company purchase a total of 39,285 shares of his common stock at a price of $14 per share, an aggregate purchase price of $549,990. At that date, Mr. Batchelor held no shares of the Company’s common stock to redeem. On October 30, 2016, the Company received a Put Option Notice from Mr. Batchelor whereby he requested that the Company purchase a total of 75,493 shares of his common stock at a price of $14 per share, an aggregate purchase price of $1,056,902. As a result of the acquisition of LifeMed ID as discussed above and at September 30, 2016, Mr. Batchelor owns a total of 676,865 shares of common stock. In accordance with ASC 480 “Distinguishing Liabilities from Equity”, the put option represents a forward purchase contract. Upon the completion of the acquisition of LifeMed ID on July 20, 2016, at which time Mr. Batchelor became a shareholder of the Company, a share repurchase liability was recorded in an amount equal to the fair value of the underlying shares of $352,071. In addition, interest expense of $1,197,929 was accredited and recorded, which is included in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2016, and the share repurchase liability was increased to $1,550,000, which represents the amount due to Mr. Batchelor under this agreement. The share purchase liability is included in accrued expenses in the accompanying consolidated balance sheets. As of November 28, 2016, the Company has yet to redeem the shares held by Mr. Batchelor due to limitations included in the Registration Right and Put Agreement.
17. Business Segments
A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. The Company has three operating segments: (1) SalTech, which includes the results of the business operation within Salamander Technologies, LLC, which provides an asset tagging and tracking software solution used to manage incidents or events, (2) AGL, which includes the results of the business operation of Agilivant, LLC, offers a real-time debit based banking and payment system, (3) LMID, which offers a suite of software solutions that overlays with existing systems and equipment which automates patient identity validation, record matching, insurance and payment requirements and access to information, and (4) OH, which includes corporate expenses (e.g. corporate administrative costs) and interest expense. Segment disclosures are provided to the extent practicable under the Company's accounting system. Transactions within and between the segments are generally made on a basis to reflect the market value of the services and have been eliminated in consolidation.
The SalTech segment was created as a result of the Company’s acquisition of Salamander Technologies, Inc. which occurred on October 1, 2015. The AGL segment was created as a result of the Company’s acquisition of Agilivant, LLC which occurred on February 12, 2016 (see Note 14). The LMID segment was created as a result of the Company’s acquisition of LifeMed ID, Inc. which occurred on July 20, 2016 (see Note 16).
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
Segment disclosures are as follows:
|
For the Three Months Ended September 30, 2016 |
|||||||||||||||||||
|
Sal-Tech |
AGL |
LMID |
OH |
Total |
|||||||||||||||
|
||||||||||||||||||||
Revenue | $ | 223,621 | $ | 24,755 | $ | 73,103 | $ | - | $ | 321,479 | ||||||||||
Loss from operations | (274,987 | ) | (366,720 | ) | (972,219 | ) | (1,711,297 | ) | (3,325,223 | ) | ||||||||||
Net income (loss) | (274,987 | ) | (306,843 | ) | (975,355 | ) | (3,190,879 | ) | (4,748,064 | ) | ||||||||||
Depreciation and amortization | 25,951 | 59,205 | 156,233 | 8,214 | 249,603 | |||||||||||||||
Capital expenditures | (402 | ) | - | (7,426 | ) | (5,132 | ) | (12,960 | ) | |||||||||||
Net loss on Investment in LifeMed ID, Inc. | - | - | - | (46,280 | ) | (46,280 | ) | |||||||||||||
Gain on extinguishment of debt | - | - | - | 172,446 | 172,446 | |||||||||||||||
Interest expense, net of interest income | - | (7,481 | ) | (3,136 | ) | (1,605,747 | ) | (1,616,364 | ) | |||||||||||
Income tax provision (benefit) | - | - | - | - | - | |||||||||||||||
|
||||||||||||||||||||
|
For the Three Months Ended September 30, 2015 |
|||||||||||||||||||
|
Sal-Tech |
AGL |
LMID |
OH |
Total |
|||||||||||||||
|
||||||||||||||||||||
Revenue | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Loss from operations | - | - | - | (704,509 | ) | (704,509 | ) | |||||||||||||
Net income (loss) | - | - | - | (876,351 | ) | (876,351 | ) | |||||||||||||
Depreciation and amortization | - | - | - | 3,172 | 3,172 | |||||||||||||||
Capital expenditures | - | - | - | (20,189 | ) | (20,189 | ) | |||||||||||||
Interest expense, net of interest income | - | - | - | (171,842 | ) | (171,842 | ) | |||||||||||||
Income tax provision (benefit) | - | - | - | - | - |
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
|
For the Three Months Ended September 30, 2015 |
|||||||||||||||||||
|
Sal-Tech |
AGL |
LMID |
OH |
Total |
|||||||||||||||
|
||||||||||||||||||||
Revenue | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Loss from operations | - | - | - | (704,509 | ) | (704,509 | ) | |||||||||||||
Net income (loss) | - | - | - | (876,351 | ) | (876,351 | ) | |||||||||||||
Depreciation and amortization | - | - | - | 3,172 | 3,172 | |||||||||||||||
Capital expenditures | - | - | - | (20,189 | ) | (20,189 | ) | |||||||||||||
Interest expense, net of interest income | - | - | - | (171,842 | ) | (171,842 | ) | |||||||||||||
Income tax provision (benefit) | - | - | - | - | - | |||||||||||||||
|
||||||||||||||||||||
|
For the Nine Months Ended September 30, 2016 |
|||||||||||||||||||
|
Sal-Tech |
AGL |
LMID |
OH |
Total |
|||||||||||||||
|
||||||||||||||||||||
Revenue | $ | 684,298 | $ | 26,786 | $ | 73,103 | $ | - | $ | 784,187 | ||||||||||
Loss from operations | (741,033 | ) | (814,254 | ) | (972,219 | ) | (4,211,820 | ) | (6,739,326 | ) | ||||||||||
Net income (loss) | (741,033 | ) | (241,943 | ) | (975,355 | ) | (6,841,602 | ) | (8,799,933 | ) | ||||||||||
Depreciation and amortization | 77,565 | 150,211 | 156,233 | 23,534 | 407,543 | |||||||||||||||
Capital expenditures | (1,398 | ) | (2,710 | ) | (7,426 | ) | (26,825 | ) | (38,359 | ) | ||||||||||
Net loss on Investment in LifeMed ID, Inc. | - | - | - | (404,310 | ) | (404,310 | ) | |||||||||||||
Gain on extinguishment of debt | - | 569,407 | - | 172,445 | 741,852 | |||||||||||||||
Interest expense, net of interest income | - | (50,206 | ) | (3,136 | ) | (2,397,917 | ) | (2,451,259 | ) | |||||||||||
Income tax provision (benefit) | - | - | - | - | - | |||||||||||||||
|
||||||||||||||||||||
|
For the Nine Months Ended September 30, 2015 |
|||||||||||||||||||
|
Sal-Tech |
AGL |
LMID |
OH |
Total |
|||||||||||||||
|
||||||||||||||||||||
Revenue | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Loss from operations | - | - | - | (1,472,604 | ) | (1,472,604 | ) | |||||||||||||
Net income (loss) | - | - | - | (1,698,882 | ) | (1,698,882 | ) | |||||||||||||
Depreciation and amortization | - | - | - | 7,768 | 7,768 | |||||||||||||||
Capital expenditures | - | - | - | (29,113 | ) | (29,113 | ) | |||||||||||||
Interest expense, net of interest income | - | - | - | (226,278 | ) | (226,278 | ) | |||||||||||||
Income tax provision (benefit) | - | - | - | - | - | |||||||||||||||
|
||||||||||||||||||||
|
As of September 30, 2016 |
|||||||||||||||||||
|
Sal-Tech |
AGL |
LMID |
OH |
Total |
|||||||||||||||
|
||||||||||||||||||||
Identifiable assets | $ | 2,601,467 | $ | 5,003,375 | $ | 14,385,847 | $ | 2,385,966 | $ | 24,376,655 | ||||||||||
|
||||||||||||||||||||
|
As of December 31, 2015 |
|||||||||||||||||||
|
Sal-Tech |
AGL |
LMID |
OH |
Total |
|||||||||||||||
|
||||||||||||||||||||
Identifiable assets | $ | 2,698,033 | $ | - | $ | - | $ | 7,981,770 | $ | 10,679,803 |
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
18. Global Licensing Fee
On September 26, 2016, the Company executed an agreement with a business partner that grants them exclusive global rights to bundle software products sold by LMID in exchange for a non-refundable licensing fee of $5 million. The fee is payable in three installments: $1.25 million upon contract signing, $1.25 million no later than December 31, 2016 and $2.5 million when the Company sells its first contract in China that equals or exceeds $5 million of revenue or April 30, 2017, whichever is later. The Company received the payment that was due upon contract signing on October 25, 2016.
19. Derivative Liability
During the three months ended September 30, 2016, there were not sufficient authorized and unissued shares for all commitments of common stock to be issued in connection with warrants, restricted stock, stock options, conversion of preferred shares and debt. As a result, 967,879 shares were issued in excess of the 10,000,000 authorized shares. Because there were not sufficient authorized and unissued shares, in accordance with ASC 815 “Derivatives and Hedging”, the shares have been reclassified as a liability in the accompanying consolidated balance sheets. As such, a reduction of preferred stock and additional paid in capital of $36,379 and $596,379, respectively, and a derivative liability of $632,758 were recorded as of September 30, 2016. Any future change in fair value of the contract [EITF 00-19, paragraph DISCUSSION, sequence n/a]][will be adjusted through earnings. When sufficient shares are authorized, the liability will be reclassified to equity.
OrangeHook, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of September 30, 2016 (unaudited) and December 31, 2015 (audited) and for
the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)
20. Proforma Combined Financial Information- Unaudited
The following presents the unaudited pro forma combined financial information as if the acquisitions of Salamander, Agilivant, and LMID occurred as of January 1, 2015. The unaudited pro forma combined financial information does not consider the reverse merger with Nuvel, as such reverse merger had not been consummated as of September 30, 2016 (see Note 4 for a description of the reverse merger with Nuvel).
For the Three Months Ended September 30,
|
||||||||
2016
|
2015
|
|||||||
Pro forma revenue
|
$
|
340,012
|
$
|
573,641
|
||||
Pro forma net loss
|
$
|
(4,979,262
|
)
|
$
|
(2,740,950
|
)
|
||
Pro forma net loss before non-controlling interest in subsidiary
|
$
|
(4,911,905
|
)
|
$
|
(2,695,264
|
)
|
||
Pro forma net loss attributable to common stockholders
|
$
|
(5,176,511
|
)
|
$
|
(2,793,355
|
)
|
||
Pro forma loss per common share – basic and diluted
|
$
|
(0.94
|
)
|
$
|
(0.76
|
)
|
||
Pro forma weighted average common shares outstanding – basic and diluted
|
5,519,162
|
3,676,123
|
||||||
For the Nine Months Ended September 30,
|
||||||||
2016
|
2015
|
|||||||
Pro forma revenue
|
$
|
1,093,338
|
$
|
1,486,670
|
||||
Pro forma net loss
|
$
|
(12,021,647
|
)
|
$
|
(7,316,588
|
)
|
||
Pro forma net loss before non-controlling interest in subsidiary
|
$
|
(11,955,536
|
)
|
$
|
(7,195,167
|
)
|
||
Pro forma net loss attributable to common stockholders
|
$
|
(12,633,135
|
)
|
$
|
(7,456,919
|
)
|
||
Pro forma loss per common share – basic and diluted
|
$
|
(2.31
|
)
|
$
|
(2.14
|
)
|
||
Pro forma weighted average common shares outstanding – basic and diluted
|
5,461,875
|
3,489,604
|
The unaudited pro forma combined financial information present above is not necessarily indicative of the results of operations that actually would have occurred had the acquisitions been completed as of January 1, 2015, nor are they necessarily indicative of future consolidated results.
Unaudited pro forma combined balance sheet information is not present herein, as the financial position of Salamander, Agilivant, and LMID are included in the Company’s condensed consolidated balance sheet as of September 30, 2016.
FINANCIAL STATEMENTS
For the fiscal years ended September 30, 2015 and 2014
Page(s) |
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|
|||
Independent Auditors’ Report |
A - 75 |
||
|
|||
Financial Statements |
|
||
|
|||
A - 76 |
|||
|
|||
A - 77 |
|||
|
|||
A - 78 |
|||
|
|||
A - 79 |
|||
|
|||
A - 80 - A - 98 |
NEED AUDITORS REPORT
LIFEMED ID, INC.
The accompanying notes are an integral part of the financial statements.
LIFEMED ID, INC.
|
For the year ended September 30, |
|||||||
|
2015 |
2014 |
||||||
REVENUE |
||||||||
Services revenue |
$ | 708,165 | $ | 486,954 | ||||
Product sales |
20,605 | 91,984 | ||||||
TOTAL REVENUE |
728,770 | 578,938 | ||||||
|
||||||||
COST OF REVENUE |
||||||||
Cost of service revenue |
490,641 | 188,462 | ||||||
Cost of product sales |
33,930 | 88,952 | ||||||
TOTAL COST OF REVENUE |
524,571 | 277,414 | ||||||
|
||||||||
GROSS PROFIT |
204,199 | 301,524 | ||||||
|
||||||||
OPERATING EXPENSES: |
||||||||
Research and development |
2,013,976 | 1,327,793 | ||||||
Sales and marketing |
932,260 | 737,572 | ||||||
General and administration |
2,002,937 | 788,413 | ||||||
TOTAL OPERATING EXPENSES |
4,949,173 | 2,853,778 | ||||||
|
||||||||
LOSS FROM OPERATIONS |
(4,744,974 | ) | (2,552,254 | ) | ||||
|
||||||||
OTHER INCOME (EXPENSE) |
||||||||
Changes in fair value of common stock warrant liability |
6,029 | 4,451 | ||||||
Interest, net |
(5,364 | ) | (17,138 | ) | ||||
|
||||||||
LOSS BEFORE INCOME TAXES |
(4,744,309 | ) | (2,564,941 | ) | ||||
|
||||||||
PROVISION FOR INCOME TAXES |
800 | 800 | ||||||
|
||||||||
NET LOSS |
$ | (4,745,109 | ) | $ | (2,565,741 | ) |
The accompanying notes are an integral part of the financial statements.
LIFEMED ID, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
|
Preferred Stock |
Additional |
Total |
|||||||||||||||||||||||||||||||||
|
Series B |
Series A |
Common Stock |
Paid-In |
Accumulated |
Shareholers' |
||||||||||||||||||||||||||||||
|
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Capital |
Deficit |
Deficit |
|||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||
Balance September 30, 2013 |
300,812 | $ | 595,112 | 7,579,484 | $ | 2,847,632 | 1,371,914 | $ | 295,175 | $ | 102,010 | $ | (4,899,807 | ) | $ | (1,059,878 | ) | |||||||||||||||||||
Issuance of shares of |
||||||||||||||||||||||||||||||||||||
Series B preferred stock: |
||||||||||||||||||||||||||||||||||||
For cash |
1,257,500 | 2,515,000 | - | - | - | - | - | - | 2,515,000 | |||||||||||||||||||||||||||
For license fee |
6,000 | 12,000 | - | - | - | - | - | - | 12,000 | |||||||||||||||||||||||||||
Returned shares |
- | - | (1,950 | ) | (1,560 | ) | (550 | ) | (440 | ) | - | - | (2,000 | ) | ||||||||||||||||||||||
Share-based compensation |
- | - | - | - | - | - | 140,527 | - | 140,527 | |||||||||||||||||||||||||||
Net loss for the year |
- | - | - | - | - | - | - | (2,565,741 | ) | (2,565,741 | ) | |||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||
Balance September 30, 2014 |
1,564,312 | 3,122,112 | 7,577,534 | 2,846,072 | 1,371,364 | 294,735 | 242,537 | (7,465,548 | ) | (960,092 | ) | |||||||||||||||||||||||||
Issuance of shares of common stock |
||||||||||||||||||||||||||||||||||||
for cash and stock options exercised |
- | - | - | - | 487,500 | 975,000 | - | - | 975,000 | |||||||||||||||||||||||||||
Issuance of shares of Series A |
||||||||||||||||||||||||||||||||||||
preferred stock for cash |
1,875,000 | 3,750,000 | - | - | - | - | - | - | 3,750,000 | |||||||||||||||||||||||||||
Share-based compensation |
- | - | - | - | - | - | 442,615 | - | 442,615 | |||||||||||||||||||||||||||
Net loss for the year |
- | - | - | - | - | - | - | (4,745,109 | ) | (4,745,109 | ) | |||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||
Balance September 30, 2015 |
3,439,312 | $ | 6,872,112 | 7,577,534 | $ | 2,846,072 | 1,858,864 | $ | 1,269,735 | $ | 685,152 | $ | (12,210,657 | ) | $ | (537,586 | ) |
The accompanying notes are an integral part of the financial statements.
LIFEMED ID, INC.
The accompanying notes are an integral part of the financial statements.
LIFEMED ID, INC.
As of and for the Years Ended September 30, 2015 and 2014
1. | SUMMARY OF BUSINESS |
LifeMed ID, Inc., (the Company), was incorporated under the laws of the State of California on November 16, 2010 for the purpose of deploying a sustainable, secure cloud-based patient identity and patient data exchange solution to the healthcare industry. The Company’s headquarters and operations are located in Citrus Heights, California.
2. | SIGNIFICANT ACCOUNTING POLICIES |
· | Basis of Presentation and Liquidity Analysis |
· | Use of Estimates |
· | Cash |
· | Fair Value of Financial Instruments |
LIFEMED ID, INC.
NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended September 30, 2015 and 2014
ASC 820 requires that the valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 establishes a three tier value hierarchy, which prioritizes inputs that may be used to measure fair value as follows:
· | Level 1 – Quoted prices in active markets for identical assets or liabilities. |
|
|
· | Level 2 – Observable inputs other than quoted prices in active markets for identical assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable market data for substantially the full term of the assets or liabilities. |
|
|
· | Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability. |
The following table presents the Company’s financial liabilities measured at fair value on a recurring basis as of September 30, 2015 and 2014:
|
September 30, 2015 |
|||||||||||||||
|
Total |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
Common stock warrant liability |
$ | 30,066 | $ | - | $ | - | $ | 30,066 |
|
September 30, 2014 |
|||||||||||||||
|
Total |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
Common stock warrant liability |
$ | 36,095 | $ | - | $ | - | $ | 36,095 |
The circumstances giving rise to the issuance of the warrant to purchase common stock is discussed in Note 11.
The change in the value of the warrant liability to purchase common stock was as follows for the year ended September 30:
|
2015 |
2014 |
||||||
Fair value at beginning of year |
$ | 36,095 | $ | 40,546 | ||||
Change in fair value |
(6,029 | ) | (4,451 | ) | ||||
Fair value at end of year |
$ | 30,066 | $ | 36,095 |
LIFEMED ID, INC.
NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended September 30, 2015 and 2014
The Company estimated the fair value of the warrant liability as of September 30, 2015 and 2014 using the Black-Scholes option-pricing model. The determination of the fair value is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables which could provide differing values. These variables include, but are not limited to, expected stock price volatility over the term of the warrant and risk free interest rates. In addition, the Black-Scholes option-pricing model requires the input of an expected life for the warrant which we have estimated based upon the stage of the Company’s development. The fair value of the warrant liability is revalued each balance sheet date utilizing the Black-Scholes valuation model computations with the decrease or increase in the fair value reported in the Company’s statements of operations as a component of other income (expense). A significant increase or decrease of any of the subjective variables independent of other changes would result in a correlated increase or decrease in the warrant liability and an inverse effect on reported interest expense.
· | Concentration of Credit Risk |
For the year ended September 30, 2015, three companies accounted for 35%, 27% and 19%, respectively, of the Company’s revenue. For the year ended September 30, 2014, five companies accounted for 23%, 19%, 14%, 14% and 11%, respectively, of the Company’s revenue.
As of September 30, 2015, two companies accounted for 47% and 31%, respectively, of the Company’s outstanding accounts receivable. As of September 30, 2014, three companies accounted for 45%, 29% and 17%, respectively, of the Company’s outstanding accounts receivable.
· | Accounts Receivable |
· | Inventory |
LIFEMED ID, INC.
NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended September 30, 2015 and 2014
· | Fixed Assets |
Fixed assets are recorded at cost and are depreciated using the straight-line method over their estimated useful lives. The Company has a policy of writing off to expense the cost of fixed assets with a purchase price of $500 or less in the period in which the purchase occurs. The Company generally uses the following estimated useful lives for each asset category:
Asset Category |
|
Estimated Useful Life |
Computer equipment |
|
3 years |
Website software |
|
5 years |
Furniture and office equipment |
|
5 years |
Leasehold improvements |
Shorter of lease term or useful life |
· | Share-Based Compensation |
· | Software Sold, Leased or Otherwise Marketed |
As of September 30, 2015 and 2014, the Company had not capitalized any of the costs incurred related to the development of its software products being marketed to the healthcare industry as the period of time between achieving technological feasibility and the general availability of the Company’s software products has been short and any costs incurred subsequent to achieving technological feasibility have not been significant. These costs are expensed and included in research and development in the accompanying statements of operations.
LIFEMED ID, INC.
NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended September 30, 2015 and 2014
· | Licenses |
The Company utilizes intellectual property that is protected in the United States by patents issued by the Unites States Patent and Trademark Office under exclusive licenses from the patent owners. License fees and royalties, which are generally a percentage of the software service or other revenue earned by the Company, with certain specified minimums, are charged to expense as incurred.
· | Impairment of Long-Lived Assets |
· | Revenue Recognition |
The Company derives its revenue from the licensing of its software, the sale of hardware and the provision of ongoing support and maintenance and upgrades of its software products and services.
The Company recognizes revenue for each component of its arrangements with customers as follows:
· | Software service fees are invoiced in advance of the service period start date which generally coincides with receipt of customer acceptance. Advance billings which are typically for periods ranging from one or twelve months, are deferred and recognized as revenue ratably over the respective service period. |
· | Implementation fees are charged to customers for the installation and customization of the system. Implementation fees incurred during the initial software services sale or within a short period of time thereafter are treated as related to the initial sale. Implementation fees are deferred until the software is live and there is customer acceptance. Once the conditions are met to recognize the implementation fee, revenue is recognized ratably over the longer of the life of the contract or the estimated useful life of the related software, which is typically one to three years. |
LIFEMED ID, INC.
NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended September 30, 2015 and 2014
· | Fees charged for customization of the software related to the initial implementation of the software are treated in the same manner as Implementation Fees – over the longer of the life of the contract or useful life of the software. Fees charged to customers for services not related to the initial implementation of the software are recognized once installation is completed and customer acceptance has occurred. |
· | Revenue is recognized on product sales when the product is shipped to the customer. Commission income received from third party resellers is recognized at the earlier of delivery of commissionable sales items to the Company’s customer, if known, or when payment is received from the reseller. |
· | Shipping and handling costs are charged to customers if necessary. Shipping and handling costs incurred by the Company have been included in cost of product sales. |
· | Deferred Revenue |
· | Research and Development Expenses |
· | Related Party Transaction |
LIFEMED ID, INC.
NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended September 30, 2015 and 2014
· | Income Taxes |
The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. To the extent deferred tax assets cannot be recognized under the preceding criteria, the Company establishes valuation allowances as necessary to reduce deferred tax assets to the amounts expected to be realized. As September 30, 2015 and 2014, all deferred tax assets were fully offset by a valuation allowance. Realization of deferred tax assets is dependent upon future federal and state taxable income. The Company’s judgments regarding deferred tax assets may change due to future market conditions, changes in U.S. or state tax laws, and other factors. These changes, if any, may require material adjustments to these deferred tax assets, resulting in a reduction in net income or an increase in net loss in the period when such determinations are made.
The Company recognizes liabilities for uncertain tax positions based upon a two-step process. To the extent a tax position does not meet a more-likely-than-not level of certainty, no benefit is recognized in the financial statements. If a position meets the more-likely-than-not level of certainty, it is recognized in the financial statements at the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company’s policy is to analyze the Company’s tax positions taken with respect to all applicable income tax issues for all open tax years (in each respective jurisdiction). As of September 30, 2015 and 2014, the Company has concluded that no uncertain tax positions were required to be recognized in its financial statements. It is the Company’s practice to recognize interest and penalties related to income tax matters in income tax expense. No amounts were recognized for interest and penalties during the years ended September 30, 2015 and 2014.
· | Accounting Pronouncements |
During July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330), Simplifying the Measurement of Inventory.” ASU No. 2015-11 applies to all inventory except that which is measured using last-in, first out (LIFO) or the retail inventory method. Inventory within the scope of the new guidance should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments will take effect for fiscal years beginning after December 15, 2016. The new guidance should be applied prospectively, and earlier application is permitted as of the beginning of an interim or annual reporting period.
LIFEMED ID, INC.
NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended September 30, 2015 and 2014
During February 2016, FASB issued ASU No. 2016-02, “Leases.” ASU No. 2016-02 was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020, with earlier application permitted. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The Company is currently assessing the effect that ASU No. 2016-02 will have on its results of operations, financial position and cash flows.
3. | RESTRICTED CASH |
4. | INVENTORY AND OTHER CURRENT ASSETS |
As of September 30, 2015 and 2014, inventory and other current assets comprised the following:
|
September 30, |
|||||||
|
2015 |
2014 |
||||||
Inventory |
$ | 106,323 | $ | 106,323 | ||||
Professional services |
23,314 | 12,315 | ||||||
Insurance |
16,504 | 7,394 | ||||||
Rent |
5,472 | 6,150 | ||||||
Employee advance |
20,000 | - | ||||||
Software license |
7,785 | - | ||||||
|
$ | 179,398 | $ | 132,182 |
5. | FIXED ASSETS |
As of September 30, 2015 and 2014, fixed assets comprised the following:
|
September 30, |
|||||||
At cost: |
2015 |
2014 |
||||||
Computer equipment |
$ | 57,011 | $ | 28,855 | ||||
Website software |
- | 26,336 | ||||||
Furniture and office equipment |
9,003 | 7,683 | ||||||
Leasehold improvements |
4,845 | 4,845 | ||||||
Capital lease assets |
25,270 | 23,176 | ||||||
|
96,129 | 90,895 | ||||||
Less accumulated depreciation and amortization |
(45,139 | ) | (21,667 | ) | ||||
|
$ | 50,990 | $ | 69,228 |
LIFEMED ID, INC.
NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended September 30, 2015 and 2014
6. | OTHER ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
As of September 30, 2015 and 2014, accrued expenses and other current liabilities comprised the following:
|
September 30, |
|||||||
|
2015 |
2014 |
||||||
Common Stock Warrant liability |
$ | 30,066 | $ | 36,095 | ||||
Accrued Compensation |
305,441 | 146,751 | ||||||
Other accrued expenses |
88,813 | 104,754 | ||||||
Due to customer |
63,792 | - | ||||||
|
$ | 488,112 | $ | 287,600 |
7. | DEFERRED REVENUE |
As of September 30, 2015 and 2014, deferred revenue comprised the following:
|
September 30, |
|||||||
|
2015 |
2014 |
||||||
Installation and configuration fees |
$ | 395,801 | $ | 740,243 | ||||
Service fees |
117,621 | 128,198 | ||||||
|
513,422 | 868,441 | ||||||
Less current portion |
(474,001 | ) | (241,761 | ) | ||||
Long-term portion |
$ | 39,421 | $ | 626,680 |
8. | CAPITAL LEASE OBLIGATION |
The Company leases certain equipment under a lease classified as a capital lease. The lease is secured by the equipment. The lease bears interest at the rate of 12.7% per annum and terminates in May 2017. The leased equipment is amortized on a straight line basis over three years. Total accumulated amortization related to the leased equipment was $11,229 and $0, as of September 30, 2015 and 2014, respectively. Future minimum lease payments under the capital lease and the present value of the minimum lease payments as of September 30, 2015 are as follows:
Year ending September 30 |
||||
2016 |
$ | 9,396 | ||
2017 |
6,264 | |||
Total minimum lease payments |
15,660 | |||
Less: Amount representing interest |
(597 | ) | ||
Present value of minimum lease payments |
15,063 | |||
Less: Current portion |
(8,169 | ) | ||
Long-term portion |
$ | 6,894 |
LIFEMED ID, INC.
NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended September 30, 2015 and 2014
9. | LONG TERM NOTE PAYABLE TO RELATED PARTY |
In 2012, the Company borrowed $25,500 from a related party pursuant to a promissory note bearing interest at the rate of 6% per annum with shares of the Company’s common stock pledged as collateral. The Company is required to make a minimum monthly payment of principal and interest of $500 until the note plus accrued interest is paid in full.
As of September 30, 2015, scheduled principal payments are as follows:
10. | LONG TERM NOTES PAYABLE TO BANK |
As of September 30, 2014, the Company had two notes payable to a bank totaling $230,498. The notes bore interest at the rate of 6% per annum, were payable in monthly installments of principal and interest totaling $7,309, and matured in December 2017. The notes were collateralized by all of the assets of the Company and guaranteed by the U.S. Small Business Administration. Both notes were paid in full as of December 31, 2014.
11. | COMMON STOCK WARRANT |
Effective August 16, 2013, pursuant to a contract with a consulting firm, in lieu of a cash retainer, the Company issued a warrant (the “Warrant”) to purchase 50,000 shares of the Company’s common stock at an exercise price of $2.00 per share. The Warrant is exercisable in whole or in part at any time at the option of the warrant holder through the earliest of (i) August 16, 2018 or (ii) immediately prior to (a) a consolidation or merger of the Company in which the Company is not the surviving entity; or (b) a change in control of the Company, as defined in the Warrant; or (c) the sale of all or substantially all of the assets of the Company; or (iii) the closing of an initial public offering of the Company’s common stock. In the event of a qualified funding, the Company is required to offer the warrant holder the right to redeem the Warrant for cash. If such an offer occurs, the Warrant holder has the right to either accept the redemption offer or retain the option to purchase shares of the Company’s common stock. The Warrant expires, if not exercised, on August 16, 2018. Pursuant to ASC 480 Distinguishing Liabilities from Equity , inasmuch as the Company may be obligated to repurchase the Warrant for cash, the Company has classified and reported the Warrant as a liability in other accrued expenses and other current liabilities on the Balance Sheets as of September 30, 2015 and 2014.
12. | COMMITMENTS AND CONTINGENCIES |
Licenses
On January 22, 2014, the Company entered into an exclusive license agreement with a patent owner to utilize certain of its patents issued by the USPTO in the United States. These patents expire in 2014 and 2018. The Company is obligated to pay the owner a royalty equal to the greater of 6.5% of the gross margin, as defined in the license agreement, derived from the sale of the licensor’s intellectual property on a standalone basis and/or sub-licensing such intellectual property or a minimum royalty of $225,000 payable as follows: $50,000 on signing the license agreement, $50,000 fifteen months after the effective date of the license agreement, $75,000 twenty-seven months after the effective date of the license agreement and $50,000 thirty months after the effective date of the license agreement. The royalty rate will be reduced to 3.5% upon the expiration of the patents. The Company has a right of first refusal to license new patents issued to licensor relating to smart cards used for healthcare purposes.
LIFEMED ID, INC.
NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended September 30, 2015 and 2014
On April 12, 2013, the Company entered into a license with another patent owner to exclusively utilize its patented intellectual property in the United States. The term of the license agreement extends from its effective date to 2024. The license agreement required the Company to pay a one-time $30,000 license fee upon execution of the agreement and an additional $50,000 license fee upon receipt of the first $500,000 of proceeds from the sale of shares of the Company’s Series B preferred stock. The Company is required to pay royalties to the licensor as follows: (i) 2.5% of the net profit, as defined by Generally Accepted Accounting Principles (GAAP) as adjusted for certain specific items set forth in the license agreement, derived from software service fees; or (ii) 5% to 8.5% of the gross margin, as defined by GAAP, with the differing rates being applicable to the Company’s pricing model derived from smart cards, as defined in the license agreement. In the event that the Company does not pay the licensor $100,000 (excluding the previously paid $80,000 in licensing fees) in royalties during the period from April 15, 2013 to December 31, 2014, the Company will pay the licensor the difference between the amount of royalties actually paid and $100,000 on January 1, 2015. In the event that total royalties paid by the Company during the period from April 15, 2013 and April 15, 2016 do not total at least $200,000, the Company will pay the licensor the difference between the amount of royalties actually paid and $200,000 on January 1, 2017. Pursuant to the terms of this agreement, based on the Company’s anticipated future operating results, during the fiscal year ended September 30, 2015, the Company accrued $225,000, representing the amount of the minimum guaranteed royalty it will be required to pay to the licensor. The Company paid the licensor $100,000 of the accrued minimum guaranteed royalty in December 2015.
Pursuant to both license agreements, the Company has a right of first refusal to license new patents prosecuted and issued to licensor relating to smart cards and related technology used for healthcare purposes. The Company also has the right of first refusal to purchase licensor’s patents and patent applications relating to smart cards used in healthcare in the event the licensor wishes to sell them.
Operating Lease
As of September 30, 2015, the Company leases its headquarters and operating facilities located in Citrus Heights, California from a company owned by the Company’s major shareholder and Chief Executive Officer pursuant to a ten year lease that commenced on April 1, 2012 and expires on March 31, 2022. As of October 1, 2014, the Company’s monthly lease payment was $5,533. Subsequently, on October 1 st of each year, the monthly rent shall be increased (never decreased) based on the percentage increase, if any, in the Consumer Price Index-All Items - All Urban Consumers-Oakland-San Francisco-Sacramento (1982-84 = 100) as published by the United States Department of Labor, Bureau of Labor Statistics. Annual rent increases, if any, are not to exceed 15% of the prior year’s monthly rent. The Company has the option to extend the lease for one additional three (3) year term at the then fair market lease rate, as defined in the agreement. The Company is responsible for (a) its pro-rata share (14.63%) of the real property taxes on the building; (b) all utilities; (c) maintaining the plumbing, heating and air conditioning systems; and (d) property management fees.
LIFEMED ID, INC.
NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended September 30, 2015 and 2014
As of September 30, 2015, the Company’s aggregate commitment under its non-cancelable lease agreement is as follows:
Years ending September 30, |
||||
2016 |
$ | 66,400 | ||
2017 |
66,400 | |||
2018 |
66,400 | |||
2019 |
66,400 | |||
2020 |
66,400 | |||
2021 and beyond |
99,600 | |||
Total minimum payments required |
$ | 431,600 |
Contingencies
The Company is subject to legal proceedings and claims that arise in the normal course of business. As of September 30, 2014, there was one matter pending regarding a former officer of the Company seeking additional compensation for the time worked for the Company. During the course of resolving the matter, the Superior Court of the State of California (the Court) required the Company to deposit $163,856 with the Court as collateral for any future resolution of the matter, which is included in restricted cash. This matter was concluded during the year ended September 30, 2015 and the Company recorded $239,566 as an expense in connection with its settlement, which is included in general and administrative expense. In October 2015, the Court released the $163,856 it was holding in connection with the matter back to the Company.
13. | PREFERRED STOCK |
As of September 30, 2014, the Company was authorized to issue a total of 10,500,000 shares of no par value preferred stock of which 8,000,000 shares were designated Series A and 2,500,000 shares were designated as Series B. In December 2014, the Company amended and restated its Articles of Incorporation increasing the total number of authorized shares of preferred stock to 11,450,000 of which 8,000,000 shares were designated as Series A and 3,450,000 shares were designated as Series B.
LIFEMED ID, INC.
NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended September 30, 2015 and 2014
SERIES A PREFERRED STOCK : The holders of Series A convertible preferred shares are entitled to receive non-cumulative dividends, if and when declared by the Company’s Board of Directors, at the rate of $.04 per share; have a liquidation preference of $.80 per share; and have voting rights equal to the number shares of common stock into which such Series A preferred shares are convertible. The Series A preferred shares are convertible into shares of the Company’s common stock at the rate of $.80 per share at any time at the option of the holder or automatically in the event of a public offering of the Company’s common stock provided that the offering price is not less than $6.00 per share and the total gross proceeds from the offering are not less than $20,000,000.
As of September 30, 2015 and 2014, a total of 7,577,534 shares of Series A convertible preferred stock were issued and outstanding.
SERIES B PREFERRED STOCK : The holders of Series B preferred shares are entitled to receive non-cumulative dividends, if and when declared by the Company’s Board of Directors, at the rate of $.10 per share; have a liquidation preference of $2.00 per share; and have voting rights equal to the number shares of common stock into which such Series B preferred shares are convertible. The Series B preferred shares are convertible into shares of the Company’s common stock at the rate of $2.00 per share at any time at the option of the holder or automatically in the event of a public offering of the Company’s common stock provided that the offering price is not less than $6.00 per share and the total gross proceeds from the offering are not less than $20,000,000.
During the years ended September 30, 2015 and 2014, the Company issued at a price per share of $2.00, a total of 1,875,000 shares and 1,257,500 shares, respectively, of its Series B convertible preferred stock for $3,750,000 and $2,515,000, respectively.
As of September 30, 2015 and 2014, respectively, a total of 3,439,312 shares and 1,564,312 shares of Series B preferred stock were issued and outstanding.
14. | COMMON STOCK |
The Company is authorized to issue a total of 25,000,000 shares of no-par value common stock of which 1,858,864 shares and 1,371,364 shares were issued and outstanding as of September 30, 2015 and 2014, respectively.
15. | STOCK OPTION PLANS |
LIFEMED ID, INC.
NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended September 30, 2015 and 2014
In October 2013, the Company adopted the 2013 Stock Option Plan (the 2013 Plan) that provided for the issuance of options to purchase up to 1,450,000 shares of the Company’s common stock to employees, officers, directors, and consultants. In September 2015 and November 2015, the Board of Directors increased the number of shares reserved for issuance under the 2013 Plan to 3,000,000 and 3,250,000, respectively. As of September 30, 2015, the Company’s board of directors has granted options to purchase 1,570,000 shares and 1,405,000 shares are available for future grant. Options that expire or otherwise terminate revert to authorized but unissued and are again available for grant under the 2013 Plan.
Options granted under the 2011 and 2013 Plans (collectively the Plans) may be incentive stock options (ISOs) or non-statutory stock options (NSOs). Incentive stock options may be granted to employees with exercises prices of no less than the fair value of the common stock, as determined by the board of directors, on the date of grant, however, if an employee holds either directly or indirectly more than 10% of the voting power of all classes of stock of the Company, the exercise price shall be no less than 110% of the fair market value of the stock on the date of grant. Non-statutory options may be granted to employees, officers, directors, or consultants at exercise prices of no less than 100% of the fair value of the common stock on the date of grant, as determined by the Board of Directors. Options granted under the Plans become exercisable as determined by the Board of Directors, generally at the rate of 25% after one year of continuous service to the Company and ratably on a monthly basis thereafter over three additional years.
In the event of stock splits and stock dividends, if any, the plan administrator may proportionately increase or decrease, as appropriate, the number of shares and exercise (purchase) price per share of the outstanding options under the Plans. In the event of a merger, in which the Company is not the surviving entity or a sale of substantially all of the Company’s assets (change of control), all outstanding options may be assumed or replaced by the surviving corporation, or may be required to be exercised or otherwise settled.
LIFEMED ID, INC.
NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended September 30, 2015 and 2014
EMPLOYEE AWARDS : The following table summarizes the options granted to, exercised by and forfeited by employees under the Plans during the period from October 1, 2013 through September 30, 2015:
|
Outstanding Options |
|||||||||||
|
Number of Shares |
Weighted- Average Exercise Price Per Share |
Aggregate Intrinsic Value |
|||||||||
Balances as of October 1, 2013 |
437,346 | $ | 0.80 | $ | - | |||||||
Options granted |
1,515,000 | 2.00 | - | |||||||||
Options exercised |
- | - | - | |||||||||
Options forfeited |
(300,000 | ) | 1.80 | (30,000 | ) | |||||||
Balances as of September 30, 2014 |
1,652,346 | 1.73 | 464,815 | |||||||||
Options granted |
420,000 | 2.00 | - | |||||||||
Options exercised |
(25,000 | ) | 2.00 | - | ||||||||
Options forfeited |
(265,000 | ) | 2.00 | - | ||||||||
Balances as of September 30, 2015 |
1,782,346 | $ | 1.74 | $ | 464,815 |
|
Options Outstanding |
Options Vested or Expected to Vest |
Options Exercisable |
|||||||||
Number of shares |
1,782,346 | 1,544,434 | 1,325,383 | |||||||||
Weighted-average exercise price |
$ | 1.80 | $ | 2.68 | $ | 1.55 | ||||||
Weighted-average remaining contractual term (in years) |
8.25 | 8.20 | 7.90 |
LIFEMED ID, INC.
NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended September 30, 2015 and 2014
The following table sets forth the status of the employee options outstanding under the Plans as of September 30, 2014:
|
Options Outstanding |
Options Vested or Expected to Vest |
Options Exercisable |
|||||||||
Number of shares |
1,652,346 | 1,374,577 | 270,158 | |||||||||
Weighted-average exercise price |
$ | 1.72 | $ | 1.69 | $ | 0.80 | ||||||
Weighted-average remaining contractual term (in years) |
9.13 | 9.08 | 7.84 |
The fair value of employee awards is estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
|
September 30, |
|||
|
2015 |
2014 |
||
Risk free interest rate |
1.37% to 1.74% |
1.36% to 1.83% |
||
Volatility |
43.69% to 46.26% |
44.30% to 45.30% |
||
Dividend yield |
0% |
|
0% |
|
Expected life of awards |
4.5 |
4.5 |
For the years ended September 30, 2015 and 2014, forfeitures were estimated to be 3.0% and 19.9%, respectively, based on historical experience. If actual forfeiture rates are materially different from such estimates or factors change and the Company makes different assumptions, future stock-based compensation expense could be significantly different from what the Company has recorded in the current period. During 2015, the Company updated the forfeiture rate calculation to more accurately reflect the forfeiture rate based on Company knowledge. Management periodically reviews actual forfeiture experience and revises its estimates, as necessary.
LIFEMED ID, INC.
NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended September 30, 2015 and 2014
NONEMPLOYEE AWARDS: The following table summarizes the options granted to, exercised by and forfeited by Company nonemployees under the Plans during the period from October 1, 2014 through September 30, 2015:
|
Outstanding Options |
|||||||||||
|
Number of Shares |
Weighted- Average Exercise Price Per Share |
Aggregate Intrinsic Value |
|||||||||
Balances as of October 1, 2013 |
55,000 | $ | 0.80 | $ | - | |||||||
Options granted |
175,000 | 2.00 | - | |||||||||
Options exercised |
- | - | - | |||||||||
Options forfeited |
- | - | - | |||||||||
Balances as of September 30, 2014 |
230,000 | 1.71 | 66,000 | |||||||||
Options granted |
75,000 | - | - | |||||||||
Options exercised |
- | - | - | |||||||||
Options forfeited |
- | - | - | |||||||||
Balances as of September 30, 2015 |
305,000 | $ | 1.71 | $ | 66,000 |
The following table sets forth the status of the nonemployee options outstanding under the Plans as of September 30, 2015:
|
Options Outstanding |
Options Vested or Expected to Vest |
Options Exercisable |
|||||||||
Number of shares |
305,000 | 305,000 | 125,313 | |||||||||
Weighted-average exercise price |
$ | 1.71 | $ | 1.71 | $ | 1.48 | ||||||
Weighted-average remaining contractual term (in years) |
7.91 | 7.91 | 7.39 |
The following table sets forth the status of the nonemployee options outstanding under the Plans as of September 30, 2014:
|
Options Outstanding |
Options Vested or Expected to Vest |
Options Exercisable |
|||||||||
Number of shares |
230,000 | 230,000 | 59,167 | |||||||||
Weighted-average exercise price |
$ | 1.71 | $ | 1.71 | $ | 1.03 | ||||||
Weighted-average remaining contractual term (in years) |
8.91 | 8.91 | 7.51 |
LIFEMED ID, INC.
NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended September 30, 2015 and 2014
The fair value of the nonemployee stock awards is estimated at the time the services are delivered using the Black-Scholes option-pricing model using the following assumptions:
|
September 30, |
|||||||
|
2015 |
2014 |
||||||
Risk free interest rate |
1.37 | % | 1.78 | % | ||||
Volatility |
43.86 | % | 44.26 | % | ||||
Dividend yield |
0 | % | 0 | % | ||||
Expected life of awards |
4.5 | 4.5 |
16. | INCOME TAXES |
The Company files U.S. Federal Income tax and California Franchise tax returns. The provision for income taxes of $800 for each of the years ended September 30, 2015 and 2014 represented the minimum California franchise tax payable for that year.
As of September 30, 2015, the Company had a net operating loss carryforward for federal income tax reporting purposes of approximately $11,730,000 that begins to expire, if not utilized to reduce U.S. Federal income taxes, in 2031. In addition, as of September 30, 2015, the Company has a net operating loss carryforward for California franchise tax reporting purposes of approximately $11,729,000, which begins to expire, if not utilized to reduce California state franchise taxes, in 2021.
As of September 30, 2015 and 2014, the Company had deferred tax assets as set forth below:
|
September 30, |
|||||||
|
2015 |
2014 |
||||||
Components of deferred taxes |
||||||||
Tax benefit of net operating loss |
||||||||
Federal |
$ | 3,990,000 | $ | 2,470,000 | ||||
California, net of federal tax effect |
684,000 | 424,000 | ||||||
Total |
4,674,000 | 2,894,000 | ||||||
Less: valuation allowance |
(4,674,000 | ) | (2,894,000 | ) | ||||
Net deferred tax assets |
$ | - | $ | - |
LIFEMED ID, INC.
NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended September 30, 2015 and 2014
17. | SUBSEQUENT EVENTS |
On March 30, 2016, the Company entered into a definitive agreement to merge with OrangeHook, Inc. Under the terms of the agreement, shareholders of the Company will receive one common share of OrangeHook, Inc. stock for every seven shares of the Company stock. The transaction is structured as a stock purchase and as such OrangeHook, Inc. is acquiring all the assets and assuming all the liabilities of the Company. No gain or loss is expected on the transaction which is subject to shareholder approval.
On March 10, 2016, the Company entered into a Business Partnership Agreement with Lenovo PC HK (“Lenovo”) for an initial period of thirty-six months with annual renewals, thereafter. Under the terms of the agreement, the Company granted Lenovo an exclusive royalty-free, non-transferable worldwide license to use, execute, preload and reproduce, deliverables solely as part of a bundled system. In addition to above, the Company granted Lenovo an exclusive, royalty-fee, non-transferable license to market and distribute deliverables solely as part of bundled system. During the term of the agreement, Lenovo will be the Company’s exclusive computer/tablet hardware partner for running the Company’s patient and consumer identity software as part of the hardware/software bundled offering. In exchange for above: 1) the Company received a payment of $900,000 for development of application configuration of embedded solution on Lenovo tablet and enterprise and other hardware, which will be recognized on a straight-line basis over the initial contract period, and 2) the Company will receive a portion, up to 30%, of gross revenue on all Company’s service monthly fees and usage, including all upgrades and upsells to Lenovo, which is due within 45 days after the last day of the calendar month in which the purchase occurred.
Financial Statements
Including Independent Auditors’ Report
For the Years Ended December 31, 2015 and 2014
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Members and Board of Directors
Agilivant
PO Box 2547
Vancouver, WA 98668
We have audited the accompanying consolidated financial statements of Agilivant, LLC, which comprise the balance sheets as of December 31, 2015 and 2014, and the related statements of operations, members’ deficit, and cash flows for the years then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Agilivant, LLC as of December 31, 2015 and 2014 and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the company will continue as a going concern. As discussed in Note 2 to the financial statements, the company has suffered recurring operating losses and negative cash flows from operations, and needs additional working capital to support future operations. These factors raise substantial doubt about its ability to continue as a going concern. Managements’ plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Minneapolis, Minnesota
May 6, 2016
Agilivant, LLC
As of December 31, 2015 and 2014
|
12/31/2015 |
12/31/2014 |
||||||
Assets |
||||||||
Current assets |
||||||||
Cash |
$ | 9,694 | $ | 6,379 | ||||
Receivable from Executive Chairman and member |
87,000 | 70,000 | ||||||
Other current assets |
- | 1,500 | ||||||
Total current assets |
96,694 | 77,879 | ||||||
|
||||||||
Total assets |
$ | 96,694 | $ | 77,879 | ||||
|
||||||||
Liabilities and Members' Deficit |
||||||||
Current liabilities |
||||||||
Notes payable: |
||||||||
OrangeHook, Inc. |
$ | 1,225,484 | $ | 220,309 | ||||
Members and affiliates |
378,250 | 377,080 | ||||||
Other |
129,007 | 318,920 | ||||||
|
1,732,741 | 916,309 | ||||||
|
||||||||
Accounts payable |
501,389 | 403,218 | ||||||
Accrued expenses: |
||||||||
Interest |
381,665 | 235,780 | ||||||
Payroll and payroll taxes |
51,634 | 64,400 | ||||||
Due to related party |
54,000 | 54,000 | ||||||
Deferred revenue, short-term |
43,500 | 43,500 | ||||||
Total current liabilities |
2,764,929 | 1,717,207 | ||||||
|
||||||||
Deferred revenue, long-term |
165,664 | 209,164 | ||||||
|
||||||||
Commitments and contingencies |
- | - | ||||||
|
||||||||
Members' Deficit |
(2,833,899 | ) | (1,848,492 | ) | ||||
|
||||||||
Total liabilities and members' deficit |
$ | 96,694 | $ | 77,879 |
The accompanying notes are an integral part of these financial statements.
Agilivant, LLC
For the Years Ended December 31, 2015 and 2014
|
For the Years Ended |
|||||||
|
12/31/2015 |
12/31/2014 |
||||||
|
||||||||
Revenue |
$ | 43,511 | $ | 108,554 | ||||
|
||||||||
Operating expenses |
||||||||
Product development and maintenance |
443,075 | 444,484 | ||||||
|
||||||||
Selling, general and administrative expenses |
436,064 | 414,100 | ||||||
|
||||||||
Total Operating expenses |
879,139 | 858,584 | ||||||
|
||||||||
Operating loss |
(835,628 | ) | (750,030 | ) | ||||
|
||||||||
Interest expense, net of interest income |
(149,779 | ) | (143,374 | ) | ||||
|
||||||||
Net loss |
$ | (985,407 | ) | $ | (893,404 | ) |
The accompanying notes are an integral part of these financial statements.
Agilivant, LLC
Statements of Changes in Members’ Deficit
For the Years Ended December 31, 2015 and 2014
|
Members' |
|||
|
Deficit |
|||
|
||||
Balance as of December 31, 2013 |
$ | (985,088 | ) | |
|
||||
Member contributions |
30,000 | |||
|
||||
Net loss |
(893,404 | ) | ||
|
||||
Balance as of December 31, 2014 |
$ | (1,848,492 | ) | |
|
||||
Net loss |
(985,407 | ) | ||
|
||||
Balance as of December 31, 2015 |
$ | (2,833,899 | ) |
The accompanying notes are an integral part of these financial statements.
Agilivant, LLC
For the Years Ended December 31, 2015 and 2014
|
2015 |
2014 |
||||||
Cash flows used for operating activities |
||||||||
Net loss |
$ | (985,407 | ) | $ | (893,404 | ) | ||
Adjustments to reconcile net loss to net cash from operating activities |
||||||||
Depreciation |
- | 350 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
- | 128,000 | ||||||
Other current assets |
1,500 | 15,000 | ||||||
Accounts payable |
98,170 | 107,948 | ||||||
Accrued expenses |
133,120 | 158,248 | ||||||
Deferred revenue |
(43,500 | ) | 38,500 | |||||
Net cash flows used for operating activities |
(796,117 | ) | (445,357 | ) | ||||
|
||||||||
Cash flows used for investing activities |
||||||||
Advances to Executive Chairman and member |
(17,000 | ) | - | |||||
Cash flows used for investing activities |
(17,000 | ) | - | |||||
|
||||||||
Cash flows from financing activities |
||||||||
Proceeds from member contributions |
- | 20,000 | ||||||
Proceeds from notes payable |
1,011,084 | 448,320 | ||||||
Payments on notes payable |
(194,652 | ) | (22,500 | ) | ||||
Net cash flows provided by financing activities |
816,432 | 445,820 | ||||||
Net increase in cash |
3,315 | 462 | ||||||
Cash |
||||||||
Beginning of year |
6,379 | 5,917 | ||||||
End of year |
$ | 9,694 | $ | 6,379 | ||||
|
||||||||
Supplemental cash from financing activities: |
||||||||
Cash paid for interest |
$ | 20,081 | $ | 58,966 | ||||
|
||||||||
Supplemental non-cash from financing activities: |
||||||||
Accrued interest converted to members' equity |
$ | - | $ | 10,000 |
The accompanying notes are an integral part of these financial statements.
Agilivant, LLC
December 31, 2015 and 2014
1. | Nature of Business and Basis of Presentation |
Agilivant, LLC (the “Company”), a Washington limited liability corporation, was formed on February 13, 2009 for the purpose of developing a real-time debit based banking and payment software system. On February 12, 2016, the Company entered into an agreement whereby certain members sold their membership units to OrangeHook, Inc. (see Note 8 for further discussion).
The Company presents its financial statements in accordance with U.S. generally accepted accounting principles (GAAP).
2. | Liquidity |
The accompanying financial statements have been prepared assuming the Company will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. During the years ended December 31, 2015 and 2014, the Company incurred net losses of $985,407 and $893,404, respectively. As of December 31, 2015, the Company had a working capital deficit of $2,668,235 and had a members’ deficit of $2,833,899. The Company’s ability to continue as a going concern is dependent on raising additional capital and to begin generating revenues and/or reducing operating expenses to eventually attain profitability. However, there can be no assurance that the sources of capital will be available on terms favorable to the Company or that the Company will successfully generate revenues and/or reduce operating expenses to attain profitability. Management anticipates the impact of one or more of the actions listed below will generate sufficient cash flows to pay its liabilities and fund the Company's operations for the next twelve months:
|
1. | Raise additional debt or equity capital on terms favorable to the Company, |
|
|
|
|
2. | Generate revenues in amounts sufficient to attain profitability, |
|
|
|
|
3. | Control operating expenses based on available cash flow from operations and the amount of capital available. |
If any or all of the aforementioned actions do not occur, the Company will not be able to meet its obligations over the next twelve months.
As discussed in Note 8, a majority of its members sold their membership units to OrangeHook, Inc. There can be no assurance that this transaction will have a positive impact on the Company’s liquidity position.
Agilivant, LLC
Notes to Financial Statements
December 31, 2015 and 2014
3. | Summary of Significant Accounting Policies |
Cash
The Company maintains cash deposits with major banks, which from time to time, may exceed federally insured limits. The Company periodically assesses the financial institutions and believes that the risk of any loss is minimal.
Furniture, Equipment and Leasehold Improvements
Furniture, fixtures and equipment are stated at cost. Depreciation is computed by using the straight-line method over the estimated remaining useful lives of the assets ranging from 3 to 5 years. The net book value of furniture, fixtures and leasehold improvements was $0 as of December 31, 2015 and 2014. Depreciation expense for the years ended December 31, 2015 and 2014 was $0 and $350, respectively.
Expenditures for maintenance, repairs and minor renewals, which do not improve or extend the life of the respective assets, are expensed as incurred. Expenditures that substantially increase an asset’s useful life are capitalized. The assets and related depreciation accounts are adjusted for equipment retirements and disposals with the resulting gain or loss included in operations.
Revenue Recognition
Revenue from software licensing arrangements is recognized when all of the following conditions exist: (1) the licensing agreement has been executed, (2) the license period has begun and the licensee can begin its use of the software, (3) the fee is fixed or determinable, (4) collection of the license fee is probable, and (5) there are no significant on-going obligations of the Company relating to the licensing arrangement.
Advance payments received from customers are deferred until all revenue recognition criteria are satisfied.
Service contract revenue is based on the stated contractual rate and is deferred and recognized ratably over the service period, which is typically 5-6 years.
Income Taxes
The Company is a limited liability company and as such is treated as a partnership for federal and state income tax purposes with all income tax liabilities and/or benefits of the Company being passed through to the members. As such, no recognition of federal or state income taxes for the Company have been provided for in the accompanying financial statements. Any uncertain tax position taken by the member is not an uncertain position of the Company.
Fair Value of Financial Instruments
Financial instruments include accrued liabilities, accounts payable and notes payable. Management believes that fair value of its financial instruments approximate their carrying value. The fair value of current financial instruments is estimated to approximate carrying value due to the short–term nature of these instruments and other market factors.
Agilivant, LLC
Notes to Financial Statements
December 31, 2015 and 2014
Use of Estimates
The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Software Sold, Leased or Otherwise Marketed
In accordance with ASC 985-20, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed , the Company capitalizes the cost incurred developing its software being marketed to customers once its technological feasibility, as defined in ASC 985-20-25 has been established. The development costs incurred prior to the establishment of the software’s technological feasibility are expensed as incurred pursuant to ASC 730-10, Accounting for Research and Development .
As of December 31, 2015 and 2014, the Company had not capitalized any of the costs incurred related to the development of its software products being marketed as the period of time between achieving technological feasibility and the general availability of the Company’s software products has been very short and any costs incurred subsequent to achieving technological feasibility have not been significant. These costs are expensed and included in product development and maintenance expenses in the accompanying statements of operations.
4. | Notes Payable |
Due to OrangeHook, Inc. (“OrangeHook”):
During 2015 and 2014, the Company received cash advances from OrangeHook in the amounts of $1,005,175 and $220,309, respectively. Amounts advanced are due on demand, are unsecured and carry an interest rate of 6% per year. Amounts due to OrangeHook totaled $1,225,484 and $220,309 as of December 31, 2015 and 2014, respectively, which are included in the accompanying balance sheets. Accrued interest on these advances total $48,975 and $0 as of December 31, 2015 and 2014, respectively, which is included in accrued interest payable in the accompanying balance sheets. Interest expense was $48,975 and $0 for the years ended December 31, 2015 and 2014, respectively. Subsequent to December 31, 2015, the Company has received additional advances totaling $85,000 from OrangeHook (See Note 8).
Due to Members and Affiliates:
Since its inception, the Company has received cash advances from various holders of its member units and their affiliates. Amounts advanced are supported by unsecured promissory notes that are due on demand with interest rates that range from 0-150% per year. Amounts due to members and their affiliates totaled $378,250 and $377,080 as of December 31, 2015 and 2014, respectively, which are included in the accompanying balance sheets. Accrued interest on these advances total $147,331 and $91,654 as of December 31, 2015 and 2014, respectively, which are included in accrued interest payable in the accompanying balance sheets. Interest expense was $71,055 and $55,872 for the years ended December 31, 2015 and 2014, respectively.
Agilivant, LLC
Notes to Financial Statements
December 31, 2015 and 2014
Other Notes Payable:
The Company has received cash advances from certain other individuals which are supported by unsecured promissory notes that are due on demand with interest rates that range from 0-48% per year. Amounts due to these individuals totaled $129,007 and $318,920 as of December 31, 2015 and 2014, respectively, which are included in the accompanying balance sheets. Accrued interest on these advances total $185,359 and $144,126 as of December 31, 2015 and 2014, respectively, which are included in accrued interest payable in the accompanying balance sheets. Interest expense was $45,702 and $86,942 for the years ended December 31, 2015 and 2014, respectively.
5. | Commitments and Contingencies |
Leases
The Company leases office space under an operating lease that expires on September 30, 2016. Future minimum rental commitments under this lease total $22,894 for the year ending December 31, 2016.
Rent expense, including operating costs, for the years ended December 31, 2015 and 2014 was $31,674 and $29,424, respectively.
6. | Receivable from Executive Chairman and Member |
During 2011, the Company provided advances totaling $70,000 to the Company’s Executive Chairman and a holder of 38% of member equity, Rene Babi. During 2015, additional advances totaling $17,000 were made to Mr. Babi, such amounts representing advances of certain payments due to him upon the completion of the pending transaction with OrangeHook (see Note 8). All advances are non-interest bearing and unsecured. As of December 31, 2015 and 2014, the receivable balance due is $87,000 and $70,000, respectively.
Agilivant, LLC
Notes to Financial Statements
December 31, 2015 and 2014
7. | Related Party Transactions |
The Company utilizes a contract product development company that is owned by two family members of Rene Babi, the Company’s founder and Executive Chairman. Total expenditures to this company for the years ended December 31, 2015 and 2014 were $102,360 and $95,180, respectively, which are included in product development and maintenance expenses in the accompanying statements of operations. Of these amounts, $32,650 and $40,740 were unpaid as of December 31, 2015 and 2014, respectively, which is included in accounts payable in the accompanying balance sheets.
In January 2012, the Company entered into a contract with an individual who is the controlling shareholder of a group of individuals that hold 17% of the member equity of the Company to provide consulting services in exchange for a fee of $5,000 per month. The contract was terminated in June 2015. Total expenditures under this contract for the years ended December 31, 2015 and 2014 were $30,000 and $65,000, respectively, which are included in selling, general and administrative expenses in the accompanying statements of operations. Total amounts due to this individual of $167,500 and $137,500 were unpaid as of December 31, 2015 and 2014, respectively, which are included in accounts payable in the accompanying balance sheets. In addition, in 2012, the Company accrued an estimate of expenses due to this individual for market development activities in the amount of $54,000, which is included on other accrued expenses in the accompanying balance sheets as of December 31, 2015 and 2014.
In May 2014, the Company sold a license to use the Company’s products to a customer controlled by the Company’s Executive Chairman in the amount of $30,000, which is included in revenue for the year ended December 31, 2014.
8. | Subsequent Event |
The Company has evaluated subsequent events occurring through May 6, 2016, the date the financial statements were available to be issued, for events requiring recording or disclosure in the Company’s financial statements.
BALANCE SHEETS
|
||||||||||||||||
ASSETS
|
||||||||||||||||
December 31, 2014
|
March 31, 2015
|
June 30, 2015
|
September 30, 2015
|
|||||||||||||
Current assets
|
||||||||||||||||
Cash and cash equivalents
|
$
|
113,181
|
$
|
25,067
|
$
|
(517
|
)
|
$
|
5,519
|
|||||||
Accounts receivable
|
90,649
|
71,198
|
120,333
|
245,177
|
||||||||||||
Inventory
|
26,568
|
26,327
|
24,170
|
22,099
|
||||||||||||
Prepaid expenses and other
|
21,570
|
4,900
|
20,238
|
11,503
|
||||||||||||
Total current assets
|
251,968
|
127,492
|
164,224
|
284,298
|
||||||||||||
Net property and equipment
|
87,514
|
83,475
|
79,364
|
74,607
|
||||||||||||
Net software development costs
|
792,835
|
801,749
|
864,637
|
889,842
|
||||||||||||
Net intangible assets
|
38,892
|
36,247
|
33,602
|
30,958
|
||||||||||||
Total assets
|
$
|
1,171,209
|
$
|
1,048,963
|
$
|
1,141,827
|
$
|
1,279,705
|
||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY
|
||||||||||||||||
Current liabilities
|
||||||||||||||||
Accounts payable
|
$
|
64,394
|
$
|
49,678
|
$
|
131,748
|
$
|
197,219
|
||||||||
Short-term bank borrowings
|
192,000
|
192,000
|
200,000
|
200,000
|
||||||||||||
Notes payable (related parties)
|
120,000
|
330,000
|
588,590
|
835,590
|
||||||||||||
Accrued expenses and other liabilities
|
74,177
|
96,145
|
75,482
|
125,96 3
|
||||||||||||
Deferred revenue
|
387,803
|
345,191
|
282,908
|
294,304
|
||||||||||||
Total current liabilities
|
838,374
|
1,013,014
|
1,278,728
|
1,653,076
|
||||||||||||
Accrued royalties
|
78,121
|
84,913
|
105,482
|
124,973
|
||||||||||||
Deferred revenue - net of current portion
|
64,739
|
23,021
|
43,890
|
37,309
|
||||||||||||
Preferred stock redemption obligation
|
3,421,879
|
3,415,087
|
3,394,518
|
3,375,027
|
||||||||||||
Total liabilities
|
4,403,113
|
4,536,035
|
4,822,618
|
5,190,385
|
||||||||||||
Shareholders' equity
|
||||||||||||||||
Common stock
|
4,803,900
|
4,803,900
|
4,805,584
|
4,805,584
|
||||||||||||
Common stock receivable
|
-
|
-
|
(200
|
)
|
-
|
|||||||||||
Unearned royalties
|
(3,421,879
|
)
|
(3,415,087
|
)
|
(3,394,518
|
)
|
(3,375,027
|
)
|
||||||||
Accumulated deficit
|
(4,613,925
|
)
|
(4,875,885
|
)
|
(5,091,657
|
)
|
(5,341,237
|
)
|
||||||||
Total shareholders' equity
|
(3,231,904
|
)
|
(3,487,072
|
)
|
(3,680,791
|
)
|
(3,910,680
|
)
|
||||||||
Total liabilities and shareholders' equity
|
$
|
1,171,209
|
$
|
1,048,963
|
$
|
1,141,827
|
$
|
1,279,705
|
SALAMANDER TECHNOLOGIES, INC.
|
||||||||||||||||||||||||
STATEMENTS OF OPERATIONS | ||||||||||||||||||||||||
3 Month -
Year to Date
|
3 Month
Period Ended
|
6 Month
Year to Date
|
3 Month
Period Ended
|
9 Month
Year to Date
|
||||||||||||||||||||
December 31, 2014
|
March 31, 2015
|
June 30, 2015
|
June 30, 2015
|
September 30, 2015
|
September 30, 2015
|
|||||||||||||||||||
Net sales
|
$
|
1,562,428
|
$
|
220,166
|
$
|
327,042
|
$
|
547,208
|
$
|
389,821
|
$
|
937,029
|
||||||||||||
Cost of sales
|
286,893
|
19,290
|
72,368
|
91,658
|
72,034
|
163,692
|
||||||||||||||||||
Gross profit
|
1,275,535
|
200,876
|
254,674
|
455,550
|
317,787
|
773,337
|
||||||||||||||||||
Selling and administrative expenses
|
1,938,383
|
459,934
|
455,398
|
915,332
|
559,482
|
1,474,814
|
||||||||||||||||||
Operating loss
|
(662,848
|
)
|
(259,058
|
)
|
(200,724
|
)
|
(459,782
|
)
|
(241,695
|
)
|
(701,477
|
)
|
||||||||||||
Interest expense
|
40,953
|
2,902
|
15,048
|
17,950
|
7,885
|
25,835
|
||||||||||||||||||
Net loss
|
$
|
(703,801
|
)
|
$
|
(261,960
|
)
|
$
|
(215,772
|
)
|
$
|
(477,732
|
)
|
$
|
(249,580
|
)
|
$
|
(727,312
|
)
|
PAGE | ||
A - 114 - A - 115
|
||
Financial Statements for the Years Ended
|
||
December 31, 2014 and 2013 (Restated – Note 13)
|
||
A - 116 | ||
A - 117 | ||
A - 118 - A - 119
|
||
A - 120 | ||
A - 121 - A - 132
|
SALAMANDER TECHNOLOGIES, INC.
|
||||||||
ASSETS
|
December 31
|
|||||||
2014
|
2013
|
|||||||
(As restated)
|
(As restated)
|
|||||||
Current assets
|
||||||||
Cash and cash equivalents
|
$
|
113,181
|
$
|
26,942
|
||||
Accounts receivable
|
90,649
|
162,745
|
||||||
Inventory
|
26,568
|
33,932
|
||||||
Prepaid expenses and other
|
21,570
|
33,347
|
||||||
Total current assets
|
251,968
|
256,966
|
||||||
Net property and equipment
|
87,514
|
93,216
|
||||||
Net software development costs
|
792,835
|
769,176
|
||||||
Net intangible assets
|
38,892
|
37,021
|
||||||
Total assets
|
$
|
1,171,209
|
$
|
1,156,379
|
||||
LIABILITIES AND SHAREHOLDERS' DEFICIT
|
||||||||
Current liabilities
|
||||||||
Accounts payable
|
$
|
64,394
|
$
|
133,537
|
||||
Short-term bank borrowings
|
192,000
|
120,000
|
||||||
Notes payable (related parties)
|
120,000
|
185,000
|
||||||
Accrued expenses and other liabilities
|
74,177
|
109,819
|
||||||
Deferred revenue
|
387,803
|
533,658
|
||||||
Total current liabilities
|
838,374
|
1,082,014
|
||||||
Accrued royalties
|
78,121
|
-
|
||||||
Deferred revenue - net of current portion
|
64,739
|
119,825
|
||||||
Preferred stock redemption obligation
|
3,421,879
|
3,500,000
|
||||||
Long-term debt
|
-
|
150,000
|
||||||
Total liabilities
|
4,403,113
|
4,851,839
|
||||||
Commitments and contingencies (Notes 1, 6, 9, and 10)
|
||||||||
Shareholders' deficit
|
||||||||
Common stock, voting, no-par - authorized 40,327 shares; issued and
|
||||||||
outstanding 31,987 shares (7,361 shares in 2013)
|
4,803,900
|
1,229,105
|
||||||
Preferred stock, voting, 8% cumulative, no par;
|
||||||||
(All classes redeemed in 2014):
|
||||||||
Series A, 1,981 shares authorized, issued and outstanding in 2013
|
-
|
854,629
|
||||||
Series B, 1,002 shares authorized, issued and outstanding in 2013
|
-
|
930,278
|
||||||
Series C, 1,007 shares authorized, 821 shares issued and
|
||||||||
outstanding in 2013
|
-
|
752,332
|
||||||
Series D, 792 shares authorized, issued and outstanding in 2013
|
-
|
400,000
|
||||||
Series E, 571 shares authorized, issued and outstanding in 2013
|
-
|
400,000
|
||||||
Additional paid-in capital
|
-
|
148,320
|
||||||
Common stock subscription receivable
|
-
|
(1,000,000
|
)
|
|||||
Unearned royalties
|
(3,421,879
|
)
|
(3,500,000
|
)
|
||||
Accumulated deficit
|
(4,613,925
|
)
|
(3,910,124
|
)
|
||||
Total shareholders' deficit
|
(3,231,904
|
)
|
(3,695,460
|
)
|
||||
Total liabilities and shareholders' deficit
|
$
|
1,171,209
|
$
|
1,156,379
|
SALAMANDER TECHNOLOGIES, INC.
|
||||||||
Year Ended December 31
|
||||||||
2014
|
2013
|
|||||||
(As restated)
|
(As restated)
|
|||||||
Net sales
|
$
|
1,562,428
|
$
|
2,096,222
|
||||
Cost of sales
|
286,893
|
501,162
|
||||||
Gross profit
|
1,275,535
|
1,595,060
|
||||||
Selling and administrative expenses
|
1,938,383
|
2,159,777
|
||||||
Operating loss
|
(662,848
|
)
|
(564,717
|
)
|
||||
Interest expense
|
40,953
|
12,207
|
||||||
Net loss
|
$
|
(703,801
|
)
|
$
|
(576,924
|
)
|
SALAMANDER TECHNOLOGIES, INC.
|
||||||||||||||||||||||||||||||||
Series A
|
Series B
|
Series C
|
||||||||||||||||||||||||||||||
Common Stock
|
Preferred Stock
|
Preferred Stock
|
Preferred Stock
|
|||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||||||||||||||
Balances, at January 1, 2013 (as restated)
|
7,034
|
$
|
229,105
|
1,981
|
$
|
854,629
|
1,002
|
$
|
930,278
|
821
|
$
|
752,332
|
||||||||||||||||||||
Common stock issuance
|
327
|
1,000,000
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||
Preferred stock transfer (Note 6)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||
Balances, at December 31, 2013 (as restated)
|
7,361
|
1,229,105
|
1,981
|
854,629
|
1,002
|
930,278
|
821
|
752,332
|
||||||||||||||||||||||||
Collection of common stock subscription
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||
Common stock issued and redemption
|
||||||||||||||||||||||||||||||||
of preferred stock (See Note 6)
|
24,626
|
3,574,795
|
(1,981
|
)
|
(854,629
|
)
|
(1,002
|
)
|
(930,278
|
)
|
(821
|
)
|
(752,332
|
)
|
||||||||||||||||||
Royalties earned
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||
Balances, at December 31, 2014 (as restated)
|
31,987
|
$
|
4,803,900
|
-
|
$
|
-
|
-
|
$
|
-
|
-
|
$
|
-
|
Total
|
||||||||||||||||||||||||||||||||||
Series D
|
Series E
|
Additional
|
Common Stock
|
Unearned
|
Accumulated
|
Shareholders'
|
||||||||||||||||||||||||||||
Preferred Stock
|
Preferred Stock
|
Paid-in
|
Subscription
|
Royalties
|
Deficit
|
Equity
|
||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Receivable
|
(As restated)
|
(As restated)
|
(As restated)
|
||||||||||||||||||||||||||
792
|
$
|
400,000
|
571
|
$
|
400,000
|
$
|
148,320
|
$
|
-
|
$
|
-
|
$
|
(3,333,200
|
)
|
$
|
381,464
|
||||||||||||||||||
-
|
-
|
-
|
-
|
-
|
(1,000,000
|
)
|
-
|
-
|
-
|
|||||||||||||||||||||||||
-
|
-
|
-
|
-
|
-
|
-
|
(3,500,000
|
)
|
-
|
(3,500,000
|
)
|
||||||||||||||||||||||||
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(576,924
|
)
|
(576,924
|
)
|
||||||||||||||||||||||||
792
|
400,000
|
571
|
400,000
|
148,320
|
(1,000,000
|
)
|
(3,500,000
|
)
|
(3,910,124
|
)
|
(3,695,460
|
)
|
||||||||||||||||||||||
-
|
-
|
-
|
-
|
-
|
500,000
|
-
|
-
|
500,000
|
||||||||||||||||||||||||||
(792
|
)
|
(400,000
|
)
|
(571
|
)
|
(400,000
|
)
|
(148,320
|
)
|
500,000
|
-
|
-
|
589,236
|
|||||||||||||||||||||
-
|
-
|
-
|
-
|
-
|
-
|
78,121
|
-
|
78,121
|
||||||||||||||||||||||||||
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(703,801
|
)
|
(703,801
|
)
|
||||||||||||||||||||||||
-
|
$
|
-
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
(3,421,879
|
)
|
$
|
(4,613,925
|
)
|
$
|
(3,231,904
|
)
|
SALAMANDER TECHNOLOGIES, INC.
|
||||||||
Year Ended December 31
|
||||||||
2014
|
2013
|
|||||||
(As restated)
|
(As restated)
|
|||||||
Cash flows from operating activities
|
||||||||
Net loss
|
$
|
(703,801
|
)
|
$
|
(576,924
|
)
|
||
Adjustments to reconcile net loss to net cash (used in) provided by
|
||||||||
operating activities:
|
||||||||
Depreciation and amortization of property and equipment
|
20,290
|
28,730
|
||||||
Amortization of software development costs and intangible assets
|
488,976
|
529,118
|
||||||
Bad debts
|
-
|
14,678
|
||||||
Changes in operating assets and liabilities that provided (used) cash:
|
||||||||
Accounts receivable
|
72,096
|
199,962
|
||||||
Inventory
|
7,364
|
(12,351
|
)
|
|||||
Prepaid expenses and other
|
11,777
|
(2,545
|
)
|
|||||
Accounts payable
|
(69,143
|
)
|
82,386
|
|||||
Accrued expenses and other liabilities
|
3,594
|
15,212
|
||||||
Accrued royalties
|
78,121
|
-
|
||||||
Deferred revenue
|
(200,941
|
)
|
(182,753
|
)
|
||||
Net cash (used in) provided by operating activities
|
(291,667
|
)
|
95,513
|
|||||
Cash flows from investing activities
|
||||||||
Purchases of property and equipment
|
(14,588
|
)
|
(8,780
|
)
|
||||
Purchases of intangible assets
|
(12,448
|
)
|
-
|
|||||
Software development costs
|
(502,058
|
)
|
(472,668
|
)
|
||||
Net cash used in investing activities
|
(529,094
|
)
|
(481,448
|
)
|
||||
Cash flows from financing activities
|
||||||||
Net short-term bank borrowings
|
72,000
|
45,000
|
||||||
Proceeds from notes payable (related parties)
|
335,000
|
185,000
|
||||||
Proceeds from convertible debt
|
-
|
150,000
|
||||||
Collection of common stock subscription
|
500,000
|
-
|
||||||
Net cash provided by financing activities
|
907,000
|
380,000
|
||||||
Net increase (decrease) in cash and cash equivalents
|
86,239
|
(5,935
|
)
|
|||||
Cash and cash equivalents, beginning of year
|
26,942
|
32,877
|
||||||
Cash and cash equivalents, end of year
|
$
|
113,181
|
$
|
26,942
|
1.
|
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
1.
|
Raise additional debt or equity capital on terms favorable to the Company,
|
2.
|
Upon the completion of one of more of the planned acquisitions, to generate revenues in amounts sufficient to attain profitability,
|
3.
|
Control general and administrative expenses based on available cash flow from operations and the amount of capital available.
|
2014 | 2013 | |||||||
Property and equipment
|
||||||||
Leasehold improvements
|
$
|
76,533
|
$
|
76,533
|
||||
Vehicles
|
66,311
|
66,311
|
||||||
Furniture and fixtures
|
144,289
|
140,565
|
||||||
Development tools
|
85,734
|
67,722
|
||||||
Computer equipment and software
|
138,812
|
145,960
|
||||||
Total
|
511,679
|
497,091
|
||||||
Less accumulated depreciation
|
||||||||
and amortization
|
424,165
|
403,875
|
||||||
Net property and equipment
|
$
|
87,514
|
$
|
93,216
|
2014
|
2013
|
|||||||
Note payable to OrangeHook with interest charged at 6%, secured by all personal property, due on demand.
|
$
|
100,000
|
-
|
|||||
Note payable to a shareholder with interest charged at 8%, unsecured, due on demand.
|
20,000
|
50,000
|
||||||
Notes payable to related parties, repaid in2014 (See Note 6)
|
-
|
135,000
|
||||||
Total related party notes payable
|
$
|
120,000
|
$
|
185,000
|
6.
|
CAPITAL STOCK TRANSACTIONS (INCLUDING SUBSEQUENT EVENT)
|
7.
|
COMMON STOCK OPTIONS ISSUED
|
Issued
Outside
Plan
Shares
|
Issued
Inside
Plan
Shares
|
Weighted
Average
Exercise
Price Per
Share
|
||||||||||
Outstanding at January 1, 2013
|
108.657
|
250
|
$
|
654.32
|
||||||||
Forfeited
|
(108.657
|
)
|
-
|
-
|
||||||||
Outstanding at December 31, 2013
|
-
|
250
|
504.80
|
|||||||||
Forfeited
|
-
|
(250
|
)
|
-
|
||||||||
Outstanding at December 31, 2014
|
-
|
-
|
-
|
8.
|
INCOME TAXES
|
2014
|
2013
|
|||||||
Noncurrent derred tax assets, net
|
||||||||
Deferred tax assets:
|
||||||||
Net operating loss carryforward
|
$
|
1,412,000
|
$
|
1,114,000
|
||||
Research and development tax credit carryforward
|
350,000
|
306,000
|
||||||
Stock option compensation expense
|
-
|
8,000
|
||||||
Intangible assets
|
21,000
|
25,000
|
||||||
Deferred revenue
|
154,000
|
222,000
|
||||||
Valuation allowance
|
(1,666,000
|
)
|
(1,412,000
|
)
|
||||
Deferred tax liabilities:
|
||||||||
Software development costs not capitalized for tax purposes
|
(270,000
|
)
|
(262,000
|
)
|
||||
Accumulated depreciation and amortization
|
(1,000
|
)
|
(1,000
|
)
|
||||
Net noncurrent deferred assets
|
$
|
-
|
$
|
-
|
Year
|
Net
Operating
Loss
|
Research and
Development
Credit
|
||||||
2025
|
$
|
173,385
|
$
|
24,439
|
||||
2026
|
-
|
38,731
|
||||||
2027
|
1,115,511
|
50,880
|
||||||
2028
|
477,212
|
44,038
|
||||||
2029
|
416,939
|
45,023
|
||||||
2030
|
278,123
|
38,779
|
||||||
2031
|
411,152
|
16,325
|
||||||
2032
|
-
|
20,602
|
||||||
2033
|
422,044
|
27,065
|
||||||
2034
|
772,259
|
44,434
|
||||||
Total
|
$
|
4,066,625
|
$
|
350,316
|
2014
|
2013
|
|||||||
Income tax benefit at statutory rate
|
$
|
(236,000
|
)
|
$
|
(196,000
|
)
|
||
Non-deductible expenses
|
25,000
|
12,000
|
||||||
Research and development credit
|
(44,000
|
)
|
(27,000
|
)
|
||||
Increase in valuation allowance
|
254,000
|
212,000
|
||||||
Other, net
|
(1,000 | ) |
(1,000
|
)
|
||||
Income tax expense
|
$
|
-
|
$
|
-
|
9.
|
COMMITMENTS
|
10
|
RELATED PARTY TRANSACTIONS
|
11.
|
RETIREMENT PLAN
|
12.
|
SUBSEQUENT EVENTS
|
13.
|
RESTATEMENT
|
As of December 31, 2014
|
||||||||||||
As
Previously
Reported
|
Adjustment
|
As
Restated
|
||||||||||
Balance Sheets:
|
||||||||||||
Deferred revenue – current portion
|
$
|
7,345
|
$
|
380,458
|
$
|
387,803
|
||||||
Total current liabilities
|
457,916
|
380,458
|
838,374
|
|||||||||
Accrued royalties
|
68,055
|
10,066
|
78,121
|
|||||||||
Deferred revenue – net of current portion-
|
64,739
|
64,739
|
||||||||||
Preferred stock redemption obligation
|
-
|
3,421,879
|
3,421,879
|
|||||||||
Total liabilities
|
525,971
|
3,877,142
|
4,403,113
|
|||||||||
Accumulated deficit
|
(4,158,662
|
)
|
(455,263
|
)
|
(4,613,925
|
)
|
||||||
Total stockholders' equity (deficit)
|
645,238
|
(3,877,142
|
)
|
(3,231,904
|
)
|
Year Ended December 31, 2014
|
||||||||||||
As
Previously
Reported
|
Adjustment
|
As
Restated
|
||||||||||
Statements of Operations:
|
||||||||||||
Net sales
|
$
|
1,354,142
|
$
|
208,286
|
$
|
1,562,428
|
||||||
Gross profit
|
1,067,249
|
208,286
|
1,275,535
|
|||||||||
Operating loss
|
(861,068
|
)
|
198,220
|
(662,848
|
)
|
|||||||
Net loss
|
(902,021
|
)
|
198,220
|
(703,801
|
)
|
Year Ended December 31, 2014
|
||||||||||||
As
Previously
Reported
|
Adjustment
|
As
Restated
|
||||||||||
Statements of Cash Flows:
|
||||||||||||
Net loss
|
$
|
(902,021
|
)
|
$
|
198,220
|
$
|
(703,801
|
)
|
||||
Changes in:
|
||||||||||||
Accrued royalties
|
68,055
|
10,066
|
78,121
|
|||||||||
Deferred revenue
|
7,345
|
(208,286
|
)
|
(200,941
|
)
|
As of December 31, 2013
|
||||||||||||
As
Previously
Reported
|
Adjustment
|
As
Restated
|
||||||||||
Balance Sheets:
|
||||||||||||
Deferred revenue – current portion
|
$
|
-
|
$
|
533,658
|
$
|
533,658
|
||||||
Total current liabilities
|
548,356
|
533,658
|
1,082,014
|
|||||||||
Deferred revenue – net of current portion
|
-
|
119,825
|
119,825
|
|||||||||
Preferred stock redemption obligation
|
-
|
3,500,000
|
3,500,000
|
|||||||||
Total liabilities
|
698,356
|
4,153,483
|
4,851,839
|
|||||||||
Accumulated deficit
|
(3,256,641
|
)
|
(653,483
|
)
|
(3,910,124
|
)
|
||||||
Total stockholders' equity (deficit)
|
458,023
|
(4,153,483
|
)
|
(3,695,460
|
)
|
Year Ended December 31, 2013
|
||||||||||||
As
Previously
Reported
|
Adjustment
|
As
Restated
|
||||||||||
Statements of Operations:
|
||||||||||||
Net sales
|
$
|
1,926,409
|
$
|
169,813
|
$
|
2,096,222
|
||||||
Gross profit
|
1,425,247
|
169,813
|
1,595,060
|
|||||||||
Operating loss
|
(734,530
|
)
|
169,913
|
(564,717
|
)
|
|||||||
Net loss
|
(746,737
|
)
|
169,913
|
(576,924
|
)
|
Year Ended December 31, 2013
|
||||||||||||
As
Previously
Reported
|
Adjustment
|
As
Restated
|
||||||||||
Statements of Cash Flows:
|
||||||||||||
Net loss
|
$
|
(746,737
|
)
|
169,913
|
(576,924
|
)
|
||||||
Changes in:
|
||||||||||||
Deferred revenue
|
(12,940
|
)
|
(169,813
|
)
|
(182,753
|
)
|
14.
|
SUPPLEMENTAL CASH FLOWS INFORMATION
|
Parent:
|
ORANGEHOOK, INC.
|
By:
/s/ James L. Mandel
|
|
James L. Mandel
|
|
Its: President
|
|
Merger Subsidiary:
|
SALAMANDER TECHNOLOGIES, LLC
|
By:
/s/ James L. Mandel
|
|
James L. Mandel
|
|
Its: President
|
|
Company:
|
SALAMANDER TECHNOLOGIES, INC.
|
By:
/s/ Russell L. Miller
|
|
Russell L. Miller
|
|
Its: President
|
Stockholders:
|
TRUSEC ID, Inc.
|
By:
/s/ Roger J. Sigler
|
|
Roger J. Sigler
|
|
Its: President and COO
|
|
/s/ Russell L. Miller Sally G. Miller
|
|
Russell L. Miller and Sally G. Miller, as Settlors/Trustees
of The Russell L. and Sally G. Miller Joint Revocable
Inter Vivos Trust, UAD 09/10/2014
|
|
/s/ Micheal A. Whelan
|
|
Micheal A. Whelan, TTEE, The Michel A.
|
|
Whelan Revocable Inter Vivos Trust UAD
|
|
04/01/05
|
|
/s/ Diane M. Whelan
|
|
Diane M. Whelan, TTEE, The Diane M. Whelan
|
|
Revocable Inter Vivos Trust UAD 04/01/05
|
|
/s/ Robert A. Jones, Jr.
|
|
Robert A. Jones, Jr.
|
|
/s/ Michael R. Clemens
|
|
Michael R. Clemens
|
|
/s/ Raymond W. Haring
|
|
Raymond W. Haring
|
|
/s/ Amy L. Caughell
|
|
Amy L. Caughell
|
Non-Compete Parties:
|
|
/s/ Russell L. Miller
|
|
Russell L. Miller
|
|
/s/ Sally G. Miller
|
|
Sally G. Miller
|
|
/s/ Michael A. Whelan
|
|
Micheal A. Whelan
|
|
/s/ Diane M. Whelan
|
|
Diane M. Whelan
|
Recipient
|
Shares
|
TruSec ID, Inc.
|
144,846
|
-
|
$200,000 to Russell L. Miller and Sally G. Miller, as Settlors/Trustees of The Russell L. Miller and Sally G. Miller Joint Revocable Inter Vivos Trust, UAD 0/9/10/2014
|
-
|
$100,000 to Micheal A. Whelan, TTEE, The Micheal A. Whelan Revocable Inter Vivos Trust UAD 4/1/05
|
-
|
$100,000 to Diane M. Whelan, TTEE, The Diane M. Whelan Revocable Inter Vivos Trust UAD 04/01/05
|
-
|
$80,000 to Robert A. Jones, Jr.
|
-
|
$11,880 to Michael R. Clemens
|
-
|
$5,940 to Raymond W. Haring
|
-
|
$2,179.98 to Amy L. Caughell
|
1.
|
PURCHASE OF ALL AGL MEMBERSHIP UNITS
.
|
1.1.
|
Consideration
. Subject to the terms and conditions of this Agreement, at the Closing or an Additional Closing (each as hereinafter defined), the Transferors shall transfer to the Company, free and clear of all liens, pledges or encumbrances of any kind, all of their respective outstanding membership units of AGL (the "
AGL Units
"), in exchange for shares of Company Stock as set forth on
Schedule 1.2
hereto.
|
1.2.
|
Delivery of Consideration
. At the Closing, the Transferors shall deliver to the Company appropriate instruments of conveyance, duly endorsed in blank and with duly and properly executed documentation attached, in proper form for transfer of all of their respective AGL Units to the Company, free and clear of all liens and encumbrances. At the Closing, the Company shall deliver to the Transferors certificates for the Company Stock to be issued to the Transferors in accordance with the provisions of
Schedule 1.2
.
|
1.3.
|
Taxes
. Each Transferor will pay all income, sales, transfer and documentary taxes, if any, payable in connection with the transfer of his, her or its AGL Units.
|
2.
|
REPRESENTATIONS AND WARRANTIES OF AGL AND THE TRANSFERORS
. AGL and each of the Transferors (solely with respect to Sections
2.1
,
2.3
,
2.5
,
2.7
,
2.8
,
2.17
and
2.19
(or such portions of those provisions which are applicable to the Transferors, respectively)), severally and not jointly, represents, warrants and agrees that each of the following statements is true and correct on the date hereof (and as of additional dates, as applicable, as set forth in Section 5.1(b) hereof) and such representations and warranties shall survive the Closing:
|
2.1.
|
Title to AGL Units
. Transferor(s) have the absolute right to sell, assign and transfer the AGL Units owned by Transferors to the Company, free and clear of any security interests, claims, liens (including tax liens), pledges, penalties, charges, encumbrances, buy-sell agreements, rights-of-first refusal, or rights of others whatsoever.
|
2.2.
|
Corporate Status of AGL
. AGL is a limited liability company duly organ-ized and validly existing under the laws of the State of Washington, and has the company power and authority and all licenses and permits required by governmental authority to own or lease and operate its properties and to carry on its business as now being conducted. AGL is qualified to do business in Washington and all other jurisdictions where it is required to be qualified.
|
2.3.
|
Capitalization
. The capitalization of AGL is as set forth on
Schedule 2.3
hereto. The equity interests set forth on
Schedule 2.3
constitute all of AGL's outstanding equity interests and are validly issued, fully paid and non-assessable. There are (i) no outstanding subscriptions, options, calls, contracts, commitments, understandings, restrictions, arrangements, voting agreements, rights of first refusal, warrants, convertible securities, derivative securities, membership unit appreciation rights or phantom units or similar items, rights or warrants, including any rights plan, and any right of conversion or exchange under any outstanding security, instrument or other agreement, obligating AGL to issue, deliver or sell, or cause to be issued, delivered or sold, additional equity interests of AGL, respectively, or obligating AGL to grant, extend or enter into any such agreement or commitment, and (ii) no voting trusts, proxies or other agreements or understandings to which AGL or any Transferor is a party or is bound with respect to the voting of any of the equity interests. AGL does not have any and has never had any subsidiaries, nor does it hold or has it ever held any equity interest of any other entity.
|
2.4.
|
Title to Property; Assets
. AGL has good and marketable title to all of the assets used in the operation of its business, free and clear of any security interests, claims, liens (including tax liens), forfeitures, mortgages, penalties, charges or encumbrances whatsoever. All such assets are in in good operating condition and such assets constitute all of the assets necessary to conduct AGL's business as currently conducted.
|
2.5.
|
Binding Effect; Approvals and Consents
. The execution and delivery of this Agreement and performance of the transactions contemplated hereby will not result in a breach or violation by the Transferors or AGL of, or constitute a default by the Transferors or AGL under, any agreement, instrument or order to which it is or they are a party or by which it or they, or any of its or their properties are bound, or the Articles of Organization or Operating Agreement of AGL or any statute, judgment, order, injunction, decree, regulation or ruling of any court or other governmental authority. This Agreement, and all other instruments required to be executed and delivered by the Transferors or AGL pursuant hereto, are, or when delivered will be, legal, valid and binding obligations of the Transferors and AGL, as the case may be, enforceable in accordance with their respective terms. No authorization, filing, notice, approval or consent of any governmental authority or agency or any third party is required in connection with the execution, delivery and performance by the Transferors or AGL of this Agreement and the exchange of the stock of OrangeHook for the AGL Units contemplated by this Agreement.
|
2.6.
|
Licenses, Permits, Compliance with Laws
. AGL holds all licenses, certificates, permits, franchises and rights from all appropriate federal, state or other public authorities necessary for the conduct of its business and have or has, as the case may be, conducted its business in compliance with all Applicable Laws. All such licenses, certificates, permits, franchises and rights are in full force and effect and are included in the assets of AGL and the Company will have the benefit of all such licenses, certificates, permits, franchises and rights following the Closing. Neither AGL nor Babi is charged with or under governmental investigation with respect to, any actual or alleged violation of any Applicable Law and is not the subject of any pending or threatened proceeding by any regulatory authority having jurisdiction over AGL's business, properties or operations. AGL is in compliance with all Applicable Laws, and has not received any notice of any sort of alleged violation of any Applicable Law. For purposes of this Agreement, "
Applicable Law
" shall mean any domestic or foreign federal, state or local statute, law, ordinance, rule, administrative interpretation, regulation, order, writ, injunction, directive, judgment, decree, policy, guideline or other requirement applicable to AGL or any of its respective affiliates, properties, assets, operations, officers, governors, directors, employees or agents, as the case may be.
|
2.7.
|
Articles, By-laws, Directors, Managers, Member Claims
.
|
a.
|
The copies of the Articles of Organization and Operating Agreement of AGL which have been furnished to the Company are true and complete copies of such documents as currently constituted.
|
b.
|
The minute books of AGL contain complete and accurate copies of all governing documents and minutes of all meetings of the governors and members of AGL held since its organization, and all resolutions and Operating Agreement provisions passed or confirmed by the governors or members of AGL other than at a meeting.
|
c.
|
The AGL Unit books, register of security holders, register of transfers, register of governors and any similar company records of AGL are complete and accurate.
|
d.
|
There are no outstanding applications or filings which would alter in any way the governing documents or legal status of AGL.
|
e.
|
Neither any Transferor nor any other current or former officer, governor or member of AGL, has any claim of any kind against AGL.
|
2.8.
|
Schedules; Information
. No representation or warranty by AGL or the Transferors in this Agreement, the Schedules attached hereto, or any statement, certificate or schedule furnished or to be furnished to the Company pursuant hereto, or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of material fact, or omits or will omit to state a material fact necessary to make the statements contained therein not misleading. The Transferors and AGL have disclosed to the Company or have identified and made available to the Company all material information relating to the business, properties, affairs and financial condition of AGL.
|
2.9.
|
[Intentionally omitted.]
|
2.10.
|
Undisclosed Liabilities
. AGL has no liabilities, obligations or commitments of any nature whatsoever, asserted or unasserted, known or unknown, absolute or contingent, accrued or unaccrued, matured or unmatured or otherwise ("
Liabilities
"), except those which are included in the Agilivant Closing Liabilities listed on Schedule 2.10.
|
2.11.
|
Absence of Certain Changes, Events and Conditions
. Since December 31, 2014, and other than in the ordinary course of business consistent with past practice, there has not been, with respect to AGL, any:
|
a.
|
event, occurrence or development that has had, or could reasonably be expected to have, individually or in the aggregate, a material adverse effect on AGL;
|
b.
|
amendment of the charter, by-laws or other organizational documents of AGL;
|
c.
|
issuance, sale or other disposition of any of its equity interests or membership units, or grant of any options, warrants or other rights to purchase or obtain (including upon conversion, exchange or exercise) any of the same;
|
d.
|
declaration or payment of any dividends or distributions on or in respect of any of its equity interests or membership units or redemption, purchase or acquisition of its capital stock;
|
e.
|
material change in any method of accounting or accounting practice of AGL, except as required by GAAP;
|
f.
|
material change in cash management practices and its policies, practices and procedures with respect to collection of accounts receivable, establishment of reserves for uncollectible accounts, accrual of accounts receivable, inventory control, prepayment of expenses, payment of trade accounts payable, accrual of other expenses, deferral of revenue and acceptance of customer deposits;
|
g.
|
entry into any contract that would constitute a material contract of AGL;
|
h.
|
incurrence, assumption or guarantee of any indebtedness for borrowed money except unsecured current obligations and Liabilities incurred in the ordinary course of business consistent with past practice;
|
i.
|
transfer, assignment, sale or other disposition of any material asset of AGL or cancellation of any debts or entitlements;
|
j.
|
transfer, assignment or grant of any license or sublicense of any material rights under or with respect to any AGL intellectual property or intellectual property agreements;
|
k.
|
material damage, destruction or loss (whether or not covered by insurance) to its property;
|
l.
|
any capital investment in, or any loan to, any other person or entity;
|
m.
|
acceleration, termination, material modification to or cancellation of any material contract to which AGL is a party or by which it is bound;
|
n.
|
any material capital expenditures;
|
o.
|
imposition of any encumbrance upon any AGL properties, equity interests or assets, tangible or intangible;
|
p.
|
any loan to (or forgiveness of any loan to), or entry into any other transaction with, any of its stockholders or current or former directors, officers and employees;
|
q.
|
entry into a new line of business or abandonment or discontinuance of existing lines of business;
|
r.
|
adoption of any plan of merger, consolidation, reorganization, liquidation or dissolution or filing of a petition in bankruptcy under any provisions of federal or state bankruptcy law or consent to the filing of any bankruptcy petition against it under any similar law;
|
s.
|
purchase, lease or other acquisition of the right to own, use or lease any property or assets for an amount in excess of $50,000, individually (in the case of a lease, per annum) or $150,000 in the aggregate (in the case of a lease, for the entire term of the lease, not including any option term), except for purchases of inventory or supplies in the ordinary course of business consistent with past practice;
|
t.
|
acquisition by merger or consolidation with, or by purchase of a substantial portion of the assets or stock of, or by any other manner, any business or any entity or any division thereof;
|
u.
|
action by AGL to make, change or rescind any tax election, amend any tax return or take any position on any tax return, take any action, omit to take any action or enter into any other transaction that would have the effect of increasing the tax liability or reducing any tax asset of the Company in respect of any post-closing tax period; or
|
v.
|
any contract to do any of the foregoing, or any action or omission that would result in any of the foregoing.
|
2.12.
|
Intellectual Property.
|
a.
|
Schedule 2.12(a)
lists all (i) AGL IP Registrations and (ii) AGL Intellectual Property, including software, that are not registered but that are material to AGL's business or operations. All required filings and fees related to the AGL IP Registrations have been timely filed with and paid to the relevant governmental authorities and authorized registrars, and all AGL IP Registrations are otherwise in good standing. AGL has provided the Company with true and complete copies of file histories, documents, certificates, office actions, correspondence and other materials related to all AGL IP Registrations.
|
b.
|
Schedule 2.12(b)
lists all AGL IP Agreements. AGL has provided the Company with true and complete copies of all such AGL IP Agreements, including all modifications, amendments and supplements thereto and waivers thereunder. Each AGL IP Agreement is valid and binding in accordance with its terms and is in full force and effect. Neither AGL nor any other party thereto is in breach of or default under (or is alleged to be in breach of or default under), or has provided or received any notice of breach or default of or any intention to terminate, any AGL IP Agreement.
|
c.
|
AGL is the sole and exclusive legal and beneficial, and with respect to the IP Registrations, record, owner of all right, title and interest in and to the AGL Intellectual Property, and has the valid right to use all other Intellectual Property used in or necessary for the conduct of the business or operations, in each case, free and clear of encumbrances. Without limiting the generality of the foregoing, AGL has entered into binding, written agreements with every current and former employee of AGL, and with every current and former independent contractor, whereby such employees and independent contractors: (i) assign to AGL any ownership interest and right they may have in the AGL Intellectual Property; and (ii) acknowledge the AGL's exclusive ownership of all AGL Intellectual Property. AGL has provided the Company with true and complete copies of all such agreements.
|
d.
|
The consummation of the transactions contemplated hereunder will not result in the loss or impairment of or payment of any additional amounts with respect to, nor require the consent of any other person in respect of, AGL's right to own, use or hold for use any Intellectual Property as owned, used or held for use in the conduct of AGL's business or operations as currently conducted.
|
e.
|
AGL's rights in the AGL Intellectual Property are valid, subsisting and enforceable. AGL has taken all reasonable steps to maintain the AGL Intellectual Property and to protect and preserve the confidentiality of all trade secrets included in the AGL Intellectual Property, including requiring all persons having access thereto to execute written non-disclosure agreements.
|
f.
|
The conduct of AGL's business as currently and formerly conducted, and the products, processes and services of AGL, have not infringed, misappropriated, diluted or otherwise violated, and do not and will not infringe, dilute, misappropriate or otherwise violate the Intellectual Property or other rights of any person. No person has infringed, misappropriated, diluted or otherwise violated, or is currently infringing, misappropriating, diluting or otherwise violating, any AGL Intellectual Property.
|
g.
|
There are no actions (including any oppositions, interferences or re-examinations) settled, pending or threatened (including in the form of offers to obtain a license): (i) alleging any infringement, misappropriation, dilution or violation of the Intellectual Property of any person by AGL; (ii) challenging the validity, enforceability, registration, registrability or ownership of any AGL Intellectual Property or its rights with respect to any AGL Intellectual Property; or (iii) by AGL or any other person alleging any infringement, misappropriation, dilution or violation by any person of the AGL Intellectual Property. AGL is not subject to any outstanding or prospective governmental order (including any motion or petition therefor) that does or would restrict or impair the use of any AGL Intellectual Property.
|
a.
|
Filing of Tax Returns
. AGL has timely filed or caused to be filed with the appropriate taxing authorities all returns (including information returns and other material information) in respect of all Taxes required to be filed through the date of this agreement. AGL is not currently the beneficiary of any extension of time within which to file any Tax return. Such returns and other information filed are complete and accurate in all material respects.
|
b.
|
Payment of Taxes
. All Taxes payable by AGL, in respect of the Tax returns referenced in
Section 2.13(a)
above, have been timely paid, and AGL does not have any liability for Taxes with respect to such Tax returns in excess of the amounts so paid except those amounts which are included in the Agilivant Closing Liabilities listed on Schedule 2.10.
|
c.
|
Audits, Investigations or Claims
. There are no pending or, to the knowledge of AGL, actions threatened for or relating to any additional liability of the AGL in respect of Taxes. There are no tax liens on any of the assets of AGL. AGL has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a tax assessment or deficiency. AGL has not received any written notice from a governmental authority in a jurisdiction where they do not file Tax returns or reports to the effect that they are subject to Tax in that jurisdiction.
|
d.
|
Classification
. All Persons engaged as employees or independent contractors by AGL are properly classified as employees and independent contractors, as applicable, in accordance with all applicable Tax codes and applicable laws and for employee benefits purposes. AGL has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, Stockholder, or other third party.
|
e.
|
Other
. AGL is not a party to any tax sharing or tax allocation agreement other than any agreement entered into in the ordinary course of business the principal subject matter of which is not Taxes. AGL has not made any payments, are obligated to make any payments (including in connection with this transaction), or are a party to any agreement that under certain circumstances could obligate either of them to make any payments that will not be deductible under Section 280G or Section 162 of the Internal Revenue Code of 1986, as amended (the "
Code
"). AGL has not distributed stock of another person, nor has their equity been distributed by another person, in a transaction that was purported or intended to be governed in whole or in part by Code Sections 355 or 361.
|
2.14.
|
Employees
.
Schedule 2.14
contains a true and complete list of all persons employed by AGL. Except as set forth on
Schedule 2.14
, AGL is not a party to any employment, consulting, or independent contractor agreement or offer letter.
|
2.15.
|
Employee Benefit Plans.
AGL does not presently maintain, participate in or contribute to any Employee Benefit Plan and has not previously maintained, participated in or contributed to any Employee Benefit Plan. For the purposes of this Agreement, an Employee Benefit Plan shall mean, any option or other equity based compensation, bonus, deferred compensation, incentive compensation, severance or other termination pay, change-in-control, health, disability, life, cafeteria, insurance, supplemental unemployment benefits, profit-sharing, pension or retirement plan, policy, program, agreement or arrangement, and each other employee benefit plan, program, agreement or arrangement, whether written or oral, sponsored, maintained, participated in or contributed to or required to be contributed to by AGL, for the benefit of any current or former employee, officer, manager, director or consultant of AGL.
|
2.16.
|
Environmental Matters.
|
a.
|
AGL has no actual or alleged material environmental liability, whether fixed or contingent, under any Applicable Law.
|
2.18.
|
Brokers.
No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of AGL or the Transferors.
Absence of Litigation.
There is no pending or threatened litigation by or against AGL or affecting any of its assets.
|
2.19.
|
Material Contracts.
|
a.
|
Schedule 2.19 lists each of the following contracts (including summaries of any oral agreements) (each a "
Contract
") of the Company (such contracts, together with all AGL IP Agreements being collectively, the "
Material Contracts
"):
|
i.
|
each Contract under the terms of which AGL: (A) is obligated to pay or otherwise give consideration of more than $100,000 in the aggregate during the calendar year ended December 31, 2016, (B) is obligated to pay or otherwise give consideration of more than $200,000 in the aggregate over the remaining term of such Contract, or (C) cannot be cancelled by AGL without penalty or further payment or without more than thirty (30) days' notice;
|
ii.
|
all bank and marketing licenses (contracts), and agent and sponsor agreements (contracts), broker, distributor, dealer, manufacturer's representative, franchise, agency, sales promotion, market research, marketing, consulting and advertising Contracts;
|
iii.
|
all management Contracts and Contracts with independent contractors or consultants (or similar arrangements) that cannot be cancelled without penalty or further payment and without more than thirty (30) days' notice;
|
iv.
|
all Contracts relating to indebtedness;
|
v.
|
all Contracts with any governmental authority;
|
vi.
|
all Contracts that result in any person or entity holding a power of attorney from the Transferors or AGL that relates to AGL's business; and
|
vii.
|
all leases for each item of machinery, equipment, tools, supplies, furniture, fixtures, personalty, vehicles, and other tangible personal property used in the AGL business that (A) involves consideration of more than $25,000 in the aggregate during the calendar year ending December 31, 2016, or (B) involves consideration of more than $75,000 in the aggregate over the remaining term of the Contract.
|
b.
|
Each Material Contract: (i) is valid and binding on AGL and the other parties thereto, and is in full force and effect, and (ii) upon consummation of the transactions contemplated by this Agreement, shall continue in full force and effect without default, breach, penalty or other adverse consequence. AGL is not (with or without lapse of time or the giving of notice or both) in breach of, or default under, any Material Contract in any material respect.
|
3.
|
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
. The Company hereby represents, warrants and agrees that the following statements are true and correct on the date hereof and such representations and warranties shall survive the Closing:
|
3.1.
|
Corporate Power
. The Company is a duly organized and validly existing corporation under the laws of the State of Minnesota with full corporate power and authority to enter into this Agreement and to carry out the terms and provisions hereof.
|
3.2.
|
Authorization and Binding Effect
. The execution and delivery of this Agreement and performance of the transactions contemplated hereby has been duly authorized by all necessary corporate action of the Company and will not result in a breach or violation by the Company of, or constitute a default by the Company under, any agreement, instrument or order to which the Company is a party or by which the Company or any of its properties is bound or its corporate charter or by-laws, or any statute, judgment, order, injunction, decree, regulation or ruling of any court or other governmental authority. This Agreement, and all other instruments required to be executed and delivered by the Company pursuant hereto, are, or when delivered will be, legal, valid and binding obligations of the Company.
|
4.
|
CLOSING
.
|
4.1.
|
Closing
.
|
a.
|
The initial closing of the transactions contemplated by this Agreement (the "
Closing
"), will take place at the offices of Fredrikson & Byron, P.A., located at 200 South Sixth Street, Suite 4000, Minneapolis, Minnesota, commencing at 9:00 a.m. local time on the date of this Agreement following full satisfaction or due waiver of all of the closing conditions set forth in
Section 5.1
, or on such other date and at such other time as the parties agree. The date of the initial Closing is referred to as the "
Closing Date
." The parties acknowledge and agree that the initial Closing may take place by remote electronic communication, including the exchange of .pdf executed documents.
|
b.
|
The parties further acknowledge and agree that after the initial Closing pursuant to Section 4.1(a) above, the Company may agree to allow additional AGL equity members to become signatories to, and therefore Transferors under, this Agreement in additional closings following full satisfaction or due waiver of all of the closing conditions set forth in
Section 5.1
, on such date and at such time as the additional AGL equity members become a signatory to this Agreement and the Company accepts such signatures (each an "
Additional Closing
"). The date of any Additional Closing is referred to as the "
Additional Closing Date
." The parties acknowledge and agree that each Additional Closing may take place by remote electronic communication, including the exchange of .pdf executed documents.
|
5.
|
CONDITIONS TO CLOSING
.
|
5.1.
|
Conditions to Obligations of the Company
.
The obligation of the Company to consummate the transactions contemplated hereby is subject to the satisfaction as of the Closing or any Additional Closing, as applicable, or the waiver by the Company, of the following conditions:
|
a.
|
For the initial Closing, the representations and warranties contained in Section 2 hereof shall be true and correct in all material respects at and as of the Closing as though then made, except for such representations and warranties qualified by materiality, which shall be true and correct in all respects. AGL and the Transferors shall have performed and complied with the covenants, agreements and conditions required to be performed or complied with by them under this Agreement on or prior to the date of the Closing;
|
b.
|
For any Additional Closing, (i) the representations and warranties contained in Section 2 hereof shall be true and correct in all material respects at and as of the initial Closing as though then made, and (ii) the representations and warranties contained in Sections 2.1, 2.3 (except for any adjustments to reflect the transfer of AGL Units from Transferors to the Company under this Agreement), 2.5, 2.7(e), 2.8 and 2.17 hereof shall also be true and correct in all material respects at and as of the Additional Closing as though then made; except, in the case of both clauses (i) and (ii) of this Section 5.1(b), for such representations and warranties qualified by materiality, which shall be true and correct in all respects. AGL and the Transferors shall have performed and complied with the covenants, agreements and conditions required to be performed or complied with by them under this Agreement on or prior to the date of the Additional Closing;
|
c.
|
The Transferors shall deliver or cause AGL to deliver each of the following:
|
i.
|
Unit interest powers or assignments separate from certificate with respect to the AGL Units representing 100% of each Transferor's fully-diluted equity ownership of AGL assigning such AGL Units to the Company, as well as the certificate (if such Units are certificated) representing all such AGL Units, each endorsed in blank;
|
ii.
|
Termination and cancellation of any warrants, options or debt or other derivative securities which are convertible into any AGL Units;
|
iii.
|
Termination and cancellation of any agreement relating to or affecting the capital of AGL, including without limitation, member control or similar agreements and buy-sell agreements;
|
iv.
|
Termination and cancellation of all options to acquire AGL Units, phantom equity, severance, stay and retention and similar employment benefit and equity programs and plans;
|
v.
|
All approvals and consents of regulatory authorities and all consents and approvals required from private third parties for them to carry out the transactions contemplated by this Agreement, each in a form reasonably acceptable to the Company;
|
vi.
|
All of the books and records of AGL or pertaining to the business of AGL, including without limitation, minute books, stock ledgers and registers, corporate books and corporate seals, if any;
|
vii.
|
A certificate from the Secretary of State of the State of Washington, of recent date, certifying as to the existence of AGL;
|
viii.
|
A Secretary's Certificate of AGL certifying (a) the Articles of Organization and Operating Agreement of AGL and (b) resolutions of the board of governors and members of AGL ratifying all past company actions and approving the transactions contemplated hereunder;
|
ix.
|
Executed Subscription Agreements in connection with the shares of Company Stock to be issued to the Transferors as consideration for the purchase of all of the outstanding AGL Units, satisfactory in form and substance to Company and its counsel; and
|
x.
|
Any other agreements, documents and instruments duly executed by the Transferors or AGL, as applicable, as the Company may reasonably require in connection with the consummation of the transactions contemplated by this Agreement.
|
5.2.
|
Conditions to Obligations of AGL and the Transferors
. The obligation of AGL and the initial Transferors to consummate the transactions contemplated hereby is subject to the satisfaction as of the Closing, or the waiver by AGL and the initial Transferors, of the following conditions:
|
a.
|
The representations and warranties contained in
Section 3
hereof shall be true and correct in all material respects at and as of the Closing as though then made, except for such representations and warranties that are qualified by materiality, which shall be true and correct in all respects. The Company shall have performed and complied with the covenants, agreements and conditions required to be performed or complied with by it under this Agreement on or prior to the date of the Closing;
|
b.
|
The Company shall have issued the number of shares of Company Stock to the Transferors as required to be issued under this Agreement and delivered certificates representing such shares to the Transferors or their representative promptly following the Closing;
|
c.
|
The Company shall have delivered to Transferors or their representative a certificate from the Secretary of State of the State of Minnesota, of recent date, certifying as to the existence and good standing of the Company;
|
d.
|
The Company shall have delivered to Transferors or Rene Babi, as an authorized representative of the Transferors, a Secretary's Certificate of the Company certifying (a) the Articles of Incorporation and By-laws of the Company; and (b) resolutions of the board of directors of the Company approving the transactions contemplated hereunder.
|
6.
|
INDEMNIFICATION
.
|
6.1.
|
Indemnification by the Transferors
. The Transferors, severally and not jointly, agree, in proportion to each such Transferor's pre-Closing pro rata percentage ownership of AGL set forth on Schedule 2.3 hereto, to indemnify, defend and hold the Company and, following the Closing and any Additional Closings, AGL and its officers, governors, directors, members, employees, agents and other affiliates harmless from and against any and all losses, claims, demands, suits, actions, damages, costs and expenses (including, without limitation, reasonable attorneys' fees and disbursements) of every kind, nature and description, (collectively, "
Claims
") based upon, arising out of or otherwise in respect of:
|
a.
|
Breaches. Any Breach or inaccuracy of any warranty, agreement, covenant or representation made in this Agreement by such Transferor or in any statement, document, exhibit or certification furnished by them pursuant hereto or the nonperformance of any covenant or obligation to be performed by such Transferor under this Agreement;
|
b.
|
Certain Taxes. Any and all taxes, interest and penalties of any kind (whether federal, state, local or foreign) at any time payable with respect to any gain or other income realized by the Transferors as a result of the transfer of the AGL Units to the Company and receipt of consideration hereunder; and
|
c.
|
Other. Fraud or intentional misrepresentations (including, without limitation, intentional or willful failure to disclose material facts) of the Transferors or their agents or representatives in connection with this Agreement and the transactions contemplated hereby.
|
6.2.
|
Indemnification by the Company
. From and after the Closing Date or Additional Closing Date, as the case may be, the Company agrees to indemnify, defend and hold the Transferors and AGL harmless from and against any and all Claims based upon, arising out of or otherwise in respect of any breach or inaccuracy of any warranty, agreement, covenant or representation made in this Agreement by the Company or in any schedule, exhibit or certification furnished by the Company pursuant hereto, or the nonperformance of any covenant or obligation to be performed by the Company under this Agreement.
|
6.3.
|
Recovery for Indemnification Claims
.
If an indemnifying party(ies) becomes obligated to indemnify an indemnified party(ies) with respect to any Claims pursuant to this
Section 6
, the Company may, in its sole discretion, seek recovery against the Transferors' Indemnification Holdback shares (as defined and further described in
Schedule 1.2
to this Agreement), shares of any Company Common Stock issued to the Transferors, or any combination of the foregoing to satisfy those Claims or losses. In the event that Company satisfies any Claims or losses with shares of the Company Common Stock issued to the Transferors, such shares shall be valued at the fair market value as of the date of the written notice of the claim to the indemnifying party, as reasonably determined by the Company in good faith, for purposes of determining the number of shares required to satisfy an indemnification claim. Company may also satisfy any losses or Claims by seeking recovery against any cash proceeds actually received from the sale or transfer of shares of Company Common Stock (including Transferors' Indemnification Holdback shares) in full and final satisfaction of any liability in relation to such shares.
|
6.4.
|
Individual Transferor Breaches
. Each Transferor shall be fully liable for all losses and Claims attributable to such Transferor's breach of representation, warranty or covenant.
|
6.5.
|
Third Party Claims
. A party seeking indemnification (an "
Indemnified Party
") shall notify the party obligated to provide indemnification (the "
Indemnifying Party
") in writing promptly after the assertion of any third-party Claim upon which the Indemnified Party has a right to base a claim for indemnification hereunder; provided, however, that no delay on the part of the Indemnified Party in notifying the Indemnifying Party shall relieve the Indemnifying Party from any obligation hereunder unless and to the extent the Indemnifying Party thereby is prejudiced. Upon receipt of such notice, the Indemnifying Party shall be entitled to (i) participate at its own expense in the defense or investigation of any such Claim, or (ii) assume the defense thereof in which event the Indemnifying Party shall not be liable to the Indemnified Party for legal or attorneys' fees thereafter incurred by the Indemnified Party in defense of such Claim; provided the Indemnifying Party will not be entitled to assume the defense of any third party claim if, the reasonable judgment of the Indemnified Party, a conflict of interest or alternative defense exists, the third party claim seeks any non-monetary damages or involves any criminal/regulatory matter, or the Indemnified Party is not vigorously defending the third party claim. If the Indemnifying Party assumes the defense of any Claim, it shall have the authority to compromise and settle such Claim, or to appeal any adverse judgment or ruling; provided, that if the Indemnified Party may have any unindemnified liability arising out of such Claim, the Indemnified Party shall have the right to approve the counsel selected by the Indemnifying Party, which approval shall not be unreasonably withheld, and the Indemnifying Party shall have the authority to compromise and settle each such Claim only with the written consent of the Indemnified Party, which consent shall not be unreasonably withheld. The Indemnified Party may continue to participate in the litigation of any Claim at its expense after the Indemnifying Party assumes the defense of such Claim. In the event the Indemnifying Party does not elect to assume the defense of a third-party Claim within 20 days after receipt of notice of the Claim from the Indemnified Party, the Indemnified Party shall have authority to compromise and settle such Claim at the expense of the Indemnifying Party, or to appeal any adverse judgment or ruling with the costs to be paid by the Indemnifying Party.
|
7.
|
GENERAL; ADDITIONAL AGREEMENTS
.
|
7.1.
|
Separate Representation
. Each Transferor hereby acknowledges that such person (i) has read and understands this Agreement, (ii) has had the opportunity to seek and receive independent advice from separate counsel of such person's own selection in connection with this Agreement and (iii) has not relied to any extent on any officer, governor, director or employee of (or counsel to) the Company or AGL.
|
7.2.
|
Expenses and Brokers
. Except to the extent otherwise provided in this Agreement, each party shall pay for its own legal, accounting and other similar expenses incurred in connection with the transactions contemplated by this Agreement. All legal, accounting or other similar expenses incurred by the Transferors for the purpose of facilitating this transaction, or precipitated by Transferors' intention to consummate the transactions contemplated by this Agreement will be regarded as expenses of the Transferors and not of AGL or any other party. The Transferors represent and warrant that they have not negotiated in connection with the transactions contemplated by this Agreement with any finder, broker or agent.
|
7.3.
|
Company Stock Agreed Value
.
The Company, the Transferors and AGL each agree that the value of the Company Stock constituting consideration in the transaction contemplated hereunder shall be $14.00 per share of Company Stock (the "
Per Share Value
"). For all relevant income tax reporting purposes, the parties' respective tax return filings reporting the transaction contemplated hereunder shall reflect the Per Share Value.
|
7.4.
|
Price Allocation
.
The Company shall prepare a schedule reflecting the allocation of the purchase price among the Transferors' proportionate share of AGL assets in a manner consistent with Internal Revenue Code Section 1060 (the "
Allocation Schedule
"), and shall deliver such Allocation Schedule to Transferors and AGL within 45 days following Closing. The Company shall report the transaction contemplated hereunder in a manner consistent with the Allocation Schedule and the requirements of Treas. Regs. Section 1.743-1(k)(2) and 1.755-1(d). AGL shall report the transaction contemplated hereunder in a manner consistent with the Allocation Schedule and the requirements of Treas. Regs. Section 1.743-1(k)(1) and 1.755-1(d). The Transferors shall report the transaction contemplated hereunder in a manner consistent with the Allocation Schedule and the requirements of Treas. Regs. Section 1.751-1(a)(3).
|
7.5.
|
Successors and Assigns
. This Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs or legal representatives of the parties hereto, but shall not otherwise inure to the benefit of any third parties unless expressly so stated herein. Neither party shall assign their rights under this Agreement without the consent of the other party, provided the Company will have the right to assign its rights under this agreement to any affiliated entity.
|
7.6.
|
Notices
. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile or other electronic transmission (with written confirmation of receipt), or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties):
|
7.7.
|
Board of Governors
. Post-Closing, AGL shall maintain a Board of Governors to provide guidance for management of operations.
|
7.8.
|
Confidentiality
. Transferors will maintain in confidence, and will cause the directors, officers, employees, agents, and advisors of AGL to maintain in confidence, and not use to the detriment of another party or the Company any written, oral, or other information obtained in in connection with this Agreement or the transactions contemplated hereby, unless (a) such information is already known to such party or to others not bound by a duty of confidentiality or such information becomes publicly available through no fault of such party, or (b) the furnishing or use of such information is required by law, in which case the appropriate Transferor will provide notice to the Company of such legal requirement and not disclose such information until the Company has had an opportunity to seek a protective order, and then will disclose only such confidential information as is necessary to satisfy the minimum legal requirement.
|
7.9.
|
Captions
. The headings of the sections herein and of the Schedules hereto are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions of this Agreement.
|
7.10.
|
Entire Agreement
. This Agreement, together with all Exhibits and Schedules attached hereto, constitutes the entire understanding between the parties hereto with respect to the matters covered herein, and supersedes all prior agreements and communication with respect thereto. This Agreement may not be amended or modified, nor may any of its terms be waived, except by written instruments signed by the parties hereto.
|
7.11.
|
Severability
.
In the event that any one or more of the provisions contained in this Agreement or in any other instrument referred to in this Agreement, will, for any reason, be held to be invalid, illegal or unenforceable in any respect, then to the maximum extent permitted by law, such invalidity, illegality or unenforceability will not affect any other provision of this Agreement or any other such instrument.
|
7.12.
|
Exhibits and Schedules
. All Exhibits and Schedules attached hereto or referred to herein are incorporated herein and made a part hereof for all purposes.
|
7.13.
|
Governing Law
. This Agreement will be governed by and construed in accordance with the internal laws of the State of Minnesota without giving effect to any choice or conflict of law provision or rule (whether of the State of Minnesota or any other jurisdiction) that would cause the application of laws of any jurisdiction other than those of the State of Minnesota.
|
7.14.
|
Multiple Counterparts
. This Agreement may be executed in separate or multiple counterparts by the various parties and all of such counterparts shall be considered as one and the same instrument notwithstanding the fact that various counterparts are signed by only a Transferor or the Company and all of such agreements shall be deemed but one and the same agreement.
|
7.15.
|
Survival of Covenants
. The covenants and agreements contained herein to be performed after Closing or any Additional Closing, as applicable, shall survive the Closing or any Additional Closing, as applicable, of the transactions contemplated by this Agreement as provided in the Agreement and may be enforced hereafter by the appropriate party hereto.
|
7.16.
|
Release
. From and after the Closing or the Additional Closing, as applicable, the Transferors, on behalf of the Transferors and their affiliates, hereby release and forever discharge AGL and the Company, and each of its individual, joint or mutual, past, present and future officers, directors, employees, representatives and agents, successors and assigns (collectively, the "
Releasees
") from any and all claims, demands, actions, obligations, contracts, agreements, debts and Liabilities whatsoever, whether known or unknown, suspected or unsuspected, both at Law and in equity, which the Transferors or the Transferors' affiliates now has, have ever had or may hereafter have against the respective Releasees arising prior to or contemporaneously with the Closing or the Additional Closing, as applicable, or on account of or arising out of any matter, cause or event occurring contemporaneously with or prior to the Closing or the Additional Closing, as applicable, whether or not relating to claims pending on, or asserted after, the Closing or the Additional Closing, as applicable. Notwithstanding the foregoing, nothing in this
Section 7.16
shall in any way limit or otherwise restrict any rights the Transferors may have against the Company arising out of, relating to or in connection with this Agreement and the transactions contemplated hereby. For the avoidance of doubt, this
Section 7.16
does not release the Releasees with respect to claims arising out of, based on or resulting from (A) any Claims for salary, wages or other cash compensation due to the undersigned solely in such employee's capacity, (B) rights to reimbursements for expenses incurred and documented prior to the date hereof and consistent with AGL's reimbursement policies, (C) unreimbursed claims under employee health and welfare plans, consistent with terms of coverage, (D) the entitlement of the undersigned to continuation coverage benefits or any other similar benefits required to be provided by law, or (E) to the extent such Releasee is now or has been at any time prior to the Closing Date an officer or director of the Company as to claims of indemnification, advancement of expenses or exculpations consistent with the articles of organization and member control agreement of the Company and applicable Law, provided, however, that the foregoing shall not be deemed to reduce or otherwise modify any Transferor's indemnification obligation under
Article VI
of this Agreement.
|
7.17.
|
Further Action.
Each of the parties hereto shall use all reasonable efforts to take, or cause to be taken, all appropriate action, do or cause to be done all things necessary, proper or advisable under Applicable Law, and to execute and deliver such documents and other papers, as may be required to carry out the provisions of this Agreement and consummate and make effective the transactions contemplated hereby and thereby.
|
a.
|
OrangeHook Consideration
. The consideration for all of the outstanding AGL Units to be acquired by the Company will be 528,721 shares of Company Stock, assuming all equity members of AGL become party to this Agreement in the initial Closing or an Additional Closing (the "
OrangeHook Consideration
").
|
b.
|
Delivery of the OrangeHook Consideration
. At the Closing and each Additional Closing, subject to the conditions set forth in this Agreement, the OrangeHook Consideration will be delivered or set aside as follows:
|
i.
|
the Company will (1) set aside up to 70,000 shares of Company Stock based on the aggregate pro rata portion of the AGL Units represented by Transferors that are party to this Agreement as set forth on
Schedule 1.2(b)(i)
(the "
Transferors' Indemnification Holdback
"); and (2) issue to the Transferors, pro rata based upon their ownership interest in the AGL Units as set forth on
Schedule 1.2(b)(i)
, up to 458,721 shares in the aggregate of Company Stock to the Transferors (the "
Closing Shares
"), and deliver certificates representing such Closing Shares to the Transferors promptly following Closing or Additional Closing. For the avoidance of doubt, the Transferors' Indemnification Holdback can and will be increased upon Additional Closings based upon the additional Transferors' pro rata portion of the Transferors' Indemnification Holdback.
|
c.
|
Transferors' Indemnification Holdback
. On the Closing Date or any Additional Closing Date, one or more certificates representing the Transferors' Indemnification Holdback shares shall be held back and retained by the Secretary or Assistant Secretary of the Company. Such Transferors' Indemnification Holdback shares, less the applicable portion of the Transferors' Indemnification Holdback shares required to satisfy any claims for indemnification pursuant to
Section 6
hereof (as rounded to the nearest share to avoid issuance of partial shares), will be delivered to the Transferors on June 2, 2017. For all Tax purposes, the Transferors' Indemnification Holdback shares shall be treated as issued and outstanding. Dividends in respect of the Transferors' Indemnification Holdback shares shall be promptly delivered to the applicable stockholders. Each Transferor owning Transferors' Indemnification Holdback shares shall have any voting rights with respect to the Holdback Shares, and Company shall take all reasonable steps necessary to allow the exercise of such rights. While the Transferors' Indemnification Holdback shares remain in the possession of the Secretary or Assistant Secretary of the Company, the applicable Transferors shall be able to exercise all incidents of ownership of such shares which are not inconsistent with the terms and conditions of this Agreement.
|
d.
|
Piggyback Registration Rights
.
|
i.
|
Whenever the Company proposes to register any of its securities under the Securities Act (other than pursuant to a registration on Form S-4 or S-8 or any successor or similar forms) and the registration form to be used may be used for the registration of Registrable Securities, whether or not for sale for its own account, the Company will give prompt written notice (but in no event less than 30 days before the anticipated filing date) to all Transferors (other than Transferors all of whose Registrable Securities are then covered by an effective registration statement), and such notice shall describe the proposed registration and distribution and offer to all such Transferors the opportunity to register the number of Registrable Securities as each such Transferor may request. The Company will include in such registration statement all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 15 days after the Transferor's receipt of the Company's notice (a "
Piggyback Registration
"). "
Registrable Securities
" shall mean (i) the Company Common Stock; (ii) Common Stock issued on the exercise of any options; and (iii) any other security of the Company issued as a dividend or other distribution with respect to or in exchange for or in replacement of any of the foregoing, provided, however, that Registrable Securities shall not include any shares which (x) have been effectively registered under the Securities Act and disposed of in accordance with a registration statement covering them, (y) have been sold to the public pursuant to Rule 144 (or by similar provision under the Securities Act), or (z) are eligible for resale by the Material Investor thereof under Rule 144 (or by similar provision under the Securities Act) without being subject to volume limitations.
|
ii.
|
|
iii.
|
The Company, in its sole discretion, may withdraw a Piggyback Registration at any time prior to the time it becomes effective.
|
iv.
|
If (i) a Piggyback Registration involves an underwritten offering of the securities being registered, whether or not for sale for the account of the Company, to be distributed (on a firm commitment basis) by or through one or more underwriters of recognized standing under underwriting terms appropriate for such a transaction, and (ii) the managing underwriter of such underwritten offering shall inform the Company and Transferors requesting such registration by letter of its belief that the distribution of all or a specified number of such Registrable Securities concurrently with the securities being distributed by such underwriters would interfere with the successful marketing of the securities being distributed by such underwriters (such writing to state the basis of such belief and the approximate number of such Registrable Securities which may be distributed without such effect), then the Company will be required to include in such registration only the amount of securities which it is so advised should be included in such registration. In such event: (x) in cases initially involving the registration for sale of securities for the Company's own account, securities shall be registered in such offering in the following order of priority: (i) first, the securities which the Company proposes to register, and (ii) second, Registrable Securities and securities which have been requested to be included in such registration by persons entitled to exercise "piggy-back" registration rights pursuant to contractual commitments of the Company (pro rata based on the amount of securities sought to be registered by Transferors and such other Persons, if any); and (y) in cases not initially involving the registration for sale of securities for the Company's own account, securities shall be registered in such offering in the following order of priority: (i) first, the securities of any person whose exercise of a "demand" registration right pursuant to a contractual commitment of the Company is the basis for the registration, (ii) second, Registrable Securities and securities which have been requested to be included in such registration by Persons entitled to exercise "piggy-back" registration rights pursuant to contractual commitments of the Company (pro rata based on the amount of securities sought to be registered by Holders and such other Persons), and (iii) third, the securities which the Company proposes to register.
|
v.
|
The right of the Transferors to register Registrable Securities pursuant to this agreement is only exercisable with respect to Registrable Securities not then covered by an effective registration statement.
|
vi.
|
Expenses
. With respect to each Piggyback Registration, all fees, costs and expenses shall be borne by the Company provided, however, that the Transferors shall bear their pro rata share of any underwriting discounts and commissions. The fees, costs and expenses of registration to be borne by the Company shall include, without limitation, all internal costs (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), all Securities and Exchange Commission (the "
SEC
") and other filing fees, listing or quotation fees, printing expenses, fees and disbursements of counsel and accountants for the Company (including the cost of any special audit requested in order to effect such registration) and one counsel for all of the Transferors, all legal fees and disbursements and other expenses of complying with state securities or "Blue Sky" laws of any jurisdiction in which the Registrable Securities to be offered are to be registered or qualified, and the premiums and other costs of policies of insurance against liability arising out of such public offering which the Company determines to obtain, but shall not include underwriting discounts and commissions attributable to equity securities not sold for the account of the Company.
|
vii.
|
Participation in Underwritten Public Offering
. No holder of Registrable Securities may participate in any underwritten registration hereunder unless such holder (i) agrees to sell such holder's Registrable Securities on the basis provided in any underwriting arrangements approved by the Transferors, and (ii) completes and executes all questionnaires, powers of attorney, custody agreements, indemnities, underwriting agreements, hold-backs and other documents required under the terms of such underwriting arrangements.
|
viii.
|
Lockup Period After an Initial Public Offering
. Notwithstanding the rights set forth above, each Transferor agrees, for the benefit of the Company, that should an underwritten initial public offering be made and should the managing underwriter of such offering require, the Transferor, or any transferee of the Transferor, will not, without the prior written consent of the Company and such underwriter, during the 180-day period commencing on the effective date of the registration statement related to such initial public offering (the "
Lockup Period
") (i) sell, transfer or otherwise dispose of, or agree to sell, transfer or otherwise dispose of any of the Shares beneficially held by the Transferor during the Lockup Period, (ii) sell, transfer or otherwise dispose of, or agree to sell, transfer or otherwise dispose of any options, rights or warrants to purchase any of the Shares beneficially held by the Transferor during the Lockup Period, or (iii) sell or grant, or agree to sell or grant, options, rights or warrants with respect to any of the Shares. The foregoing lockup would not prohibit, during the Lockup Period, gifts to donees or transfers by will or the laws of descent to heirs or beneficiaries provided such donees, heirs and beneficiaries shall be bound by the restrictions set forth herein.
|
ix.
|
Termination
. The rights of the Transferors hereunder shall terminate three (3) years after the date of the closing of a Qualified Public Offering. "
Qualified Public Offering
" means an initial public offering of Common Stock by the Company pursuant to a public distribution (a) in which the net proceeds to the Company are not less than $25,000,000, (b) the Common Stock of the Company is listed and traded on a national securities exchange, and (c) the aggregate market capitalization represented by outstanding shares of Common Stock immediately after such offering would be not less than $50,000,000.
|
x.
|
Registration Procedures.
Whenever holders of Registrable Securities have requested that any Registrable Securities be included in a registration pursuant to this
Article 9
, the Company will use reasonable efforts to effect the registration of such Registrable Securities in accordance with the intended method of disposition thereof.
|
$_____________
|
Issue Date: _______________
|
$[Amount]
|
[Date]
|
Minneapolis, Minnesota
|
Specified Date or Achievement
|
Number of Shares as to which
|
(each, a "Vesting Time")
|
Risks of Forfeiture Lapse
|
[The date and time of day
or
|
[to be completed]
|
certification of achievement
|
|
procedures should be approved when
|
|
award is granted and specified in
|
|
this section]
|
Specified Date or Achievement
|
Number of Units
|
|
(each, a "Vesting Time")
|
that Vest
|
|
[Exact time/procedures for
|
[To be completed]
|
|
certifying achievement should be
|
||
determined when Award is approved
|
||
and specified in this Section]
|
1.
|
Employment
.
OrangeHook agrees to employ Employee and Employee agrees to provide services for OrangeHook on the terms and conditions set forth below.
|
2.
|
Scope of Employment
.
During the Employment Period (as defined below), Employee shall be appointed and serve as the Chief Executive Officer and Chairman of the Board of Agilivant, LLC, an OrangeHook subsidiary. Employee will be a member of the OrangeHook executive committee.
|
3.
|
Employee's Obligations
.
The general duties and responsibilities of the position are set forth on
Exhibit B
hereto. No modification or change of Employee's title or responsibilities and/or duties shall modify, change or revoke any provision of this Agreement.
|
3.1.
|
Best Efforts; Full Working Time
.
Employee agrees to devote Employee's best efforts, attention, skill, relations and experience to the performance of Employee's duties in accordance with the provisions of this Agreement. Employee shall apply all of Employee's full working time to performing these services.
|
3.2.
|
Supervision and Direction of Services
.
Employee's services shall be under the supervision and direction of the CEO of OrangeHook.
|
3.3.
|
Level of Authority; Rules
.
Employee shall have the governance and hiring and firing authority (for Agilivant officers, if any) as approved by OrangeHook's Board of Directors. Employee's spending authority will be as specified within the approved budget for Agilivant. Employee shall be bound by all the policies, rules and regulations of OrangeHook now in force and by all such other policies, rules and regulations as may be hereafter implemented and will faithfully observe and abide by the same. No such policy, rule or regulation shall alter, modify or revoke Employee's status or any other provision of this Employment Agreement. OrangeHook will provide copies of, or electronic access to, all executive and employee policies.
|
3.4.
|
[Intentionally Omitted]
.
|
3.5.
|
Non-Solicitation
.
Employee agrees that during his employment, and for a period of 12 months following termination of employment for whatever reason, Employee will not, without the written consent of OrangeHook:
|
(c) |
Solicit any employee or contractor of OrangeHook or its subsidiaries, or persuade or induce any employee or contractor to terminate or alter the employee's or contractor's relationship with OrangeHook or its subsidiaries.
|
(i) |
who/which is a customer of OrangeHook or its subsidiaries as of Employee's last date of employment, or who/which was a customer of OrangeHook or its subsidiaries at any time during the twenty-four (24) calendar month period immediately preceding Employee's last date of employment; and
|
(ii) |
to or with whom/which Employee sold or provided products, processes or services on behalf of OrangeHook, or about whom/which Employee had access to confidential information by reason of Employee's employment with OrangeHook, or with whom/which Employee had any business involvement of any kind as a result of Employee's employment with OrangeHook, at any time during the lesser of (A) the period of Employee's employment with OrangeHook, and (B) the twenty-four (24) calendar month period immediately preceding Employee's last date of employment.
|
3.6.
|
Office Location
.
For the time being, Employee shall perform Employee's duties under this Agreement primarily in Roseville, CA. Employee's duties will require relocation, and OrangeHook and Employee agree upon a temporary living arrangement of up to 90 days and consisting of reimbursement of up to $3,000 per month in expenses. The parties will agree on a relocation allowance package prior to Employee's move.
|
3.7.
|
Term
.
Employee's term of employment with OrangeHook shall begin on the Effective Date and shall continue thereafter until the first anniversary of the Effective Date (the "Employment Period"),
unless sooner terminated pursuant to the provisions of this Agreement; provided, however, that nothing in the foregoing will be construed as a guaranty of salary and/or benefits for any specific period of time. The Employment Period and the terms of this Agreement will be automatically extended for two-year periods following the first anniversary of the Effective Date, subject to the terms of this Agreement, unless Employee provides notice of his intention not to renew the Agreement at least 90 calendar days prior to the expiration of the Employment Period, as extended.
|
3.8.
|
Termination
.
OrangeHook may terminate Employee's employment hereunder at any time prior to the end of the Employment Period with or without Cause (as defined below), subject to the terms set forth in Sections 3.8 and 3.9 hereof. Employee may voluntarily terminate his employment prior to the end of the Employment Period by giving OrangeHook written notice. Upon termination of Employees' employment with OrangeHook, Employee's rights under any applicable benefit plans shall be determined under the provisions of those plans, unless otherwise specifically set forth herein.
|
3.8.1.
|
Death
.
Employee's employment and this Agreement shall terminate in the event of his death. Except as provided herein, OrangeHook shall have no obligation to pay or provide any compensation or benefits under this Agreement on account of Employee's death, or for periods following Employee's death.
|
3.8.2.
|
Cause
.
OrangeHook may terminate Employee's employment and this Agreement for Cause by giving Employee notice in writing. The term
"Cause"
for termination of Employee's employment shall mean the occurrence of any of the following: (a) Employee's failure or neglect to substantially perform (other than by reason of disability), the essential duties of his position, which shall specifically include failing to respond to communications from OrangeHook's CEO on a timely basis, , or Employee's refusal or failure to follow or carry out any reasonable direction of the CEO or the Board of Directors of OrangeHook, which failure, neglect or refusal, if susceptible to cure, remains uncured after thirty (30) calendar days following written notice to Employee; (b) Employee engaging in theft, embezzlement, fraud or misappropriation of any property of OrangeHook and/or an OrangeHook subsidiary, (c) Employee pleading guilty to, or being convicted by a court of law of, offenses involving fraud, moral turpitude, embezzlement, theft or similar criminal conduct, or any felony; (d) misconduct in connection with the performance of Employee's duties or use of alcohol, drugs or any controlled substance that is detrimental to the business or reputation of OrangeHook and/or an OrangeHook subsidiary, (e) Employee's material breach of this Agreement that remains uncured for a period of thirty (30) calendar days following written notice to Employee, or (f) any breach of the Proprietary Information and Confidentiality Agreement attached hereto as
Exhibit A
. Written notice by OrangeHook to Employee under clauses (a) and (e) of this Section 3.8.2 shall describe the particulars of the Cause determination in sufficient detail to allow Employee a reasonable opportunity to remedy or eliminate the circumstances giving rise to the Cause within the time period specified for curing any such breach of this Agreement.
|
3.8.3.
|
Disability
.
If Employee is unable to perform his services (with reasonable accommodation) by reason of disability due to illness or incapacity, Employee shall be entitled to receive such compensation as shall be approved and authorized by policies adopted from time to time by the board of directors of OrangeHook. Notwithstanding the foregoing, if such illness or incapacity does not cease to exist within, and Employee is unable to perform Employee's essential duties (with reasonable accommodation), for a six (6) consecutive month period, OrangeHook may thereupon terminate this Agreement and Employee shall not be entitled to receive any further compensation from OrangeHook (other than accrued but unpaid compensation through the date of termination). For purposes of this Agreement, Employee is "disabled" when he is unable to continue his normal duties of employment, by reason of a medically determined physical or mental impairment. In determining whether or not Employee is disabled, OrangeHook may rely upon the opinion of any doctor that specializes in such particular impairment affecting Employee, selected jointly by OrangeHook and Employee. If OrangeHook and Employee cannot agree on such specialist, resolution shall be settled by arbitration under the terms of this Agreement.
|
3.8.4.
|
Good Reason
.
Employee may terminate his employment for Good Reason, as defined herein. For purposes of this Agreement,
"Good Reason"
shall mean any of the following events: (a) without Employee's express written consent, a material reduction of Employee's duties, which represents a material diminution in Employee's position or responsibilities with OrangeHook/Agilivant in effect immediately prior thereto or the removal of Employee from such position and responsibilities; (b) without Employee's express written consent, a substantial reduction, without good business reasons, of the facilities and perquisites (including corporate office space and location so long as Employee is employed) available to Employee prior to such reduction; (c) a material reduction by OrangeHook in the Base Salary or Incentive Compensation of Employee as in effect prior to such reduction; (d) without Employee's written consent, OrangeHook requires that Employee's primary location for work (other than travel required by Employee's position) be a location more than thirty (30) driving miles from Employee's then current primary office location; or (e) any material breach by OrangeHook of any provision of this Agreement. In order to terminate this Agreement for Good Reason, Employee shall provide OrangeHook with: (i) written notice of the Good Reason (which notice must be delivered within ninety (90) days following the date of the event constituting Good Reason and which notice shall describe the particulars of the Good Reason in sufficient detail to allow OrangeHook the reasonable opportunity to remedy or eliminate the Good Reason(s), if susceptible of being remedied or eliminated); and (ii) thirty (30) days following delivery of such written notice to remedy or eliminate the Good Reason(s). In the event that Employee provides such notice and OrangeHook fails to remedy or eliminate the Good Reason(s) within such thirty (30)-day period, Employee shall have thirty (30) days following the end of the foregoing thirty (30)-day cure period to provide OrangeHook with written notice that Employee is terminating this Agreement as a result of such Good Reason(s).
|
3.9.
|
Payments Upon Termination of Employment
.
|
3.9.1.
|
Termination by OrangeHook for Cause, As a Result of Death, Disability or by Employee Without Good Reason
.
Upon termination of Employee's employment by OrangeHook for Cause, as a result of death, disability or by Employee without Good Reason, Employee (or Employee's heirs in the event of Employee's death) shall be entitled to receive in cash payment an amount equal to all previously accrued but unpaid compensation described in Section 4.
|
3.9.2.
|
Termination by OrangeHook Without Cause, Due to a Change of Control or by Employee With Good Reason
.
Upon termination of Employee's employment by OrangeHook without Cause or due to a Change of Control, or by Employee with Good Reason, Employee shall be entitled to receive a lump sum payment in an amount equal to all previously accrued but unpaid compensation described in Section 4 plus (a) 12 months of Employee's Base Salary, unless the termination event occurs during the first 12-month Employment period, in which case Employee will be entitled to his Base Salary for the greater of (i) the balance of the term remaining on the first 12-month Employment Period or (ii) 6 months at Employee's then-current rate (without giving effect to any decrease that triggers a termination of employment for Good Reason), and (b) the amount of any Short Term Incentive Compensation that would have been earned through the end of the quarter in which termination occurs. In addition, if such termination occurs in anticipation of, or within 6 months following, a Change of Control of OrangeHook, Employee shall be entitled to the immediate vesting of all unvested options (as defined in Exhibit C, if any, and such options will not be forfeited. For purposes of this Agreement, "Change of Control" shall have the same meaning as set forth in the OrangeHook, Inc. 2016 Equity Incentive Plan.
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3.9.3.
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Timing of Payments
. Payments required pursuant to Subsections 3.9.1 and 3.9.2 shall be made within 45 days of the date of termination, except as otherwise required under Section 8.11 below, subject to Employee's execution and non-revocation of a release in a form satisfactory to the Company.
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4.1 . |
Base Salary
.
Employee will be paid a Base Salary of two hundred seventy-five thousand dollars ($275,000.00) per year subject to normal payroll withholdings, except that Employee will receive fifty (50%) of his Base Salary until the CEO and Board of Directors have determined the Company's liquidity and capitalization position can reasonably support payment of the full amount of the Base Salary. The Company will establish an accrual on its balance sheet for the unpaid portion of the Base Salary. Employee's Base Salary will increase 5% on each anniversary of the Effective Date during the Employment Period.
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4.2 |
Incentive Compensation
.
Provided that Employee remains continuously employed by OrangeHook and/or an OrangeHook subsidiary until the applicable dates set forth in
Exhibit C
, Employee shall be entitled to the Short Term and Long Term Incentive Compensation as set forth on
Exhibit C
.
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4.4. |
Standard Executive Benefits
.
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5.
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Employment Representations
.
Employee represents that: (i) the performance by Employee of his duties and other obligations under this Agreement does not and will not violate or conflict with, or constitute a default or breach of, any covenant or obligation under any other employment agreement, contract, or other instrument to which Employee is a party or by which he is bound; and (ii) Employee will not disclose to OrangeHook any confidential or proprietary information of any other person or employer and will not bring to OrangeHook any property or documents of a confidential nature that belong to any other person or employer.
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6.
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Trade Secrets
.
Employee acknowledges that OrangeHook has gone to great time and expense to develop customers and to develop procedures and processes for development of products and services and the sales of products and services. Such procedures and processes in addition to various other types of proprietary information are included as part of the "
confidential information
" described in the "
Proprietary Information and Confidentiality Agreement
" attached hereto as
Exhibit A
. Employee has previously executed the Proprietary Information Agreement or agrees to execute OrangeHook 's Proprietary Information Agreement contemporaneously with the execution of this Agreement and employment.
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7.
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Remedies for Breach of Covenant Regarding Non-Solicitation and Confidentiality
.
The parties agree that the verified breach by Employee of any covenants contained in Sections 3.5 and 6 will result in immediate and irreparable injury to OrangeHook. In the event of any verified breach by Employee of the covenants contained in Sections 3.5 and 6, OrangeHook shall be entitled to seek recourse through all available legal and equitable remedies necessary or useful to prevent any likelihood of immediate or irreparable injury to OrangeHook and/or an OrangeHook subsidiary. The parties agree that, in the case of such a breach by Employee of any of the provisions of such Sections, OrangeHook may take any appropriate legal action, including without limitation action for injunctive relief, consisting of orders temporarily restraining and preliminarily and permanently enjoining such actual or threatened breach. Damages are only equal to the documented monetary damage. No Employee compensation provision here within will be withheld or disallowed to Employee until proven and recognized by a court of law.
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8.
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Miscellaneous
.
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8.10 |
Survival
.
The provisions set forth in Sections 3.5, 3.8, 3.9, 6, 7, 8 and Exhibit A (Proprietary Information and Confidentiality Agreement) of this Agreement will survive any termination of Employee's employment with OrangeHook and the termination of this Agreement.
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8.11 |
Internal Revenue Code Section 409(A
)
. The intent of the parties is that payments and benefits under the Agreement comply with or be exempt from Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations and guidance thereunder ("
Section 409A
") and, accordingly, to the maximum extent permitted the Agreement shall be interpreted to be in compliance therewith or exempt therefrom. To the extent any such cash payment or continuing benefit payable upon Employee's termination of employment is nonqualified deferred compensation subject to Section 409A, then, only to the extent required by Section 409A after application of all applicable exceptions, such payment or continuing benefit shall not commence until the date which is six (6) months after the date of separation from service, and any previously scheduled payments shall be made in a lump sum (without interest) on that date. For purposes of Section 409A, the phrase "termination of employment" (or other words to that effect), as used in this Agreement, shall be interpreted to mean "separation from service" as defined under Section 409A. Notwithstanding the foregoing, OrangeHook makes no representations that the payments and benefits provided under this Agreement comply with Section 409A and in no event shall OrangeHook be liable for all or any portion of any taxes, penalties, interest or other expenses that may be incurred by Employee on account of non-compliance with Section 409A.
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§
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Creation and development of a payments business to capture market share and increase the valuation of OrangeHook by:
|
o
|
Leveraging the assets of OrangeHook's Agilivant subsidiary to create value globally
|
o
|
Integrating a health savings account component utilizing Agilivant platform
|
o
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Entering banks into agreements with OrangeHook to facilitate the payments program
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§
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Leveraging the sales channel of OrangeHook's subsidiary LifeMed ID, Inc. ("LMID") to service the health industry and to capture acquiring revenue domestically and internationally including but not limited China
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§
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Leveraging the cloud rules based healthcare engine to create an integrated payments gateway
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§
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Serving as a member of the OrangeHook executive committee to assist in formulating and driving OrangeHook strategy and business policy
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§
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Developing and implementing strategic partnerships and identifying and assessing acquisitions in collaboration with OH Chief Strategy Officer.
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§
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Respond in a timely manner to communications from OrangeHook's Chief Executive Officer.
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§
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Completion of the responsibilities required of the Chairman of Agilivant, LLC in a timely manner and in cooperation with the General Counsel or CEO of OrangeHook.
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Subsidiary
|
State of Incorporation
or Organization
|
Approximate Percentage Equity Interests
Owned by OrangeHook, Inc.
|
||
OrangeHook, Inc.
|
Minnesota
|
100% owned by Nuvel Holdings, Inc.
|
||
Salamander Technologies, LLC
|
Minnesota
|
100%
owned by OrangeHook, Inc.
|
||
Agilivant, LLC
|
Washington
|
82%
owned by OrangeHook, Inc.
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LifeMed ID, Inc.
|
California
|
100% owned by OrangeHook, Inc.
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Nuvel, Inc.
|
Delaware
|
100% owned by Nuvel Holdings, Inc.
|