NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
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NOTE 1.
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DESCRIPTION OF BUSINESS:
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AMERI Holdings, Inc. (“AMERI”, the “Company”, “we” or “our”) is a company that, through the operations of its eleven
subsidiaries, provides SAP
TM
cloud and digital enterprise services to clients worldwide. Headquartered in Suwanee, Georgia, we typically go to market both vertically by industry and horizontally by product/technology specialties
and provide our customers with a wide range of business and technology offerings. We work with customers, primarily within North America, to improve process, reduce costs and increase revenue through the judicious use of technology. The
Company earns almost all of its revenue from North America. The Company takes the position that all of its businesses operate as a single segment.
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NOTE 2.
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BASIS OF PRESENTATION:
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The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance
with generally accepted accounting principles in the United States of America, or U.S. GAAP, and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended. Certain information and disclosure notes normally included in
annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to those rules and regulations, although we believe that the disclosures made are
adequate to ensure the information presented is not misleading.
The accompanying unaudited condensed consolidated financial statements reflect all adjustments (which were of a normal,
recurring nature) that, in the opinion of management, are necessary to present fairly our financial position, results of operations and cash flows as of and for the interim periods presented. All intercompany transactions have been eliminated
in the accompanying unaudited condensed consolidated financial statements.
Our comprehensive income (loss) consists of net income (loss) plus or minus any periodic currency translation
adjustments.
The results for the interim periods presented are not necessarily indicative of the results expected for any future
period. The following information should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Recent Accounting Pronouncements
New Standards to Be Implemented
In January 2017, the FASB issued ASU No. 2017-04, simplifying the Test for Goodwill Impairment. Under this new standard,
goodwill impairment would be measured as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine
goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination.
This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods. Early adoption is permitted for interim or annual goodwill impairment test performed on testing dates after January 1,
2017. Based on the Company’s preliminary assessment of the foregoing update, it does not anticipate such update will have a material impact its financial statements.
Standards Implemented
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. This new standard replaces the existing
guidance on leases and requires the lessee to recognize a right-of-use asset and a lease liability for all leases with lease terms equal to or greater than twelve months. For finance leases, the lessee would recognize interest expense and
amortization of the right-of-use asset, and for operating leases, the lessee would recognize total lease expense on a straight-line basis. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning
on or after December 15, 2018. Upon adoption, entities will be required to use a modified retrospective transition which provides for certain practical expedients. Entities are required to apply the new standard at the beginning of the
earliest comparative period presented. Early adoption of this new standard is permitted. The Company has adopted this new standard during the current quarter. The Company does not expect the requirement to recognize a right-of-use asset and a
lease liability for operating leases to have a material impact on the presentation of its consolidated statements of financial position.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments (ASU 2016-15), which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017,
and interim periods within those fiscal years. The company has implemented the above standard effective from Quarter 3 of 2018 and has made the respective disclosures in Statement of Cash Flow.
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NOTE 3.
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BUSINESS COMBINATIONS:
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Acquisition of Ameri Georgia
On November 20, 2015, we completed the acquisition of Bellsoft, Inc., a consulting company based in Lawrenceville,
Georgia, which specializes in SAP software, business intelligence, data warehousing and other enterprise resource planning services.
Following the acquisition, the name of Bellsoft, Inc. was changed to Ameri100 Georgia Inc. (“Ameri Georgia”).
Ameri Georgia has operations in the United States, Canada and India.
The total purchase price of $9.9 million was allocated to net working capital of $4.6 million, intangibles of $1.8
million, taking into consideration projected revenue from the acquired list of Ameri Georgia customers over a period of three years, and goodwill. The excess of total purchase price over the net working capital and intangibles allocations has
been allocated to goodwill.
On January 17, 2018, we completed all payment obligations to the former shareholders of Ameri Georgia in connection with
the Ameri Georgia share purchase agreement, and we have no further payment obligations pursuant thereto.
Acquisition of Bigtech Software Private Limited
On June 23, 2016, we entered into a definitive agreement to purchase Bigtech Software Private Limited (“Bigtech”), a
pure-play SAP services company providing a wide range of SAP services including turnkey implementations, application management, training and basis ABAP support. Based in Bangalore, India, Bigtech offers SAP services to improve business
operations at companies of all sizes and verticals.
The acquisition of Bigtech was effective as of July 1, 2016, and the total consideration for the acquisition of
Bigtech was $850,000, consisting of:
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(a)
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A cash payment in the amount of $340,000 which was due within 90 days of closing and was paid on September 22, 2016;
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(b)
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Warrants for the purchase of 51,000 shares of our common stock (valued at approximately $250,000 based on the $6.51 closing price of our common stock on the closing
date of the acquisition), with such warrants exercisable for two years. The former shareholders of Bigtech exercised such warrants in full and were issued shares of common stock as of July 5, 2018; and
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(c)
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$255,000 payable in cash earn-outs to the sellers of Bigtech, if Bigtech achieved certain pre-determined revenue and EBITDA targets in 2017 and 2018. On October 4,
2018, we issued an aggregate of 72,570 shares of common stock to the former shareholders of Bigtech in satisfaction of an earn-out owed to them. As of October 4, 2018, we
had resolved all remaining payments under the Bigtech purchase agreement and we have no further payment obligations pursuant thereto.
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Bigtech’s financial results are included in our condensed consolidated financial results starting July 1, 2016. The
Bigtech acquisition did not constitute a significant acquisition for the Company for purposes of Regulation S-X. The valuation of Bigtech was made on the basis of its projected revenues.
On July 22, 2016, we acquired all of the outstanding membership interests of Virtuoso, L.L.C. (“Virtuoso”), a Kansas
limited liability company
, pursuant to the terms of an Agreement of Merger and Plan of Reorganization, by and among us, Virtuoso
Acquisition Inc., Ameri100 Virtuoso Inc., Virtuoso and the sole member of Virtuoso (the “Sole Member”)
. Virtuoso is an SAP consulting firm specialized in providing services on SAP S/4 HANA finance, enterprise mobility and cloud
migration and is based in Leawood, Kansas.
In connection with the merger, Virtuoso’s name was changed to Ameri100 Virtuoso Inc.
The Virtuoso acquisition did not constitute a significant acquisition for the Company for purposes of Regulation S-X.
The total purchase price of $1.8 million was allocated to intangibles of $0.9 million, taking into consideration
projected revenue from the acquired list of Virtuoso customers over a period of three years, and the balance was allocated to goodwill. The Virtuoso earn-out payments for 2016 amounted to $0.06 million in cash and 12,408 shares of common
stock, which were delivered to the Sole Member during the twelve months ended December 31, 2017. As of January 23, 2018, we had resolved all remaining payments under the Virtuoso merger agreement with the Sole-Member and we have no further
payment obligations pursuant thereto.
Acquisition of Ameri Arizona
On July 29, 2016, we acquired 100% of the membership interests of DC&M Partners, L.L.C. (“Ameri Arizona”), an
Arizona limited liability company, pursuant to the terms of a Membership Interest Purchase Agreement by and among us, Ameri Arizona, all of the members of Ameri Arizona, Giri Devanur and Srinidhi “Dev” Devanur, our former President and Chief
Executive Officer and current Executive Chairman, respectively. In July 2017, the name of DC&M Partners, L.L.C. was changed to Ameri100 Arizona LLC. Ameri Arizona is an SAP consulting company headquartered in Chandler, Arizona. Ameri
Arizona provides its clients with a wide range of information technology development, consultancy and management services with an emphasis on the design, build and rollout of SAP implementations and related products.
The
aggregate purchase price for the acquisition of Ameri Arizona was $15.8 million, consisting of:
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(a)
|
A cash payment in the amount of $3,000,000 at closing;
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(b)
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1,600,000 shares of our common stock (valued at approximately $10.4 million based on the $6.51 closing price of our common stock on the closing date of the
acquisition), which were to be issued on July 29, 2018 or upon a change of control of our company (whichever occurred earlier). At the election of the former members of Ameri Arizona, in lieu of receiving shares of our common
stock, each former member was entitled to receive a cash payment of $2.40 per share; and
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(c)
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Earn-out payments of $1,500,000 payable in cash each year to be paid, if earned, through the achievement of annual revenue and gross margin targets in 2017 and 2018.
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The total purchase price of $15.8 million was allocated to intangibles of $5.4 million, taking into consideration
projected revenue from the acquired list of Ameri Arizona customers over a period of three years, and the balance was allocated to goodwill.
In August 2018, the Company
resolved the payment of all earn-out payments to the former members of Ameri Arizona pursuant to the Ameri Arizona membership interest purchase agreement,
and the Company has no further payment obligations with respect to any Ameri
Arizona earn-out
.
As of July 29, 2018, two former members of Ameri Arizona properly elected to receive an aggregate of $2,496,000 in cash in lieu of stock and
such payment was due on or about September 28, 2018. The Company has not yet paid such cash payments (which represent deferred purchase price for Ameri Arizona) and company has negotiated for deferred payment terms with the two former
members of Ameri Arizona who elected such cash payments. On July 30, 2018, we issued 560,000 shares of common stock to the remaining former member of Ameri Arizona who had not elected to receive cash in lieu of stock. Such former member has
asserted that he had properly elected to receive cash instead of stock prior to the deadline for such election.
The Company has entered into a settlement agreement,
dated February 4, 2019, in which the Company will pay an amount of $200,000 to such member in four equal monthly installments starting from February 2019 and ending in May 2019, which settles such dispute in its entirety.
Acquisition of Ameri California
On March 10, 2017, we acquired 100% of the shares of ATCG Technology Solutions, Inc. (“Ameri California”), a Delaware
corporation, pursuant to the terms of a Share Purchase Agreement among the Company, Ameri California, all of the stockholders of Ameri California (the “Stockholders”), and the Stockholders’ representative. In July 2017, the name of ATCG
Technology Solutions, Inc. was changed to Ameri100 California Inc. Ameri California provides U.S. domestic, offshore and onsite SAP consulting services and has its main office in Folsom, California. Ameri California specializes in providing
SAP Hybris, SAP Success Factors and business intelligence services.
The aggregate purchase price for the acquisition of Ameri California was $8.8 million, consisting of:
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(a)
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576,923 shares of our common stock, valued at approximately $3.8 million based on the closing price of our common stock on the closing date of the acquisition;
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(b)
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Unsecured promissory notes issued to certain of Ameri California’s selling stockholders for the aggregate amount of $3,750,000 (which notes bear interest at a rate of
6% per annum and mature on June 30, 2018);
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(c)
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Earn-out payments in shares of our common stock (up to an aggregate value of $1.2 million worth of shares) to be paid, if earned, in each of 2018 and 2019 based on
certain revenue and earnings before interest taxes, depreciation and amortization (“EBITDA”) targets as specified in the purchase agreement. We have determined that the earn-out targets for each year have been fully achieved, and
283,344 shares of common stock were issued in 2018 in respect of the 2017 earn-out period and $605,000 worth of common stock was issued in January 2019 in respect of the 2018 earn-out period; and
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(d)
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An additional cash payment of $0.06 million for cash that was left in Ameri California at closing.
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The total purchase price of $8.8 million was allocated to intangibles of $3.75 million, taking into consideration
projected revenue from the acquired list of Ameri California customers over a period of three years, and goodwill. The excess of total purchase price over the intangibles allocation has been allocated to goodwill. For this acquisition, the
net cash outflow in 2017 was $0.2 million.
In August 2018, we repaid all of the unsecured promissory notes issued to the Ameri California selling stockholders and
we have no further payment obligations pursuant thereto.
Presented below is the summary of the foregoing acquisitions:
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Allocation of purchase price in millions of U.S. dollars
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Asset Component
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Ameri
Georgia
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Bigtech
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Virtuoso
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Ameri
Arizona
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Ameri
California
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Intangible Assets
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1.8
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0.6
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0.9
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5.4
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3.8
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Goodwill
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3.5
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0.3
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|
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0.9
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|
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10.4
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5.0
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Working Capital
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|
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|
|
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Current Assets
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|
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|
|
|
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|
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Cash
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1.4
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|
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-
|
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|
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-
|
|
|
|
-
|
|
|
|
-
|
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Accounts Receivable
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5.6
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-
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|
|
-
|
|
|
|
-
|
|
|
|
-
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Other Assets
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0.2
|
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|
|
-
|
|
|
|
-
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|
|
-
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|
|
|
-
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7.3
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|
|
-
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|
|
-
|
|
|
|
-
|
|
|
|
-
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Current Liabilities
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|
|
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|
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|
|
|
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Accounts Payable
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1.3
|
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|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
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Accrued Expenses & Other Current Liabilities
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1.3
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|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
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|
|
|
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2.7
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|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
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Net Working Capital Acquired
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4.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
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|
|
|
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|
|
|
|
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Total Purchase Price
|
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9.9
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0.9
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1.8
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15.8
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|
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8.8
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As of the date of this report the Company owed an aggregate of $2,596,000 in consideration payable by cash.
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NOTE 4.
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REVENUE RECOGNITION:
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We recognize revenue in accordance with the Accounting Standard Codification 606 “Revenue Recognition.” Revenue is
recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller’s price to buyer is fixed and determinable, and (4)
collectability is reasonably assured. We recognize revenue from information technology services as the services are provided. Service revenues are recognized based on contracted hourly rates, as services are rendered or upon completion of
specified contracted services and acceptance by the customer.
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NOTE 5.
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INTANGIBLE ASSETS:
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The Company’s intangible assets primarily consists of the customer lists it acquired through various acquisitions. We
amortize our intangible assets that have finite lives using either the straight-line method or based on estimated future cash flows to approximate the pattern in which the economic benefit of the asset will be utilized. Amortization expense
was $0.6 million and 0.8 million for the three months ended March 31, 2019 and March 31, 2018 respectively. This amortization expense relates to customer lists which expire through 2022.
During the year ended December 31, 2018, we determined, based upon the results of our annual goodwill impairment
testing as further described in Note 6, that a triggering event had occurred with respect to certain customer lists contained in the reporting units where goodwill impairment was determined to have occurred, and recorded an impairment
charge of $0.9 million. The determination of the fair value of intangible assets requires significant inputs, judgments and estimates. These fair value measurements, and related inputs, are considered to be Level 3 measures under the fair
value hierarchy as further described in Note 12.
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in
business combinations. The total value of the Company’s goodwill was $13.7 million as of March 31, 2019 and December 31, 2018.
As per Company policy, goodwill impairment tests are conducted on an annual basis and any impairment is reflected in the
Company’s Statements of Operations.
During the year ended December 31, 2018, as a result of performing our annual impairment testing, we determined that
impairment existed on certain of our reporting units and recorded impairment charges amounting to $8.2 million as a result of our impairment testing. The full goodwill impairment on Virtuoso, Bigtech and Ameri Consulting Service Pvt. Ltd,
and the partial goodwill impairment on Ameri Arizona were primarily driven by declines in estimated future cash flows to be generated by the reporting units as these reporting units that have experienced declining cash flows that what were
expected at the time of each acquisition. The determination of the fair value of a reporting unit requires significant inputs, judgments and estimates. These fair value measurements, and related inputs, are considered to be Level 3 measures
under the fair value hierarchy as further described in Note 12.
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NOTE 7.
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EARNINGS (LOSS) PER SHARE:
|
Basic income (loss) per share is computed based upon the weighted average number of common shares outstanding for the
period. When applicable, diluted income (loss) per share is calculated using two approaches. The first approach, the treasury stock method, reflects the potential dilution that could occur if outstanding stock options, warrants, restricted
stock units and outstanding shares to be awarded to satisfy contingent consideration for the business combinations (collectively, the “Equity Awards”) were exercised and issued. The second approach, the if converted method, reflects the
potential dilution of the Equity Awards, the 8% Convertible Unsecured Promissory Notes (the “2017 Notes”) described in Note 10 being exchanged for common stock. Under this method, interest expense, net of tax, if any, associated with the 2017
Notes, up through redemption, is added back to net income attributable to common stockholders and the shares outstanding are increased by the underlying 2017 Notes are considered to be issued.
For the three months ended March 31, 2019 and 2018, no shares related to the issuance of common stock upon exercise of
the Equity Awards or the exchange of the 2017 Notes for common stock were considered in the calculation of diluted loss per share, as the effect would be anti-dilutive due to net losses attributable to common stockholders for both periods.
A reconciliation of net loss attributable to common stockholders and weighted average shares used in computing basic and
diluted net loss per share is as follows:
|
|
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For the Three Months
Ended
|
|
|
|
|
March 31,
2019
|
|
|
March 31,
2018
|
|
|
Numerator for basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
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$
|
(1,965,677
|
)
|
|
|
(2,129,170
|
)
|
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Numerator for diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders - as reported
|
|
$
|
(1,965,677
|
)
|
|
|
(2,129,170
|
)
|
|
Interest expense on 2017 Notes, net of taxes
|
|
|
-
|
|
|
|
-
|
|
|
Net income (loss) attributable to common stockholders - after assumed conversions of dilutive shares
|
|
$
|
(1,965,677
|
)
|
|
|
(2,129,170
|
)
|
|
Denominator for weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic shares
|
|
|
45,185,080
|
|
|
|
18,654,197
|
|
|
Dilutive effect of Equity Awards
|
|
|
-
|
|
|
|
|
|
|
Dilutive effect of 2017 Notes
|
|
|
-
|
|
|
|
-
|
|
|
Diluted shares
|
|
|
45,185,080
|
|
|
|
18,654,197
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share – basic:
|
|
$
|
(0.04
|
)
|
|
|
(0.11
|
)
|
|
Income (loss) per share – diluted:
|
|
$
|
(0.04
|
)
|
|
|
(0.11
|
)
|
During the quarter ended March 31 2019, the Company has not granted any restricted stock units and stock options to
purchase Company’s common stock to key employees or directors out of Company’s 2015 Equity Incentive Award Plan.
The company has took charge of $0.3 million as stock
compensation expenses for the three months ended March 31 2019 and March 31 2018.
On January 23, 2019, certain subsidiaries of the Company, including Ameri100 Arizona LLC, Ameri100 Georgia, Inc.,
Ameri100 California, Inc. and Ameri and Partners, Inc., as borrowers (individually and collectively, “Borrower”) entered into a Loan and Security Agreement (the “Loan Agreement”), with North Mill Capital LLC, as lender (the “Lender”). The
Loan Agreement has an initial term of two years from the closing date, with renewal thereafter if Lender, at its option, agrees in writing to extend the term for additional one year periods (the “Term”). The Loan Agreement is collateralized
by a first-priority security interest in all of the assets of Borrower. In addition, (i) pursuant to a Corporate Guaranty entered into by the Company in favor of the Lender (the “Corporate Guaranty”), the Company has guaranteed the Borrower’s
obligations under the Credit Facility and (ii) pursuant to a Security Agreement entered into between the Company and Lender (the “Security Agreement”), the Company granted a first-priority security interest in all of its assets to Lender.
The Borrowers received an initial advance on January 23, 2019 in an amount of approximately $2.85 million (the “Initial
Advance”). Borrowings under the Credit Facility accrue interest at the prime rate (as designated by Wells Fargo Bank, National Association) plus one and three quarters percentage points (1.75%), but in no event shall the interest rate be less
than seven and one-quarter percent (7.25%). Notwithstanding anything to the contrary contained in the Loan Documents, the minimum monthly interest payable by Borrower on the Advances (as defined in the Loan Agreement) in any month shall be
calculated based on an average Daily Balance (as defined in the Loan Agreement) of Two Million Dollars ($2,000,000) for such month. For the first year of the Term, Borrower shall pay to Lender a facility fee equal to $50,000, due in equal
monthly installments, with additional facility fees due to Lender in the event borrowings exceed certain thresholds and with additional facility fees due and payable in later years or upon later milestones. In addition, Borrower shall pay to
Lender a monthly fee (the “Servicing Fee”) in an amount equal to one-eighth percent (.125%) of the average Daily Balance (as defined in the Loan Agreement) during each month on or before the first day of each calendar month during the Term.
The
Company used approximately $2.75 million of the Initial Advance to repay all of its outstanding obligations under the Credit Facility. Upon payment, the Company’s obligations under the Credit Facility were terminated.
Borrower also agreed to certain negative covenants in the Loan Agreement, including that they will not, without the prior
written consent of Lender, enter into any extraordinary transactions, dispose of assets, merge, acquire, or consolidate with or into any other business organization or restructure.
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NOTE 10.
|
CONVERTIBLE NOTES:
|
On March 7, 2017, we completed the sale and issuance of 8% Convertible Unsecured Promissory Notes (the “2017 Notes”) for
aggregate proceeds to us of $1.25 million from four accredited investors, including one of the Company’s then-directors, Dhruwa N. Rai, and David Luci, who became a director of the Company in February 2018. The 2017 Notes were issued pursuant
to Securities Purchase Agreements between the Company and each investor. The 2017 Notes bear interest at 8% per annum until maturity in March 2020, with interest being paid annually on the first, second and third anniversaries of the issuance
of the 2017 Notes beginning in March 2018. From and after an event of default and for so long as the event of default is continuing, the 2017 Notes will bear default interest at the rate of 10% per annum. The 2017 Notes can be prepaid by us
at any time without penalty. As of March 31, 2019, all interest payments due on the 2017 Notes have been paid in full.
During this first quarter of 2019 the company repaid $0.25 million towards 2017 notes.
The 2017 Notes are convertible into shares of our common stock at a conversion price equal to $2.80. The holders of the
2017 Notes have the right, at their option, at any time and from time to time to convert, in part or in whole, the outstanding principal amount and all accrued and unpaid interest under the 2017 Notes into shares of the Company’s common stock
at the conversion price.
The 2017 Notes rank junior to our secured credit facility with Sterling National Bank. The 2017 Notes also include
certain negative covenants including, without the investors’ approval, restrictions on dividends and other restricted payments and reclassification of its stock.
|
NOTE 11.
|
COMMITMENTS AND CONTINGENCIES:
|
Operating Leases
The Company's principal facility is located in Suwanee, Georgia. The Company also leases office space in various
locations with expiration dates between 2019 and 2021. The lease agreements often include leasehold improvement incentives, escalating lease payments, renewal provisions and other provisions which require the Company to pay taxes, insurance,
maintenance costs, or defined rent increases. All of the Company's leases are accounted for as operating leases. Rent expense is recorded over the lease terms on a straight-line basis. Rent expense was $70,219 and $73,310 for the three months
ended March 31, 2019 and 2018, respectively.
|
Year ending December 31,
|
|
Amount
|
|
|
2019
|
|
|
125,176
|
|
|
2020
|
|
|
18,204
|
|
|
Total
|
|
$
|
143,380
|
|
|
NOTE 12.
|
FAIR VALUE MEASUREMENT:
|
We utilize the following valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This
hierarchy prioritizes the inputs into three broad levels as follows:
|
|
•
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;
|
|
•
|
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or
indirectly through market corroboration, for substantially the full term of the financial instrument; and
|
|
•
|
Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.
|
A financial asset or liability’s classification within the hierarchy is determined based upon the lowest level input
that is significant to the fair value measurement.
The following table sets forth the financial assets, measured at fair value, by level within the fair value hierarchy as
of March 31, 2019:
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Cash equivalents:
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
|
|
|
$
|
-
|
|
|
Warrant liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
|
-
|
|
|
|
-
|
|
|
$
|
|
|
|
$
|
|
|
The following table sets forth the financial assets, measured at fair value, by level within the fair value hierarchy as
of December 31, 2018:
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Cash equivalents:
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
|
|
|
$
|
-
|
|
|
Warrant liability
|
|
|
|
|
|
|
|
|
|
|
4,189,388
|
|
|
|
4,189,388
|
|
|
Contingent consideration
|
|
|
-
|
|
|
|
-
|
|
|
|
605,223
|
|
|
|
605,223
|
|
|
Total
|
|
|
-
|
|
|
|
-
|
|
|
$
|
4,794,611
|
|
|
$
|
4,794,611
|
|
The following table presents the change in level 3 instruments:
|
|
|
|
|
|
|
|
|
|
|
Closing balance December 31
st
2018
|
|
|
4,794,611
|
|
|
Additions during the period
|
|
$
|
450,267
|
|
|
Paid/settlements
|
|
|
(605,223
|
)
|
|
Total gains recognized in Statement of Operations
|
|
|
-
|
|
|
Closing balance March 31
st
2019
|
|
$
|
4,639,655
|
|
The fair value of the contingent consideration was estimated using a discounted cash flow technique with significant
inputs that are not observable in the market. The significant inputs not supported by market activity included our probability assessments of expected future cash flows related to the acquisitions during the earn-out period, appropriately
discounted considering the uncertainties associated with the obligation, and calculated in accordance with the respective terms of the share purchase agreements.
No financial instruments were transferred into or out of Level 3 classification during the period ended March 31 2019
and year ended December 31, 2018.
|
NOTE 13.
|
PRIVATE OFFERING:
|
On July 25, 2018, we entered into a securities purchase agreement (the “Initial Securities Purchase Agreement”) with
certain institutional and accredited investors (“Initial Purchasers”) for the sale of 5,000,000 shares of our common stock (“Initial Shares”) and warrants to purchase a total of 4,000,001 shares (“Initial Warrant Shares”) of our common stock
(“Initial Purchaser Warrants”) for total consideration of approximately $6,000,000 (“Initial Investment”). On July 30, 2018, we issued an aggregate of 3,250,000 of the Initial Shares to the Initial Purchasers, with the remaining Initial
Shares to be issued pursuant to pre-funded Warrants, subject to adjustment. The $6,000,000 purchase price paid by the Initial Purchasers on July 30, 2018 represents the entire purchase price for the Initial Shares and the Initial Purchaser
Warrants (excluding the exercise price to be paid upon the exercise of Initial Purchaser Warrants), including upon the issuance of additional Shares (through the adjustment of a pre-funded warrant) and for additional Warrant Shares issuable
upon the occurrence of certain events described below.
On August 21, 2018, we entered into a second securities purchase agreement (the “Second Securities Purchase Agreement”,
and together with the Initial Securities Purchase Agreement, the “Purchase Agreements”) with an accredited investor (the “Additional Purchaser”, and with the Initial Purchaser, the “Purchasers”) for the sale of 500,417 shares of our common
stock, via a pre-funded warrant due to share issuance limitations (the “Additional Shares”, and with the Initial Shares, the “Common Stock”), and warrants to purchase 400,333 shares (the “Additional Warrant Shares”, and with the Initial
Warrant Shares, the “Warrant Shares”) of our common stock (the “Additional Purchaser Warrants”, and with the Initial Purchaser Warrants, the “Purchaser Warrants”) for gross proceeds of approximately $600,000 (the “Additional Investment”). The
Additional Investment was made in connection with, and substantially on the same terms and using the same forms as, the private placement of the Initial Shares and Initial Purchaser Warrants (such private placement and the Additional
Investment, the “Private Placement”). The $600,000 purchase price paid by the Additional Purchaser on August 21, 2018 represents the entire purchase price for the Additional Shares and the Additional Purchaser Warrants (excluding the
exercise price to be paid upon the exercise of Additional Purchaser Warrants), including upon the issuance of additional Shares (through the adjustment of a pre-funded warrant, all pre-funded warrants with the Purchaser Warrants, the
“Warrants”) and for additional Warrant Shares issuable upon the occurrence of certain events described below.
The initial price per share of Common Stock equaled $1.20 and the initial per share exercise price of the Purchaser
Warrants equaled $1.60. The per share purchase price and the exercise price were subject to adjustment as described below. The Initial Purchaser Warrants are immediately exercisable, subject to ownership limitations described below, and
expire five years after the date of issuance. The Initial Purchaser Warrants are exercisable on a cashless basis six months after the issuance date if there is no effective registration statement registering the resale of the shares
underlying the Initial Purchaser Warrants. The Additional Purchaser was not issued any shares at the closing of the Additional Investment, due to Nasdaq stock issuance limitations at the time of closing, but the Additional Shares will be
issued upon the exercise of a pre-funded warrant for no additional consideration to the Company. The Additional Purchaser Warrants and the Additional Purchaser’s pre-funded warrant are currently exercisable, subject to ownership limitations
described below, and expire five years after the date of issuance. The Warrants contain provisions for the adjustment of the number of shares issuable upon the exercise of the warrant and of the exercise price in the event of stock dividends,
splits, mergers, asset sales, tender or exchange offers, reclassifications, reorganizations or recapitalizations, combinations, or the like.
The per share purchase price (through the pre-funded Warrants) and Warrant exercise price was automatically adjusted
lower (the “Price Adjustment”) to 80% (with respect to the purchase price of the Common Stock) and 110% (with respect to the exercise price of the Warrants) of the lowest of the average daily prices on the 6 trading days following each of:
(i) the date our stockholders approved the Private Placement transaction (such approval was obtained on September 27, 2018) and (ii) the date a registration statement covering the resale of securities being issued in the Private Placement was
declared effective by the Securities and Exchange Commission (the “SEC”) (such registration statement on Form S-1, file no. 333-227011, was declared effective on October 23, 2018 (the “Effective Registration”)). Due to the Price Adjustment,
the lowest purchase price of $0.29 for the Common Stock issued at closing under the Purchase Agreements and pursuant to the pre-funded Warrants was achieved, and all 22,758,621 shares registered under the Effective Registration as issued or
issuable under the Purchase Agreements and pursuant to the pre-funded Warrants were issued to the selling stockholders. In addition, the exercise price of the Purchaser Warrants was subject to the Price Adjustment, which has resulted in
22,544,139 shares of common stock being issuable under the Purchaser Warrants when exercised. The Purchaser Warrants have been fully adjusted and neither the exercise price or the number of shares issuable under such warrants are subject to
further adjustment, except pursuant to typical anti-dilution provisions.
In accordance with the exercise provisions of the Purchaser Warrants, the 22,544,139 shares issuable under the Purchaser
Warrants following the full Price Adjustment was determined by holding constant the aggregate exercise price of $7,040,534.40 for the Purchaser Warrants at the time of closing of the Private Placement (which was calculated based on 4,400,334
total Purchaser Warrants at the closing date multiplied by the exercise price of $1.60, which equals $7,040,534.40), and then dividing the $7,040,534.40 aggregate exercise price by the post-Price Adjustment exercise price of $0.3123 to get
22,544,139 shares. As 18,206,897 shares of common stock issuable pursuant to the Purchaser Warrants were previously registered under the Effective Registration, 4,337,242 additional shares of common stock are to be registered pursuant to a
new registration statement to cover all of the shares issuable under the Purchaser Warrants following the final Price Adjustment.
The Company has allocated the aggregate gross proceeds received to the Purchaser Warrants, the Initial Shares issued and
the pre-funded warrants. Due to the reset features present in the Purchaser Warrants along with the existence of down-round protection in the event of future financing transactions at lower prices, the Purchaser Warrants were determined to be
derivative financial instruments and therefore, have been recorded as a liability (“Warrant Liability”) in the accompanying consolidated balance sheets. The Purchaser Warrants were initially recorded at fair value with fair value determined
utilizing a Black-Scholes option pricing model with the following assumptions: expected term of 5 years; expected volatility of 111.8%; risk free interest rate of 2.37% and an expected dividend yield of zero. The calculated aggregate fair
value of $1,429,000 was reflected as Warrant Liability. The remaining proceeds received under the Purchase Agreements were allocated to the Initial Shares and pre-funded warrants and recorded within stockholder’s equity. The fair value of the
Purchaser Warrants was reassessed to reflect the Price Adjustment and number of shares issuable upon exercise. The resulting increase in the fair value of the Purchaser Warrants of $2,760,819 was reflected as “Changes in Fair Value of Warrant
Liability” within the accompanying consolidated statements of comprehensive income (loss) during the year ended December 31 2018. For March 31 2019, the Purchaser Warrants were reassessed to reflect the Price Adjustment and number of shares
issuable upon exercise. The resulting increase in the fair value of the Purchaser Warrants of $
450,267
was reflected as “Changes in Fair Value of Warrant
Liability” within the accompanying consolidated statements of comprehensive income (loss).
Under the terms of all of the Warrants, a selling stockholder may not exercise Warrants to the extent such exercise
would cause such selling stockholder, together with its affiliates and attribution parties, to beneficially own a number of shares of common stock which would exceed 4.99% or 9.99%, as applicable, of our then outstanding common stock
following such exercise, excluding for purposes of such determination shares of common stock issuable upon exercise of the Warrants which have not been exercised. In addition, the Warrants have transaction-specific anti-dilution provisions.
A.G.P. / Alliance Global Partners (“AGP”) acted as exclusive placement agent for the issuance and sale of the securities in
the Private Placement. We agreed to pay AGP an aggregate fee equal to 7% of the gross proceeds received by us from the sale of the securities in the transaction, plus expenses. We also agreed to grant to AGP or its designees warrants to
purchase up to 150,000 shares of our common stock (the “Placement Agent Warrants”). The Placement Agent Warrants are currently exercisable and terminate on July 27, 2022. The Placement Agent Warrants have an exercise price of $1.32 per share.
The terms of the Placement Agent Warrants are otherwise substantially similar to the terms of the Private Placement Warrants, except the Placement Agent Warrants have customary anti-dilution provisions and do not have the Price Adjustment
mechanism. The Placement Agent Warrants were valued at the date of grant utilizing a Black-Scholes option pricing model with substantially similar assumptions to those used for the Purchaser Warrants. The resulting fair value of $49,000 was
recorded within stockholder’s equity as a cost of the Private Placement transaction.
2018 Preferred Stock Amendment
On June 22, 2018, we entered into an Amendment Agreement with Lone Star Value Investors, LP (“LSV”), pursuant to which
we and LSV agreed to the amendment and restatement of the certificate of designations (the “Amendment”) for our Series A Preferred Stock (the “Series A Preferred”) and the issuance of warrants (the “Amendment Warrants”) for the purchase of
5,000,000 shares of our common stock to holders of the Series A Preferred (the “Warrant Issuance”), provided that the Amendment and the Warrant Issuance were subject to approval by our stockholders at our 2018 annual meeting of stockholders
(the “2018 Annual Meeting”).
As the Amendment and the Warrant Issuance were approved by our stockholders at the 2018 Annual Meeting, the Amendment,
was filed with the Delaware Secretary of State following stockholder approval, providing for, among other things:
|
(a)
|
the payment of the March 31, 2018 dividend payment in-kind in shares of Series A Preferred;
|
|
(b)
|
elimination of any prior default in respect of non-payment of accrued dividends through the filing effective date of the Amendment (the “Effective Date”);
|
|
(c)
|
payment in-kind in shares of Series A Preferred of dividends for all dividend periods from April 1, 2018 through March 31, 2020 at a rate of 2% per annum of the
liquidation preference (the “Adjusted Rate”); and
|
|
(d)
|
commencing April 1, 2020, we will pay cash dividends per share at a rate per annum equal to the Adjusted Rate multiplied by the liquidation preference; provided,
however, dividends for periods ending after April 1, 2020 may be paid at the election of our Board of Directors in-kind through the issuance of additional shares of Series A Preferred for up to four dividend periods in any
consecutive 36-month period, determined on a rolling basis.
|
In addition, the Amendment revised the change of control definition to mean a change in control of at least 70% of the
voting power of all shares of stock of the Company and clarified that a change of control shall not be deemed to be a dissolution, liquidation or winding up of the Company. The Amendment also eliminated voting rights with respect to the
authorization, creation or issuance of any securities ranking senior or equal to the Series A Preferred.
Following our 2018 Annual Meeting, promptly
following the effectiveness of the Amendment, the Company
issued an aggregate of 15,325 shares of our Series A Preferred
to holders of our Series A Preferred, on a pro rata basis, as payment of accrued in-kind dividends owed on such preferred stock and
completed the Warrant
Issuance to holders of the Series A Preferred at such time.
The Amendment Warrants are only exercisable for cash, with an exercise price of $1.50 per share, for five years from the
date of issuance. In the event that the closing price of our common stock is $2.00 or higher for ten trading days out of a fifteen consecutive trading day period, the Company shall have the option, in its sole discretion, to elect to
accelerate the termination date of the Amendment Warrants to such date that is 30 days (or more, in the Company’s sole discretion) following the date of such election. Following such accelerated termination date, any unexercised Amendment
Warrants shall automatically be canceled without any further obligations on the part of the Company or the holders of such Amendment Warrants. The Amendment Warrants were valued utilizing a Black-Scholes option pricing model with the
following assumptions: expected term of 5 years; expected volatility of 111.8%; risk free interest rate of 2.37% and an expected dividend yield of zero.
|
ITEM 2.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited
consolidated financial statements (and notes thereto) included in our Annual Report on Form 10-K for the year ended December 31, 2018. This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and
uncertainties. See "Special Note Regarding Forward-Looking Statements" included elsewhere herein.
We use the terms "we," "our," "us," "AMERI" and "the Company" in this report to refer to AMERI Holdings, Inc. and its
wholly-owned subsidiaries.
Company History
We were incorporated under the laws of the State of Delaware in February 1994 as Spatializer Audio Laboratories, Inc.,
which was a shell company immediately prior to our completion of a “reverse merger” transaction on May 26, 2015, in which we caused Ameri100 Acquisition, Inc., a Delaware corporation and our newly created, wholly owned subsidiary, to be
merged with and into Ameri and Partners Inc (“Ameri and Partners”), a Delaware corporation (the “Merger”). On May 26, 2015, we completed the Merger, in which we caused Ameri100 Acquisition, Inc., a Delaware corporation and our newly created,
wholly owned subsidiary, to be merged with and into Ameri and Partners (doing business as Ameri100), a Delaware corporation. As a result of the Merger, Ameri and Partners became our wholly owned operating subsidiary. The Merger was
consummated under Delaware law, pursuant to an Agreement of Merger and Plan of Reorganization, dated as of May 26, 2015 (the “Merger Agreement”), and in connection with the Merger we changed our name to AMERI Holdings, Inc. We are
headquartered in Suwanee, Georgia.
Overview
We specialize in delivering SAP cloud, digital and enterprise services to clients worldwide. Our SAP focus allows us to
provide technological solutions to a broad and growing base of clients. Our model inverts the conventional global delivery model wherein offshore IT service providers are based abroad and maintain a minimal presence in the United States. With
a strong SAP focus, our client partnerships anchor around SAP cloud and digital services. We pursue an acquisition strategy that seeks to disrupt the established business model of offshore IT service providers.
We generate revenue by providing consulting services under written service contracts with our customers. The service
contracts we enter into generally fall into two categories: (1) time-and-materials contracts and (2) fixed-price contracts.
When a customer enters into a time-and-materials or fixed-price (or a periodic retainer-based) contract, the revenue is
recognized in accordance with the deliverables of each contract. If the deliverables involve separate units of accounting, the consideration from the arrangement is measured and allocated to the separate units, based on vendor specific
objective evidence of the value for each deliverable.
The revenue under time and materials contracts is recognized as services are rendered and performed at contractually
agreed upon rates. Revenue pursuant to fixed-price contracts is recognized under the proportional performance method of accounting. We routinely evaluate whether revenue and profitability should be recognized in the current period. We
estimate the proportional performance on fixed-price contracts on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project.
For the three months ended March 31, 2019 and March 31, 2018, sales to five major customers accounted for 42% and 39% of
our total revenue, respectively. One of our customers contributed 13% of our revenue for the three months ended March 31, 2019 and two of our customers has contributed 13% and 11% of our revenue for the comparable period in 2018.
We continue to explore strategic alternatives to improve the market position and profitability of our product and
service offerings in the marketplace, generate additional liquidity for the Company, and enhance our valuation. We expect to pursue our goals during the next twelve months through organic growth and through other strategic alternatives. Some
of these alternatives have included, and could continue to include, selective acquisitions. The Company has obtained financing and additional capital from the sale of equity and incurrence of indebtedness in the past, and continues to
consider capital raising and financing from the sale of various types of equity and incurrence of indebtedness to provide capital for our business plans and operations in the future.
Matters that May or Are Currently Affecting Our Business
The main challenges and trends that could affect or are affecting our financial results include:
|
•
|
Our ability to raise additional capital, if and when needed;
|
|
•
|
Our ability to enter into additional technology-management and consulting agreements, to diversify our client base and to expand the geographic areas we serve;
|
|
•
|
Our ability to attract competent, skilled professionals and on-demand technology partners for our operations at acceptable prices to manage our overhead;
|
|
•
|
Our ability to acquire other technology services companies and integrate them with our existing business; and
|
|
•
|
Our ability to control our costs of operation as we expand our organization and capabilities.
|
RESULTS OF OPERATIONS
Results of Operations for the Three Months Ended March 31, 2019 Compared to the Three Months Ended March 31,
2018.
|
|
|
Three Months
Ended
March 31, 2019
|
|
|
Three Months
Ended
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
10,686,196
|
|
|
$
|
11,063,010
|
|
|
Cost of revenue
|
|
|
8,546,232
|
|
|
|
8,720,125
|
|
|
Gross profit
|
|
|
2,139,964
|
|
|
|
2,342,885
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Selling, general and administration
|
|
|
2,877,309
|
|
|
|
2,878,942
|
|
|
Acquisition related expenses
|
|
|
-
|
|
|
|
10,000
|
|
|
Depreciation and amortization
|
|
|
561,017
|
|
|
|
820,736
|
|
|
Operating expenses
|
|
|
3,438,326
|
|
|
|
3,709,678
|
|
|
Operating (loss)
|
|
|
(1,298,362
|
)
|
|
|
(1,366,793
|
)
|
|
Interest expenses
|
|
|
(142,554
|
)
|
|
|
(211,159
|
)
|
|
Changes in fair value of warrant liability
|
|
|
(450,267
|
)
|
|
|
|
|
|
Others, net
|
|
|
-
|
|
|
|
6,199
|
|
|
Total other income (expenses)
|
|
|
(592,821
|
)
|
|
|
(204,960
|
)
|
|
(Loss) before income taxes
|
|
|
(1,891,183
|
)
|
|
|
(1,571,753
|
)
|
|
Tax benefit / (provision)
|
|
|
31,211
|
|
|
|
-
|
|
|
Net (loss) attributable to the Company
|
|
|
(1,859,972
|
)
|
|
|
(1,571,353
|
)
|
|
Dividend on preferred stock
|
|
|
(105,705
|
)
|
|
|
(557,417
|
)
|
|
Net (loss) attributable to common stock holders
|
|
|
(1,965,677
|
)
|
|
|
(2,129,170
|
)
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
|
Foreign exchange translation
|
|
|
18,714
|
|
|
|
29,791
|
|
|
Comprehensive (loss)
|
|
$
|
(1,946,963
|
)
|
|
$
|
(2,099,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.11
|
)
|
|
Diluted income (loss) per share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of common shares outstanding
|
|
|
45,185,080
|
|
|
|
18,654,197
|
|
|
Diluted weighted average number of common shares outstanding
|
|
|
45,185,080
|
|
|
|
18,654,197
|
|
Revenues
Revenues for the three months ended March 31, 2019 decreased by $0.38 million, or 3%, as compared to the three months
ended March 31, 2018, mainly because we did not pursue certain low margin, professional services business during the three months ended March 31, 2019.
For the three months ended March 31, 2019 and March 31, 2018, sales to five major customers accounted for 42% and 39% of
our total revenue, respectively. One of our customers contributed 13% of our revenue for the three months ended March 31, 2019 and two of our customers has contributed 13% and 11% of our revenue for the comparable period in 2018. We derived
most of our revenues from our customers located in North America for the three months ended March 31, 2019 and March 31, 2018.
Gross Margin
Our gross margin was 20% for the three months ended March 31, 2019, as compared to 21% for the three months ended March
31, 2018. The decrease in gross margin was due to one project related to solution based revenue which has lower margins, and no such revenue was applicable for the comparable period of 2018.
Our target gross margins in future periods are anticipated to be in the range of 20% to 25% based on a mix of project
revenues and professional service revenues. However, there is no assurance that we will achieve such anticipated gross margins.
Selling, General and Administration Expenses
Selling, general and administration (“SG&A”) expenses include all costs, including rent costs, which are not
directly associated with revenue-generating activities, as well as the non-cash expense for stock-based compensation. These include employee costs, corporate costs and facilities costs. Employee costs include administrative salaries and
related employee benefits, travel, recruiting and training costs. Corporate costs include reorganization costs, legal, accounting and outside consulting fees. Facilities costs primarily include rent and communications costs.
SG&A expenses for the three months ended March 31, 2019 and three months ended March 31 2018 were consistent at $2.9
million
Depreciation and Amortization
Depreciation and amortization expense amounted to $0.6 million for the three months ended March 31, 2019, as compared to
$0.8 million for the three months ended March 31, 2018. The customer lists from each acquisition are amortized over a period of 60 months.
Operating Income (Loss)
Our operating loss was $1.3 million for the three months ended March 31, 2019, as compared to $1.4 million for the three
months ended March 31, 2018.
Interest Expense
Our interest expense for the three months ended March 31, 2019 was $0.14 million as compared to $0.21 million for the
three months ended March 31, 2018.
Income Taxes
We recorded a tax benefit for income taxes of $0.03 million and $0 million for the three months ended March 31, 2019
and for the three months ended March 31, 2018, respectively.
Acquisition Related Expenses
We had acquisition related expenditures of $0 million and $0.01 million during the three months ended March 31, 2019 and
for March 31, 2018, respectively. These expenses included legal, professional services, valuation and due diligence services and other acquisition related fees incurred in connection with our acquisitions.
Liquidity and Capital Resources
Our cash position was approximately $1.7 million as of March 31, 2019, as compared to $1.4 million as of December 31,
2018, an increase of approximately $0.3 million primarily due to the funds received from exercise of warrants.
Cash used for operating activities was $1 million during the three months ended March 31, 2019 and was primarily a
result of net changes in working capital requirements. Cash used in investing activities was $0.1 million during the three months ended March 31, 2019. Cash provided by financing activities was $1.4 million during the three months ended March
31, 2019.
We incurred recurring losses as a result of costs and expenses related to our selling, general and administration
activities and acquisition strategy. As of March 31, 2019, we had negative working capital of $3.2 million and cash of $1.7 million. Historically, our principal sources of cash have included bank borrowings and sales of securities. Our
operating expenses are likely to continue to grow and, as a result, we will need to generate significant additional revenues to cover such expenses.
Our financial statements as of March 31, 2019 have been prepared under the assumption that we will continue as a going
concern. Our ability to continue as a going concern is dependent upon our ability to raise additional funding through the issuance of equity or debt securities, as well as to attain further operating efficiencies and, ultimately, to
generate additional revenues. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. We can give no assurances that additional capital that we are able to obtain, if any, will be
sufficient to meet our needs. The foregoing conditions raise substantial doubt about our ability to continue our operations.
Available Credit Facility, Borrowings and Repayment of Debt
On January 23, 2019, certain subsidiaries of the Company, including Ameri100 Arizona LLC, Ameri100 Georgia, Inc.,
Ameri100 California, Inc. and Ameri and Partners, Inc., as borrowers (individually and collectively, “Borrower”) entered into a Loan and Security Agreement (the “Loan Agreement”), with North Mill Capital LLC, as lender (the “Lender”). The
Loan Agreement has an initial term of two years from the closing date, with renewal thereafter if Lender, at its option, agrees in writing to extend the term for additional one year periods (the “Term”). The Loan Agreement is collateralized
by a first-priority security interest in all of the assets of Borrower. In addition, (i) pursuant to a Corporate Guaranty entered into by the Company in favor of the Lender (the “Corporate Guaranty”), the Company has guaranteed the Borrower’s
obligations under the Credit Facility and (ii) pursuant to a Security Agreement entered into between the Company and Lender (the “Security Agreement”), the Company granted a first-priority security interest in all of its assets to Lender.
The Borrowers received an initial advance on January 23, 2019 in an amount of approximately $2.85 million (the “Initial
Advance”). Borrowings under the Credit Facility accrue interest at the prime rate (as designated by Wells Fargo Bank, National Association) plus one and three quarters percentage points (1.75%), but in no event shall the interest rate be less
than seven and one-quarter percent (7.25%). Notwithstanding anything to the contrary contained in the Loan Documents, the minimum monthly interest payable by Borrower on the Advances (as defined in the Loan Agreement) in any month shall be
calculated based on an average Daily Balance (as defined in the Loan Agreement) of Two Million Dollars ($2,000,000) for such month. For the first year of the Term, Borrower shall pay to Lender a facility fee equal to $50,000, due in equal
monthly installments, with additional facility fees due to Lender in the event borrowings exceed certain thresholds and with additional facility fees due and payable in later years or upon later milestones. In addition, Borrower shall pay to
Lender a monthly fee (the “Servicing Fee”) in an amount equal to one-eighth percent (.125%) of the average Daily Balance (as defined in the Loan Agreement) during each month on or before the first day of each calendar month during the Term.
The
Company used approximately $2.75 million of the Initial Advance to repay all of its outstanding obligations under the Sterling National bank Credit Facility. Upon payment, the Company’s obligations under the Sterling National Bank Credit
Facility were terminated.
Borrower also agreed to certain negative covenants in the Loan Agreement, including that they will not, without the prior
written consent of Lender, enter into any extraordinary transactions, dispose of assets, merge, acquire, or consolidate with or into any other business organization or restructure.
If an Event of Default (as defined in the Loan Agreement) occurs, Lender may, among other things, (i) declare all
obligations immediately due and payable in full; (ii) cease advancing money or extending credit to or for the benefit of Borrower; and/or (iii) terminate the Loan Agreement as to any future liability or obligation of Lender, without affecting
Lender's right to repayment of all obligations and Lender’s security interests.
On March 7, 2017, we completed the sale and issuance of 8% Convertible Unsecured Promissory Notes (the “2017 Notes”) for
aggregate proceeds to us of $1.25 million from four accredited investors, including one of the Company’s then-directors, Dhruwa N. Rai, and David Luci, who became a director of the Company in February 2018. The 2017 Notes were issued pursuant
to Securities Purchase Agreements between the Company and each investor. The 2017 Notes bear interest at 8% per annum until maturity in March 2020, with interest being paid annually on the first, second and third anniversaries of the issuance
of the 2017 Notes beginning in March 2018. From and after an event of default and for so long as the event of default is continuing, the 2017 Notes will bear default interest at the rate of 10% per annum. The 2017 Notes can be prepaid by us
at any time without penalty. As of March 31, 2019, all interest payments due on the 2017 Notes have been paid in full.
During this first quarter of 2019 the company repaid $0.25 million towards 2017 notes.
The 2017 Notes are convertible into shares of our common stock at a conversion price equal to $2.80. The holders of the
2017 Notes have the right, at their option, at any time and from time to time to convert, in part or in whole, the outstanding principal amount and all accrued and unpaid interest under the 2017 Notes into shares of the Company’s common stock
at the conversion price.
The 2017 Notes rank junior to our secured credit facility with Sterling National Bank. The 2017 Notes also include
certain negative covenants including, without the investors’ approval, restrictions on dividends and other restricted payments and reclassification of its stock.
Accounts Receivable
Accounts receivable for the period ended March 31, 2019 were $8.9 million as compared to $7.9 million as on December 31,
2018.
Accounts Payable
Accounts payable for the period ended March 31, 2019 were $5.1 million as compared to $4.4 million as on December 31, 2018.
Accrued Expense
Accrued expenses for the period ended March 31, 2019 were $1.6 million as compared to $1.7 million as on December 31,
2018.
Operating Activities
Our largest source of operating cash flows is cash collections from our customers. Our primary uses of cash for
operating activities are for personnel-related expenditures, leased facilities and taxes.
Off- Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Impact of Inflation
We do not believe that inflation had a significant impact on our results of operations for the periods presented. On an
ongoing basis, we attempt to minimize any effects of inflation on our operating results by controlling operating costs and, whenever possible, seeking to ensure that billing rates reflect increases in costs due to inflation.
For all significant foreign operations, the functional currency is the local currency. Assets and liabilities of these
operations are translated at the exchange rate in effect at each period end. Statements of Operations accounts are translated at the exchange rate prevailing as of the date of the transaction. The gains or losses resulting from such
translation are reported under accumulated other comprehensive income (loss) as a separate component of equity. Realized gains and losses from foreign currency transactions are included in other income, net for the periods presented.
Recent Accounting Pronouncements
See Note 2 to our unaudited condensed consolidated financial statements for additional information.
Critical Accounting Policies
Revenue
Recognition.
We recognize revenue in accordance with the Accounting Standard Codification 606 “Revenue Recognition.” Revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists,
(2) delivery has occurred or services have been rendered, (3) the seller’s price to buyer is fixed and determinable, and (4) collectability is reasonably assured. We recognize revenue from information technology services as the services are
provided. Service revenues are recognized based on contracted hourly rates, as services are rendered or upon completion of specified contracted services and acceptance by the customer.
Stock-Based
Compensation.
Stock-based compensation expense for awards of equity instruments to employees and non-employee directors is determined based on the grant-date fair value of those awards. We recognize these compensation costs net of
an estimated forfeiture rate over the requisite service period of the award. Forfeitures are estimated on the date of grant and revised if actual or expected forfeiture activity differs materially from original estimates.
Warrant Liability
The Company accounts for the warrants issued in connection with the July 25, 2018 Initial Securities Purchase Agreement
in accordance with the guidance on Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which provides that the Company classifies the warrant instrument as a liability at its fair value and
adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statement of operations. The
fair value of warrants issued by the Company in connection with private placements of securities has been estimated using the warrants quoted market price.
Impairment.
Long-lived assets, which include property, plant and equipment, and certain other assets to be held and used by us, are reviewed when events or changes in circumstances indicate that the carrying amount of the assets may not be
recoverable based on estimated future cash flows. If this assessment indicates that the carrying values will not be recoverable, as determined based on undiscounted cash flows over the remaining useful lives, an impairment loss is recognized
based on the fair value of the asset.
Income
Taxes.
We provide for income taxes utilizing the asset and liability method of accounting. Under this method, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of
assets and liabilities and their financial reporting amounts at each balance sheet date, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. If it is
determined that it is more likely than not that future tax benefits associated with a deferred income tax asset will not be realized, a valuation allowance is provided. The effect on deferred income tax assets and liabilities of a change in
the tax rates is recognized in income in the period that includes the enactment date. Tax benefits earned on employee stock awards in excess of recorded stock-based compensation expense are credited to additional paid-in capital. Our
provision for income taxes also includes the impact of provisions established for uncertain income tax positions, as well as the related interest.
Accounts
Receivable.
We extend credit to clients based upon management’s assessment of their credit-worthiness on an unsecured basis. We provide an allowance for uncollectible accounts based on historical experience and management evaluation
of trend analysis. We include any balances that are determined to be uncollectible in allowance for doubtful accounts.
Business
Combination.
We account for business combinations using the acquisition method, which requires the identification of the acquirer, the determination of the acquisition date and the allocation of the purchase price paid by the
acquirer to the identifiable tangible and intangible assets acquired, the liabilities assumed, including any contingent consideration and any non-controlling interest in the acquiree at their acquisition date fair values. Goodwill represents
the excess of the purchase price over the fair value of net assets acquired, including the amount assigned to identifiable intangible assets. Identifiable intangible assets with finite lives are amortized over their useful lives.
Acquisition-related costs are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in our consolidated financial statements from the acquisition date.
Goodwill
and Purchased Intangibles.
We evaluate goodwill and purchased intangible assets for impairment at least annually, or as circumstances warrant. Goodwill is evaluated at the reporting unit level by comparing the fair value of the
reporting unit with its carrying amount. For purchased intangible assets, if our annual qualitative assessment indicates possible impairment, we test the assets for impairment by comparing the fair value of such assets to their carrying
value. In determining the fair value, we utilize various estimates and assumptions, including discount rates and projections of future cash flows. If an impairment is indicated, a write down to the implied fair value of goodwill or fair value
of intangible asset is recorded.
Valuation
of Contingent Earn-out Consideration.
Acquisitions may include contingent consideration payments based on the achievement of certain future financial performance measures of the acquired company. Contingent consideration is required
to be recognized at fair value as of the acquisition date. We estimate the fair value of these liabilities based on financial projections of the acquired companies and estimated probabilities of achievement. We believe our estimates and
assumptions are reasonable, however, there is significant judgment involved. We evaluate, on a routine, periodic basis, the estimated fair value of the contingent consideration and changes in estimated fair value, subsequent to the initial
fair value estimate at the time of the acquisition, will be reflected in income or expense in the consolidated statements of operations. Changes in the fair value of contingent consideration obligations may result from changes in discount
periods and rates, changes in the timing and amount of revenue and/or earnings estimates and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria. Any changes in the estimated fair value
of contingent consideration may have a material impact on our operating results.
Special Note Regarding Forward-Looking Information
Some of the statements in this Quarterly Report on Form 10-Q and elsewhere constitute forward-looking statements under
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements involve known and unknown risks, uncertainties and other factors that may cause results, levels of
activity, growth, performance, tax consequences or achievements to be materially different from any future results, levels of activity, growth, performance, tax consequences or achievements expressed or implied by such forward-looking
statements. Such factors include, among other things, those listed below.
The forward-looking statements included in this Form 10-Q and referred to elsewhere are related to future events or
our strategies or future financial performance, including statements concerning our 2019 outlook, future revenue and growth, customer spending outlook, general economic trends, IT service demand, future revenue and revenue mix, utilization,
new service offerings, significant customers, competitive and strategic initiatives, growth plans, potential stock repurchases, future results, tax consequences and liquidity needs. In some cases, you can identify forward-looking statements
by terminology such as "may," "should," "believe," "anticipate," "anticipated," "expectation," "continued," "future," "forward," "potential," "estimate," "estimated," "forecast," "project," "encourage," "opportunity," "goal," "objective,"
"could," "expect," "expected," "intend," "plan," "planned," or the negative of such terms or comparable terminology. These forward-looking statements inherently involve certain risks and uncertainties, although they are based on our current
plans or assessments which are believed to be reasonable as of the date of this Form 10-Q.
Although we believe that the expectations in the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance, growth, earnings per share or achievements. However, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Except as otherwise required, we
undertake no obligation to update any of the forward-looking statements after the date of this Form 10-Q to conform such statements to actual results.