Cash provided by financing activities consists primarily of net proceeds from borrowings on lines of credit, proceeds from and repayments of our factor agreement, proceeds from private placements of equity, the issuance and repayment of promissory notes, and capital leases.
Management’s Report on Internal Control over Financial Reporting
Evaluation of Disclosure Controls and Procedures
We maintainOur management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2016. Based on that are designedevaluation and the material weaknesses described below, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective such that the information relating to ensure that informationour company required to be disclosed in our Securities and Exchange ActCommission reports (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’sSEC rules and forms and that such information(ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls or procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectivesas a result of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitationsmaterial weaknesses in all control systems, no evaluation of controls can provide absolute assurance that all control problems or acts of fraud, if any, within the Company have been detected.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and proceduresprocedures. The material weaknesses relate to our inability to timely file our reports and other information with the SEC as of December 31, 2014, the endrequired under Section 13 of the annual period covered by this report. The evaluationExchange Act, together with material weaknesses in our internal control over financial reporting. Material weaknesses in our internal control over financial reporting as discussed below are (i) ineffectiveness of the Board of Directors, (ii) our lack of the quantity of resources and personnel with an appropriate level of knowledge and experience in the application of U.S. GAAP commensurate with our financial reporting requirements, and (iii) our lack of information technology (“IT”) governance, physical safeguards and access to programs and data. To remediate the material weaknesses in disclosure controls and procedures, included a review of the disclosure controls’we plan to hire additional experienced accounting and procedures’ objectives, design, implementationother personnel to assist with filings and the effect of the controls and procedures on the information generated for use in this report. In the course of our evaluation, we sought to identify errors, control problems or acts of fraudfinancial record keeping and to confirm the appropriate corrective actions, including process improvements, were being undertaken. Based on the foregoing,take additional steps to improve our Chief Executive Officerfinancial reporting systems and Chief Financial Officer concluded that our disclosure controlsimplement new policies, procedures and procedures were effective as of December 31, 2014 at the reasonable assurance level.controls.
Management’s Report on Internal Control Overover Financial Reporting
Our management is responsible for establishing and maintaining adequate internal controls over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal controls over financial reporting are a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).
Because of their inherent limitations, internal controls over financial reporting may not prevent or detect misstatements in a timely manner. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework described in Internal Control-Integrated Framework issued by the Commission of Sponsoring Organizations of the Treadway Commission, as revised in 2013. Based on that evaluation, management has concluded that the Company did not maintain effective internal control over financial reporting as of the fiscal year ended December 31, 2015 due to the existence of material weaknesses in the internal control over financial reporting described below.
Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Management has determined that we did not maintain effective internal controls over financial reporting as of the fiscal year ended December 31, 2015 due to the existence of the following material weaknesses identified by management:
Ineffective Board of Directors
We did not appear to have an effective Board of Directors that demonstrates independence from management and exercises oversight responsibility and has the ability to discharge its responsibilities. The following areas related to tone at the top are contributing factors to the weaknesses described in the control environment that require remediation:
· | We did not maintain appropriate controls relating to the issuance of stock grants, with a grant date of September 20, 2014, by the CEO which caused misstatements in our 2015 consolidated statements of operations. The lack of adequate controls over the granting of stock, the related documentation and recording of expense in the proper period constitute a material weakness which resulted in material errors in the financial statements. |
· | We did not maintain appropriate governance and controls surrounding the CEO consulting with various advisors not compensated by the Company. The lack of adequate controls surrounding review of the CEO's consultations with outside advisors constitutes a material weakness. |
Remediation efforts to address the material weakness relating to ineffective Board of Directors
During 2016, management has replaced exiting board members in a timely fashion with knowledgeable replacements to further enhance corporate governance. In addition, management has implemented additional controls during 2016 to ensure that all stock compensation programs are to be approved by the Board of Directors, in which limits of authority around grants are established and appropriately carried out by management.
Insufficient number of personnel with an appropriate level of knowledge and experience in the application of U.S. GAAP
We did not maintain an effective control environment, as evidenced by: (i) an insufficient number of personnel appropriately qualified to perform execution and monitoring activities and (ii) an insufficient number of personnel with an appropriate level of GAAP knowledge and experience and ongoing training in the application of GAAP commensurate with external financial reporting requirements. As a result, there were adjustments to our financial reporting. As discussed elsewherestatements were identified by our auditors. These findings and adjustments then resulted in our inability to prepare and timely file the required 2015 10-K filing with the SEC.
Remediation efforts to address the material weakness relating to insufficient number of personnel with an appropriate level of knowledge and experience in the application of U.S. GAAP
Management intends to hire additional accounting support to further enhance the accounting review process as well as engage with third-party consultants. Management will look to provide existing staff with additional training, as deemed necessary by the annual review process.
Lack of IT governance, physical safeguards and access to programs/data
We have inadequate design of IT general and application controls that could prevent the information systems from providing complete and accurate information consistent with financial reporting objectives and current needs. For a sufficient period of time during the reporting period, we had decentralized systems, inadequate IT support staff, and adequate records and storage retention.
Remediation efforts to address the material weakness relating to lack of IT governance, physical safeguards and access to programs/data
In late 2015, management hired an IT Director to oversee the department. In addition, we are looking at new accounting systems, which will replace the existing accounting system and better support our control environment. Many new IT policies and procedures have been adopted by the Company in 2016, which include security, change and patch management and back-up procedures. In addition, network infrastructure systems have been safeguarded and a help desk system has been implemented to monitor significant events in 2015.
The effectiveness of our internal controls over financial reporting as of December 31, 2015 has been audited by SingerLewak LLP, the Company’s independent registered public accounting firm, as stated in their report which is included in this Annual Report on Form 10-K, pursuant to10-K.
Report of Independent Registered Public Accounting Firm
To the Exchange Agreement by which Six Dimensions, for accounting purposes, acquired CleanTech occurred on September 29, 2014. Prior to the Exchange Agreement, Six Dimensions was a privately held company,Board of Directors and therefore its controls were not required to be designed or maintained in accordance with Rule 13a-15 under the Exchange Act. Our design of public company internal controls over financial reporting has required, and will continue to require, significant time and resources from our management and other personnel. As a result, management was unable, without incurring unreasonable effort or expense, to conduct an assessment of ourStockholders
6D Global Technologies, Inc.
New York, New York
We have audited 6D Global Technologies, Inc.'s internal control over financial reporting as of December 31, 2014.
Based2015, based on criteria established in Internal Control — Integrated Framework issued by the foregoing and as permitted by Section 215.02Committee of Sponsoring Organizations of the SEC’s Compliance and Disclosure Interpretations,Treadway Commission in 2013. 6D Global Technologies, Inc.’s management is excludingresponsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting forincluded in the year ended December 31, 2014. Pursuant to Regulation S-K 308(b), this Annualaccompanying Management’s Report on Form 10-K does not includeInternal Control over Financial Reporting. Our responsibility is to express an attestation report of our company’s registered public accounting firm regardingopinion on the company's internal control over financial reporting.reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management's assessment: 1) The absence of an effective Board of Directors which demonstrates independence from management, 2) an insufficient number of personnel with an appropriate level of knowledge and experience in the application of U.S. generally accepted accounting principles and 3) lack of Information Technology governance. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2015 consolidated financial statements, and this report does not affect our report dated July 8, 2016, on those consolidated financial statements.
In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, 6D Global Technologies, Inc. has not maintained effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of 6D Global Technologies, Inc. and our report dated July 8, 2016, expressed an unqualified opinion.
/s/ SingerLewak LLP
Los Angeles, California
July 8, 2016
Item 9B. – Other Information
None
PART III
ItemItem 10. – Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
Our directors and executive officers and their respective ages, positions, and biographical information are set forth below. Our bylaws require not less than three independent directors and our current directors serve until our next annual meeting or until each is replaced by a qualified director. There are no existing family relationships between our executive officers or directors.
Name | | Age | | Position with the Company | | Director Term |
Tejune Kang | | 40 | | Chairman of the Board and Chief Executive Officer | | Since September 2014 |
Mark Szynkowski | | 48 | | Chief Financial Officer | | Since December 2014 |
Bradley Timchuk | | 51 | | President and Chief Operations Officer | | Since April 2016 |
Thomas J. Iaciofano | | 40 | | Vice President | | Since May 2016 |
Piotr A. Chrzaszcz | | 52 | | Director | | Since October 2015 |
Michael Bannout | | 57 | | Director | | Since October 2015 |
Sarah Michael | | 29 | | Director | | Since April 2016 |
Tejune Kang, Chairman of the Board and Chief Executive Officer
Mr. Kang has served as the Chief Executive Officer of Six Dimensions, the predecessor company to 6D Global, since the Company’s founding in 2004, and was appointed chairman of the Board of Directors of 6D Global in September 2014. Before founding Six Dimensions, Mr. Kang was a principal of Kang Management Group, a commercial real estate developer in Nevada, until 2009 when it was closed down due to the global financial crisis that negatively affected the real estate markets in the West Coast. In early 2010, Mr. Kang filed a bankruptcy petition under Chapter 7 of Title 11 of the United States Code in connection with his personal guarantee of land projects and the inability to refinance related indebtedness. Since then, Mr. Kang has devoted his efforts to growing Six Dimensions. Prior to Kang Management Group, Mr. Kang was an engineer for five years with PeopleSoft (now Oracle Corporation). While at PeopleSoft, Mr. Kang managed Human Resources, Financial, Supply Chain, and Enterprise Performance Management software implementations for Fortune 500 companies including Boeing, Apple, AT&T, HP. Mr. Kang is a member of Harvard Business School’s Owner President/Management Program (OPM 50), Inc. Business Owners Council (IBOC), Vistage, Entrepreneurs’ Organization (EO), Alliance of CEOs, National Association of Asian American Professionals (NAAAP) and Massachusetts Institute of Technology (MIT) Key Executive Program and Entrepreneurial Masters Program (EO). Mr. Kang graduated from The University of California, Davis with a Bachelor of Science degree in Managerial Economics.
Mark Szynkowski, Chief Financial Officer
Prior to joining the Company, from December 2005 to July 2014, Mr. Szynkowski was Vice President of Finance for Epiq Systems, a provider of integrated technology products and services for the legal profession. Prior to his tenure at Epiq Systems, Mr. Szynkowski served as Chief Financial Officer and Controller for multiple high-growth organizations and began his career with Ernst & Young. Mr. Szynkowski graduated from Alfred University with a Bachelor degree in Accounting.
Bradley Timchuk, President and Chief Operations Officer
Prior to joining the Company, Mr. Timchuk was employed by TigerLogic Corporation, and served as its Chief Executive Officer from September 2014 until March 2015, in which role he was responsible for TigerLogic’s restructuring, strategic partnerships, and growth strategy. Prior to that, Mr. Timchuk served as Executive Vice President of Worldwide Sales and Marketing at TouchCommerce, Inc., an online customer engagements solution company, from May 2012 through November 2013, and in various capacities at Fuel Industries, Inc., a private youth engagement agency, beginning in March 2010, including as Executive Vice President, Chief Executive Officer from November 2010 through September 2011, and in an advisory capacity through April 2012. Mr. Timchuk has also served as Senior Vice President of Sales and Business Development for eFusion, Inc. Mr. Timchuk attended Mohawk College in Canada, where he studied Computer Electronics Technology.
Thomas J. Iaciofano, Vice President
Mr. Iaciofano is responsible for ensuring overall revenue and margin growth of 6D Global CMS segment, strategic acquisitions, product development, partnerships, and operations. Prior to being named to his current position Mr. Iaciofano is responsible for ensuring overall revenue and margin growth of 6D Global CMS segment, strategic acquisitions, product development, partnerships, and operations. Prior to being named to his current position Mr. Iaciofano was Director of the Content Management System (CMS) and Digital Asset Management (DAM) practice. His team consists of solution delivery managers, technical architects, development leads, engineers, and subject matter experts. He is also responsible for the opening and managing of 6D Labs, the Company’s center of excellence focused on solution delivery and support for technology implementations. Mr. Iaciofano has over 13 years of experience in web and internet-based solution delivery as well as leading enterprise-level web-based content management systems. Prior to joining Six Dimensions in 2011, he held various leadership roles in web content management for higher education, commercial and the non-profit space.
Piotr A. Chrzaszcz, Director
Mr. Chrzaszcz has served as the CEO of Commercial Masterminds, Inc., a commercial real estate investment and advisory firm from 2007-2012 and holds the advanced real estate investor designation, Certified Commercial Investment Member (CCIM). Mr. Chrzaszcz was an active leader in the CCIM community and a guest lecturer for the UC Berkeley Extension, Personal Financial Planning Program discussing due diligence in commercial real estate. Mr. Chrzaszcz is currently a Vice President for a local California bank working as their Corporate Real Estate Manager and an active investor trading his own portfolio. Mr. Chrzaszcz is an Air Force veteran and holds a Bachelor of Science in Aerospace Engineering from Boston University. Mr. Chrzaszcz’s leadership experience gained while in executive management and with his investment experience led the Board of Directors to conclude that Mr. Chrzaszcz should serve as a director of the Company.
Michael Bannout, Director
Mr. Bannout has served as the CEO and President of M. London Group, Inc. for the past 25 years, a privately owned men’s and women’s fashion accessories and apparel company, which he started in New York City as a small cut and sew manufacturing company and built into a multi-million dollar enterprise with world-wide distribution. Mr. Bannout attended Brooklyn College in Brooklyn, NY. Mr. Bannout’s substantial management, executive, and leadership experience gained from his extended service as CEO and President of his own company led the Board of Directors to conclude that Mr. Bannout should serve as a director of the Company.
Sarah Michael, Director
Ms. Michael is currently a Project Director of Hospitality House where she administers the financial analysis of private equity firms, REITs, hotel brands, and real estate owners and developers to reduce expenses and improve company efficiencies. She provides conceptual strategy, operational expertise, financial underwriting, landlord representation and operator sourcing. Formerly, Ms. Michael worked in the Commercial Real Estate Team at Nest Seekers International and served as the Vice President of healtheo360, an online healthcare social media company. Ms. Michael holds a Bachelor of Science in Psychology from St. John’s University. Ms. Michael’s strategic, operational, and financial underwriting experience led the Board of Directors to conclude that Ms. Michael should serve as a director of the Company.
Corporate Governance
Board Leadership Structure and Risk Oversight
The information requiredBoard oversees the Company’s management in the competent and ethical operation of the Company, and assures that the long-term interests of the stockholders are being served.
Our Chairman of the Board is also the Chief Executive Officer of the Company. We believe that by having this itemcombined position, our Chief Executive Officer serves as a bridge between management and the Board, ensuring that both act with a common purpose. In addition, we believe that the combined position facilitates our focus on both long and short term strategies. Further, we believe that the advantages of having a Chief Executive Officer with extensive knowledge of the Company, as opposed to a relatively less informed independent Chairman, outweigh potential disadvantages. Additionally, we believe that our majority of independent directors provide sufficient independent oversight of our management. We do not have a lead independent director.
We administer our risk oversight function through our Audit Committee as well as through our Board as a whole. Our Audit Committee is incorporatedempowered to appoint and oversee our independent registered public accounting firm, monitor the integrity of our financial reporting processes and systems of internal controls and provides an avenue of communication among our independent auditors, management, and our Board.
Board Committees
The Board has a standing Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee (the “Nominating Committee”). The Board has determined that the Chairs and all committee members are independent under applicable NASDAQ and SEC rules for committee memberships. The members of the committees are shown in the table below.
Director | | Audit Committee | | | Compensation Committee | | | Nominating Committee | |
Tejune Kang | | -- | | | -- | | | -- | |
Sarah Michael | | Chair | | | Member | | | Member | |
Piotr A. Chrzaszcz | | Member | | | Member | | | Chair | |
Michael Bannout | | Member | | | Chair | | | Member | |
The Audit Committee is responsible for overseeing the Company’s corporate accounting, financial reporting practices, audits of financial statements, and the quality and integrity of the Company’s financial statements and reports. In addition, the Audit Committee oversees the qualifications, independence and performance of the Company’s independent auditors. In furtherance of these responsibilities, the Audit Committee’s duties include the following: evaluating the performance and assessing the qualifications of the independent auditors; determining and approving the engagement of the independent auditors to perform audit, reviewing and attesting to services and performing any proposed permissible non-audit services; evaluating employment by referencethe Company of individuals formerly employed by the independent auditors and engaged on the Company’s account and any conflicts or disagreements between the independent auditors and management regarding financial reporting, accounting practices or policies; discussing with management and the independent auditors the results of the annual audit; reviewing the financial statements proposed to our Proxy Statementbe included in the Company’s annual or transition report on Form 10-K; discussing with management and the independent auditors the results of the auditors’ review of the Company’s quarterly financial statements; conferring with management and the independent auditors regarding the scope, adequacy and effectiveness of internal auditing and financial reporting controls and procedures; and establishing procedures for the 2015 Annual Meetingreceipt, retention and treatment of Stockholderscomplaints regarding accounting, internal accounting control and auditing matters and the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters.
The Compensation Committee is responsible primarily for reviewing the policies, practices and procedures relating to be filedthe compensation of the officers and other managerial employees and the establishment and administration of employee benefit plans. It advises and consults with the Securitiesofficers of the Company as may be requested regarding managerial personnel policies. The Compensation Committee also has such additional powers as may be conferred upon it from time to time by the Board.
The Nominating Committee is responsible for assisting the Board in identifying individuals qualified to become members of the Board and Exchange Commission within 120 daysexecutive officers of the Company; selecting, or recommending that the Board select, director nominees for election as directors by the stockholders of the Company; developing and recommending to the Board a set of effective governance policies and procedures applicable to the Company; leading the Board in its annual review of the Board’s performance; recommending to the Board director nominees for each committee; making recommendations regarding committee purpose, structure and operations; and overseeing and approving a managing continuity planning process. During the fiscal year ended December 31, 2014.2015, there were no changes to the procedures by which holders of our common stock may recommend nominees to the Board.
The Audit Committee, Compensation Committee, and Nominating Committee operate under written charters adopted by the Board. Copies of these charters are available at http://ir.6dglobal.com/governance-docs.
Audit Committee Financial Expert
The Board has determined that Sarah Michael qualifies as an “audit committee financial expert” as defined under applicable SEC rules, and that all members of the Audit Committee meet the additional criteria for independence of audit committee members set forth in Rule 10A-3(b)(1) under the Exchange Act.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s officers and directors, and persons who own more than ten percent of a registered class of the Company’s equity securities, to file reports of securities ownership and changes in such ownership with the SEC. Officers, directors and greater than ten percent stockholders also are required by SEC rules to furnish the Company with copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of such forms furnished to the Company, and on written representations from the reporting persons, the Company believes that all officers, directors and beneficial owners of more than 10% of our common stock have filed their initial statements of ownership on Form 3 on a timely basis, and the officers, directors and beneficial owners of more than 10% of our common stock have also filed the required Forms 4 or 5 on a timely basis, with the exception of the following:
Name | | Number of late Reports | | | Transactions not timely reported | | | Known failures to file a required form | |
Adam Hartung | | 1 | | | 1 | | | 0 | |
TJ Iaciofano | | 1 | | | 1 | | | 0 | |
Tejune Kang | | 1 | | | 1 | | | 0 | |
Matthew Sullivan | | 1 | | | 1 | | | 0 | |
Mark Szynkowski | | 1 | | | 1 | | | 0 | |
Code of Ethics
The Company has a code of business conduct and ethics (the “Code of Ethics”) that applies to all employees, including the Company’s principal executive officer, principal financial officer, and principal accounting officer, as well as to the Board. The code is available at http://ir.6dglobal.com/governance-docs. The Company intends to disclose any changes in, or waivers from, this code by posting such information on the same website or by filing a Form 8-K.
Item 11. – Executive Compensation
The information required by this item is incorporated by referencefollowing table presents a summary of the compensation paid to our Proxy Statement for the 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days ofexecutive officers during the fiscal yearyears ended December 31, 2015 and 2014. Except as listed below, there were no bonuses, other annual compensation, restricted stock awards or stock options or any other compensation paid to the named executive officers.
Name and principal position | | Year | | | Salary ($) | | | Bonus ($) | | | Stock awards ($) | | | Option awards ($) | | | Nonequity incentive plan compensation ($) | | | Nonqualified deferred compensation earnings ($) | | | All other compensation ($) | | | Total ($) | |
Tejune Kang Chief Executive Officer and Chairman of the Board | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mark Szynkowski Chief Financial Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Bradley Timchuk (2) President and Chief Operations Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Thomas Iaciofano Executive Vice President | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Matthew Sullivan Executive Vice President (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Matthew Sullivan Served as Executive Vice President until July, 2015. |
(2) | Bradley Timchuk was appointed as President and Chief Operations Officer effective on May 1st, 2016 |
The Company offers competitive compensation packages to attract and retain executives who manage the day-to-day business of the Company while fostering the further growth of the Company. These compensation packages include a base salary and other incentives, such as cash bonuses and stock options, determined on a case-by-case basis. In the case of the Company’s Chief Executive Officer, Tejune Kang, and its former Executive Vice President, Matthew Sullivan, this program is tied to the Company’s performance. These executives’ bonus payments vary based on meeting (or exceeding) both a revenue goal and a profitability margin. Under this system, if only minimum criteria are met, the executive does not receive a bonus. Conversely, should the executive exceed the revenue expectations and profitability margin, then he would be entitled to receive a cash bonus and a stock option grant. By design, this compensation plan rewards executives only for exceeding expectations. The amounts payable in both instances have accelerators for different target points. For example, revenue of $20,000,000 would equate to no bonus payment or stock option grant, while achieving a revenue target of $20,000,001 with a 5% profit margin would result in a cash bonus and the issuance of stock options. In total, there are three accelerators, with the maximum constituting a revenue target of $40,000,001+ and a profitability margin of 10%. Profit is defined as EBIT, and no bonus is paid or stock option granted until the completion of the year-end financial audit. Prior to the Company going public, Tejune Kang, the Company’s CEO, Chairman and significant stockholder, transferred some of his stock to long-term employees, including Matthew Sullivan and Thomas Iaciofano, which transfer vested over 4 years so long as each recipient remained an employee. For accounting purposes these stock transfers by Tejune Kang were recorded as compensation expenses of the Company. During a portion of 2014, Matthew Sullivan was compensated by the Company as an independent contractor through a third party corporation. CEO/Chairman Tejune Kang, as part of his compensation agreement received an allowance for certain personal expenses, which was valued at $64,700, in addition to his salary of $85,500. On March 17, 2016, Mr. Kang’s employment agreement was amended to eliminate the allowance and reflect a base salary of $220,000 per year. The Company’s officers participate in the normal employee compensation strategy: a base salary, a year-end bonus and a stock option grant, as governed by the Company’s 2015 Omnibus Incentive Plan.
Employment Agreements
Mr. Kang, Mr. Szynkowski, and Mr. Timchuk are the only executive employees that currently have employment agreements with the Company.
Mr. Kang’s employment agreement was amended on March 17, 2016. Under the amended employment agreement, Mr. Kang’s total compensation consists of a base salary of $220,000 (without any allowance or reimbursement of personal expenses), with an opportunity for a performance bonus based upon a combination of Company revenue and profitability targets. If Mr. Kang’s employment is terminated for cause by the Company or if he terminates his employment without good reason, he will be entitled to receive his accrued base salary (and benefits, if Mr. Kang terminates without good reason), but will forfeit all stock options (whether vested or unvested). If Mr. Kang’s employment is terminated without cause by the Company, if he terminates his employment with good reason, or if he terminates his employment in connection with a Change in Control, he will be entitled to a $55,000 lump sum payment and all of his unvested stock options will immediately vest.
Mr. Szynkowski was an at-will employee and did not have a written employment agreement with the Company during 2015. On January 1, 2016, the Company entered into a written employment agreement with Mr. Szynkowski. The employment agreement has a two-year term and provides for base compensation of $215,000, with an opportunity for a bonus of up to $21,500 based upon a combination of Company revenue and profitability targets. If Mr. Szynkowski’s employment is terminated for cause by the Company, or if he terminates his employment without good reason, then he will be entitled to receive his accrued base salary through the date of termination (and benefits, if Mr. Szynkowski terminates without good reason), but will forfeit all stock options (whether vested or unvested). If Mr. Szynkowski’s employment is terminated without cause by the Company, if he terminates his employment with good reason, or if his employment is terminated in connection with a change of control of the Company, he will be entitled to a $53,750 lump sum payment and all of his unvested stock options will immediately vest.
Mr. Timchuk entered into a written employment agreement with the Company on May 1, 2016, which has a two-year term and provides him with an annual base salary of $240,000 and the opportunity for a performance and a discretionary bonus. In addition, pursuant to the employment agreement, the Company agreed to issue Mr. Timchuk, on May 1, 2016, stock options to purchase 200,000 shares of the Company’s common stock, to vest annually in five equal installments. If Mr. Timchuk’s employment is terminated for cause by the Company or if he terminates his employment without good reason, then he will be entitled to receive his accrued base salary through the date of termination (and benefits, if Mr. Timchuk terminates without good reason), but will forfeit all stock options (whether vested or unvested). If Mr. Timchuk’s employment is terminated without cause by the Company, or upon a change in control, or if Mr. Timchuk resigns for good reason, Mr. Timchuk is entitled to a severance payment of $60,000 and any unvested stock options will terminate and be null and void (except in the case of a Change in Control, in which case all granted but unvested stock options shall immediately vest).
Outstanding Equity Awards at Fiscal Year End
The following table sets forth information regarding equity awards held by our named executive officers as of December 31, 2015.
| | Option Awards | | | Stock Awards | |
Name | | Number of Securities underlying Unexercised Options (#) Exercisable | | | Number of Securities underlying Unexercised Options (#) Unexercisable | | | Equity incentive plan awards: Number of securities underlying unexercised unearned options (#) | | | Option Exercise Price ($/Sh) | | | Option Expiration Date | | | Number of shares or units of stock that have not vested (#) | | | Market value of shares or units of stock that have not vested ($) | | | Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#) | | | Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($) | |
Tejune Kang | | | - | | | | 45,000 | (3) | | | - | | | $ | 8.28 | | | April 1, 2025 | | | | - | | | $ | - | | | | - | | | | - | |
Mark Szynkowski | | | - | | | | 50,000 | (3) | | | - | | | $ | 8.28 | | | April 1, 2025 | | | | - | | | $ | - | | | | - | | | | - | |
Bradley Timchuk (1) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | $ | - | | | | - | | | | - | |
Thomas Iaciofano | | | - | | | | 20,000 | (3) | | | - | | | $ | 8.28 | | | April 1, 2025 | | | | 150,000 | | | $ | 435,000 | | | | - | | | | - | |
Matthew Sullivan (2) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | $ | - | | | | - | | | | - | |
(1) | Bradley Timchuk began serving as President and Chief Operations Officer on May 1, 2016. |
(2) | Matthew Sullivan served as Executive Vice President until July, 2015 upon which options and future stock grants were forfeited. |
(3) | Stock options granted April 1, 2015 have a yearly vesting schedule over a 5-year period. |
Compensation of Directors
Name | | Fees earned or paid in cash ($) | | | Stock awards ($) | | | Option awards ($) | | | Non-equity incentive plan compensation ($) | | | Nonqualified deferred compensation earnings ($) | | | All other compensation ($) | | | Total ($) | |
Adam Hartung (1) | | | 37,500 | | | | - | | | | 73,100 | | | | - | | | | - | | | | - | | | | 110,600 | |
David S. Kaufman (2) | | | 15,000 | | | | - | | | | 73,100 | | | | - | | | | - | | | | - | | | | 88,100 | |
Terry McEwen (3) | | | 15,000 | | | | - | | | | 73,100 | | | | - | | | | - | | | | - | | | | 88,100 | |
Anubhav Saxena (4) | | | 15,000 | | | | - | | | | 73,100 | | | | - | | | | - | | | | - | | | | 88,100 | |
Piotr A. Chrzaszcz (5) | | | 14,500 | | | | - | | | | 21,400 | | | | - | | | | - | | | | - | | | | 35,900 | |
Michael Bannout (6) | | | 14,500 | | | | - | | | | 21,400 | | | | - | | | | - | | | | - | | | | 35,900 | |
(1) | Adam Hartung served as a Director until April, 2016. |
(2) | David S. Kaufman served as a Director until October, 2015. |
(3) | Terry McEwen served as a director until November, 2015. |
(4) | Anubhav Saxena served as a director until October, 2015. |
(5) | Piotr A. Chrzaszcz began serving as a director on October 24, 2015. |
(6) | Michael Bannout began serving as a director on October 27, 2015. |
The Company has agreed to compensate its independent directors $5,000 for each full quarter for which they serve and actively participate in Board activities, such as attending meetings of the Board and committees of the Board. For the fourth quarter of 2015 and forward, the Company agreed to compensate its independent directors $10,000 for director fee, $2,500 fee for being a chairman of the Nominating and Compensation Committee, $3,750 for Chairman of the Audit Committee, and $1,000 fee for being a member of each committee for each full quarter for which they serve and actively participate in Board and Committee activities. Directors are also eligible to receive stock options as granted. As discussed in more detail below under the heading “Equity Compensation Plan,” in February 2015, the Company and its stockholders adopted an Omnibus Compensation Plan.
During 2015 the Board held 4 meetings in person, 15 telephonic meetings and acted by written consent 1 time. One director attended in person or telephonically or by written consent 36% of all board and applicable meetings during the time they were active board members. All other directors attended in persons, telephonically or by written consent at least 75% of all board and applicable meetings during the time they are active board members.
Arrangements or Understandings
There was no arrangement or understanding between any of our directors and any other person pursuant to which any director was to be selected as a director.
Item 12. – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table shows certain information requiredas of June 30, 2016 with respect to the beneficial ownership of the Company’s common stock by: (i) each person the Company believes beneficially holds more than 5% of the outstanding shares of the Company’s common stock based solely on the Company’s review of SEC filings; (ii) each director; (iii) each named executive officer; and (iv) all directors and executive officers as a group. Unless otherwise noted below, the address of each beneficial owner listed in the table is c/o 6D Global Technologies, Inc., 17 State Street, Suite 2550, New York, NY 10004.
We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by this itemthe footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws.
Applicable percentage ownership is incorporatedbased on 78,247,864 shares of Common Stock outstanding at June 30, 2016. In computing the number of shares of common stock beneficially owned by referencea person and the percentage ownership of that person, we deemed outstanding shares of common stock subject to our Proxy Statementoptions or warrants held by that person that are currently exercisable or exercisable within sixty days of June 30, 2016. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Beneficial ownership representing less than one percent is denoted with an asterisk (*).
Name and Address of Beneficial Owner | | Amount of Beneficial Ownership | | | Percentage of Class | |
Executive Officers and Directors | | | | | | |
Tejune Kang, Chief Executive Officer and Chairman of the Board (1) | | | 23,296,474 | | | | 29.8 | % |
Mark Szynkowski, Chief Financial Officer | | | * | | | | * | |
Matthew Sullivan, former Executive Vice President | | | * | | | | * | |
Thomas J. Iaciofano, Executive Vice President | | | * | | | | * | |
Adam Hartung, former Director | | | * | | | | * | |
Piotr A. Chrzaszcz, Director | | | * | | | | * | |
Michael Bannout, Director | | | * | | | | * | |
Sarah Michael, Director | | | * | | | | * | |
All executive officers and directors as a Group (8 persons) | | | 23,646,474 | | | | 30.2 | % |
Other > 5% Security Holders | | | | | | | | |
NYGG (Asia) Ltd. (2) | | | 35,149,883 | | | | 44.9 | % |
Epics Grantor Retained Annuity Trust II (3) | | | 4,000,000 | | | | 5.1 | % |
(1) | Pursuant to a stockholders’ agreement, Mr. Kang, Chairman and CEO of the Company and any successor to or designee of the CEO, was appointed as proxy of NYGG (Asia) Ltd., with the full power to vote NYGG (Asia) Ltd.’s shares in the same manner and in the same proportion as shares of common stock that are not held by NYGG (Asia) Ltd. are voted. The stockholders’ agreement shall terminate upon delisting of the shares from NASDAQ or dilution of NYGG (Asia) Ltd.’s stake in the Company or its possible successor below 5% of the Company’s outstanding common stock. |
(2) | The address of the beneficial owner is 12th Floor, Ruttonjee House, 11 Duddell Street, Central, Hong Kong, China. See (1) above regarding stockholders’ agreement. |
(3) | The address of the beneficial owner is PO Box 3477 San Ramon, CA 94583. |
Equity Compensation Plan
The Company had no equity compensation plans in effect as of December 31, 2014, and therefore, there were no outstanding equity awards at fiscal year-end. On January 22, 2015, Annual Meetingthe Board approved the Company’s 2015 Omnibus Incentive Plan (the “Plan”) pursuant to which the Company is authorized to issue up to 4,800,000 shares of StockholdersCommon Stock to be filed with the Securitiesqualified participants. On January 27, 2015, NYGG (Asia), Ltd., Kang Kapital LLC, Kang Family LLC, and Exchange Commission within 120 daysTKO, LLC, who collectively own 58,400,444 shares of Common Stock (representing 75.28 percent of the year fiscal endedvoting power of the Company on such date) executed a written consent adopting the Plan (the “Written Consent”). The company filed and commenced mailing of an Information Statement on Schedule 14C on February 5, 2015, disclosing the adoption of the Plan by the Board and by the stockholders pursuant to the Written Consent. In accordance with Rule 14c-2 of the Exchange Act, the Plan became effective on February 25, 2015.
As of March 29, 2016, the Company’s common stock was traded over-the-counter as a grey market security. These securities are not currently traded on the OTCQX, OTCQB or OTC Pink marketplaces. Broker-dealers are not willing or able to publicly quote grey market securities because of a lack of investor interest, company information availability or regulatory compliance.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information regarding compensation plans under which securities of the Company are authorized for issuance, as of December 31, 2014.2015:
Plan Category | | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | (b) Weighted-average exercise price of outstanding options, warrants and rights | | | (c) Number of securities remaining available for future issuance under equity compensation plans excluding securities reflected in column (a)(1) | |
Equity compensation plan approved by security holders (1) | | | 1,116,000 | | | $ | 8.23 | | | | 3,684,000 | |
Equity compensation plan not approved by security holders | | | - | | | | - | | | | - | |
Total | | | 1,116,000 | | | | | | | | 3,684,000 | |
(1) | Represents options issued pursuant to the Company’s 2015 Omnibus Incentive Plan. |
Item 13. – Certain Relationships and Related Transactions, and Director Independence
Review, Approval or Ratification of Transactions with Related Persons
The information required by this item is incorporated by reference to our Proxy StatementCode of Ethics contains a policy for the 2015 Annual Meetingreview of Stockholderstransactions in which the Company conducts business with a relative or significant other of a director, officer, or employee of the Company (a “Related Party Transaction”). The Related Party Transaction must be disclosed to the Company’s Chief Financial Officer to determine whether or not it is material to the Company. In the event the Related Party Transaction is determined to be filed withmaterial, it must be reviewed and approved in writing by the Securities and Exchange Commission within 120 daysAudit Committee in advance of the consummation of such Related Party Transaction. Significant Related Party Transactions, including those involving the Company’s directors or executive officers, must be reviewed and approved in writing in advance by the Company’s Board of Directors.
Transactions with Related Persons
Six Dimensions Inc., the private company predecessor to the Company, had a loan outstanding to its largest stockholder/owner at the time, Tejune Kang, during the fiscal year fiscal ended December 31, 2014. This loan bore interest at 2.64% with no definite repayment terms. During the year ended December 31, 2014, interest totaled $46,433, which was included in the Company’s consolidated balance sheet. During the year ended December 31, 2014, and prior to the Company becoming a reporting company, the loan balance of $456,563 was eliminated, as the Company treated the loan as a stockholder distribution.
Director Independence
The Board has determined that Sarah Michael, Piotr A. Chrzaszcz, and Michael Bannout are independent directors under the applicable laws and regulations of the SEC and the Listing Rules of NASDAQ. Adam Hartung was an independent director under these applicable laws and regulations until his resignation in April 2016. Anubav Saxena, Adam Hartung, and David Kaufman were independent directors under these applicable and regulations laws until their resignation in September 2015. Terry McEwen was not an independent director under these applicable laws and regulations until his resignation in October 2015. In making these determinations, the Board considered the types and amounts of the commercial dealings between the Company and the companies and organizations with which the directors are affiliated.
There are no family relationships among any of our directors or executive officers.
Item 14. – Principal Accountant Fees and Services
Principal Accounting Fees and Services
On October 22, 2014, the Company, with the approval of the Audit Committee, engaged BDO USA, LLP as the Company’s new independent registered public accounting firm. Marcum LLP (“Marcum”) and Li and Company, PC (“Li & Co.”), were previously engaged at separate times as the independent accounting firm of Six Dimensions, LLC (“Six Dimensions”), the predecessor and now subsidiary of the Company, while it was a privately-held company. On October 24, 2014, the Company notified and confirmed with Marcum that it had been dismissed as the independent accounting firm of Six Dimensions LLC. Marcum was never engaged as the Company’s independent registered public accounting firm, nor had they issued any financial reports related to the Company prior to its dismissal. Li & Co. was previously engaged separately from Marcum as the independent accounting firm of Six Dimensions while it was a privately-held company. On October 24, 2014 Six Dimensions notified Li & Co. that it had been dismissed as the independent accounting firm of Six Dimensions. Li & Co. was not engaged as the Company’s independent registered public accounting firm at any time.
On March 17, 2016, BDO USA, LLP resigned as the auditors to the Company. On April 18, 2016, The Company engaged with SingerLewak LLP as the Company’s new independent registered public accounting firm. SingerLewak LLP conducted the audit for years ending December 31, 2014 and December 31, 2015.
The information requiredfollowing table sets forth all fees paid or accrued by this item is incorporated by reference to our Proxy Statementthe Company for the 2015 Annual Meeting of Stockholders to be filed withaudit and other services provided by the Securities and Exchange Commission within 120 days ofCompany’s public accounting firms for the year fiscalyears ended December 31, 2014.2015 and December 31, 2014
BDO USA, LLP(1) | | 2015 | | | 2014 | |
Audit Fees(2) | | $ | 322,467 | | | $ | 127,150 | |
Audit-Related Fees(3) | | | - | | | | - | |
Tax Fees(4) | | | - | | | | - | |
All Other Fees(5) | | | - | | | | - | |
Total | | $ | 322,467 | | | $ | 127,150 | |
SingerLewak LLP(1) | | 2015 | | | 2014 | |
Audit Fees(2) | | $ | - | | | $ | - | |
Audit-Related Fees(3) | | | - | | | | - | |
Tax Fees(4) | | | - | | | | - | |
All Other Fees(5) | | | - | | | | - | |
Total | | $ | - | | | $ | - | |
(1) | BDO USA, LLP resigned as company auditor on March 17, 2016. SingerLewak LLP was engaged by the Company on April 18, 2016. |
(2) | Audit fees relate to professional services rendered in connection with the audit of the Company’s annual financial statements and quarterly review of financial statements included in the Company’s Quarterly Reports on Form 10-Q. |
(3) | Audit-related fees comprise fees for professional services that are reasonably related to the performance of the worldwide audit or review of the Company’s financial statements. |
(4) | Tax fees relate to professional services rendered in connection with tax audits, international tax compliance, and international tax consulting and planning servicer. |
(5) | Other Fees consist of fees for services other than the services reported in audit fees, audit-related fees, and tax fees. |
PART IV
ItemItem 15. – Exhibits, Financial Statement Schedules
3.1(1)3.1 (8) | Certificate of Incorporation, as amended by the Certificate of Amendment to the Certificate of Incorporation |
| |
3.2 (1) | Certificate of Designations of Preferences, Powers, Rights and Limitations of Series A Redeemable Convertible Preferred Stock |
| |
3.3 (2) | Bylaws |
| |
10.1 (2)(3) | Divesture and Exchange Agreement, dated June 11, 2014, by and among the Company and Ping Chen, Shengfen Lin, Wenge Chen, Bei Lu and Dianfu Lu |
| |
10.2 (2)(3) | Escrow Agreement, dated June 11, 2014, by and among the Company, Ping Chen, Shengfen Lin, Wenge Chen, Bei Lu and Dianfu Lu., and Holland & Knight, LLP |
| |
10.3 (2)(3) | Forbearance and Waiver Agreement, dated June 11, 2014, by and between the Company and NYGG (Asia) Ltd., dated June 11, 2014 |
| |
10.4 (2)(3) | Release and Waiver Agreement, dated June 11, 2014, by and among NYGG (Asia), Ltd., and Liaoning Creative Bellows Co., Ltd. and Liaoning Creative Wind Power Equipment Co., Ltd. |
| |
10.5 (3)(4) | Agreement and Plan of Share Exchange, dated June 13, 2014, by and among CleanTech Innovations, Inc., Initial Koncepts, Inc., d/b/a Six Dimensions, Inc., and Tejune Kang |
| |
10.6 (1)(2) | Debt Conversion Agreement, dated September 29, 2014 by and between the Company and NYGG (Asia) Ltd. |
| |
10.6 (4)10.6* | |
| |
10.7 (4)(5) | Form of Subscription Agreement, dated November 13, 2014, by and between the Company and the subscribers on the signature pages thereto. |
| |
10.8 (6) | Securities Purchase Agreement, dated March 4, 2015, by and between the Company and Ms. Topaz and Mr. Porath. |
| |
10.9 (6) | Securities Purchase Agreement, dated March 20, 2015, by and between the Company and SwellPath, Inc. |
| |
10.10 (6) | Goodwill Purchase Agreement, dated March 20, 2015, by and between the Company and Adam Ware. |
| |
10.11 (1) | Stock Purchase Agreement, dated August 10, 2015, by and between the Company and the investor named therein. |
| |
10.12 (7) | Stockholders’ Agreement, dated January 14, 2016, by and between the Company and NYGG (Asia) Ltd., and Exhibit A thereto, Irrevocable Proxy, dated January 14, 2016, by and between the Company and NYGG (Asia) Ltd. |
| |
10.13* | |
| |
21.1* | |
| |
24.1* | |
| |
31.1* | |
| |
31.2* | |
| |
32.1** | |
| |
32.2** | |
| |
101.INS* | XBRL Instance Document |
| |
101.SCH* | XBRL Taxonomy Extension Schema |
| |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase |
| |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase |
| |
101.LAB* | XBRL Taxonomy Extension Label Linkbase |
| |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase |
(1) | Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on August 13, 2015. |
(2) | Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on October 1, 2014. |
(2) (3) | Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on June 16, 2014. |
(3) (4) | Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on June 17, 2014. |
(4) (5) | Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 21, 2014. |
(6) | Incorporated by reference to the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 15, 2015. |
(7) | Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 20, 2016. |
(8) | Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on June 9, 2015. |
* Filed Herewith
** This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| 6D Global Technologies Inc. | |
| | | |
Dated: March 30, 2015 July 8, 2016 | By: | /s/ Tejune Kang | |
| | Tejune Kang, Chief Executive Officer | |
| | (Principal Executive Officer) | |
| | | |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Tejune Kang his true and lawful attorney-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Tejune Kang | | March 30, 2015 |
Tejune Kang, Chief Executive Officer (Principal Executive Officer) | | July 8, 2016 |
| | |
/s/ Mark Szynkowski | | March 30, 2015
|
Mark Szynkowski, Chief Financial Officer (Principal Financial Officer) | | July 8, 2016 |
| | |
/s/ Adam HartungPiotr A. Chrzaszcz | | March 30, 2015
|
(Director) | | July 8, 2016 |
| | |
/s/ David S. KaufmanMichael Bannout | | March 30, 2015
|
(Director) | | July 8, 2016 |
| | |
/s/ Terry McEwenSarah Michael | | March 30, 2015
|
(Director) | | |
| | |
/s/ Anubhav Saxena | | March 30, 2015July 8, 2016
|
(Director) | | |
6D GLOBAL TECHNOLOGIES INC.
CONSOLIDATED FINANCIAL STATEMENTS
Contents
| Page |
| F-2 to F-3 |
| |
| F-4F-3 |
| |
| F-4 |
| |
| F-5 |
| |
| F-6 |
| |
| F-7 |
| |
| F-8F-6 |
| |
| F-9F-7 |
ReportReport of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
6D Global Technologies, Inc.
New York, New York
We have audited the accompanying consolidated balance sheetsheets of 6D Global Technologies, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ (deficit) equity (deficit), and cash flows for the year ended December 31, 2014.years then ended. These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these financial statements based on our audit.audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of 6D Global Technologies, Inc. at December 31, 2014, and the results of its operations and its cash flows for the year ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
New York, New York
March XX, 2015
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
6D Global Technologies, Inc.
(Formerly Initial Koncepts, Inc.)
We have audited the accompanying balance sheet of 6D Global Technologies, Inc. (formerly Initial Koncepts, Inc.) (the “Company”) as of December 31, 2013, and the related statements of operations, stockholders’ equity (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit providesaudits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company6D Global Technologies, Inc. and subsidiaries as of December 31, 2013,2015 and 2014, and the results of itstheir operations and itstheir cash flows for the yearyears then ended in conformity with accounting principlesU.S. generally accepted accounting principles.
We have also audited, in accordance with the United Statesstandards of America.the Public Company Accounting Oversight Board (United States), 6D Technologies, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Our report dated July 8, 2016 expressed an opinion that 6D Technologies, Inc. had not maintained effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 92 to the financial statements, the Company had an accumulated deficit at December 31, 2013,has suffered recurring losses from operations and the Company is currently a net loss and net cash useddefendant in operating activities for the year then ended. These factors raiseseveral class action lawsuits with various shareholders. This raises substantial doubt about the Company’sCompany's ability to continue as a going concern. Management’sManagement's plans in regardsregard to these matters also are also described in Note 9.2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Skillman, New Jersey/s/ SingerLewak LLP
June 3, 2014Los Angeles, California
July 8, 2016
6D GLOBAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
6D GLOBAL TECHNOLOGIES, INC.CONSOLIDATED BALANCE SHEETS
| | December 31, 2014 | | | December 31, 2013 | | | December 31, 2015 (Audited) | | | December 31, 2014 (Audited) | |
Assets | | | | | | | | | | | | |
Current Assets | | | | | | | | | | | | |
| | $ | 4,888,797 | | | $ | 5,611 | | | $ | 6,096,417 | | | $ | 4,888,797 | |
| | | 1,316,448 | | | | 1,117,624 | | | | 1,713,112 | | | | 1,316,448 | |
Other receivable | | | | 105,799 | | | | - | |
| | | 62,049 | | | | 131,844 | | | | 491,714 | | | | 62,049 | |
| | | 161,255 | | | | - | | | | - | | | | 161,255 | |
Prepaid expenses and other current assets | | | 165,907 | | | | 47,457 | | | | 309,773 | | | | 165,907 | |
| | | 6,594,456 | | | | 1,302,536 | | | | 8,716,815 | | | | 6,594,456 | |
| | | | | | | | | | | | | | | | |
Property and Equipment, net | | | 154,917 | | | | 183,841 | | | | 473,051 | | | | 154,917 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | 110,699 | | | | 110,499 | | | | 655,707 | | | | 110,699 | |
| | | 24,075 | | | | 48,707 | | | | 65,216 | | | | 24,075 | |
| | | - | | | | 410,130 | | |
Internally developed software | | | | 208,749 | | | | - | |
Goodwill | | | | 8,218,940 | | | | - | |
Intangible assets, net | | | | 2,533,350 | | | | - | |
| | | 134,774 | | | | 569,336 | | | | 11,681,962 | | | | 134,774 | |
| | | | | | | | | | | | | | | | |
| | $ | 6,884,147 | | | $ | 2,055,713 | | | $ | 20,871,828 | | | $ | 6,884,147 | |
| | | | | | | | | | | | | | | | |
Liabilities and Stockholders' Equity (Deficit) | | | | | | | | | |
Liabilities, Redeemable Convertible Preferred Stock and Stockholders' (Deficit) Equity | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Current maturities of capital lease liability | | | $ | 129,857 | | | $ | 53,610 | |
Current maturities of notes payable | | | | 6,600 | | | | 6,600 | |
Accounts payable and accrued liabilities | | $ | 1,039,301 | | | $ | 818,316 | | | | 1,881,448 | | | | 1,039,301 | |
| | | 833,938 | | | | 870,295 | | | | - | | | | 833,938 | |
Current maturities of capital lease liability | | | 53,610 | | | | 52,892 | | |
Short-term debt | | | | 623,642 | | | | - | |
| | | 68,420 | | | | - | | | | 257,586 | | | | 68,420 | |
Current maturities of notes payable | | | 6,600 | | | | 586,600 | | |
Contingent consideration, current portion | | | | 343,777 | | | | - | |
Total Current Liabilities | | | 2,001,869 | | | | 2,328,103 | | | | 3,242,910 | | | | 2,001,869 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Capital lease liability, net of current maturities | | | 111,130 | | | | 131,348 | | | | 184,852 | | | | 111,130 | |
Notes payable, net of current maturities | | | 53,420 | | | | 60,020 | | | | 46,820 | | | | 53,420 | |
| | | 30,000 | | | | - | | | | 50,000 | | | | 30,000 | |
| | | 55,429 | | | | 73,192 | | |
Deferred rent, net of current portion | | | | 69,415 | | | | 55,429 | |
Derivative liability | | | | 17,220,000 | | | | - | |
Contingent consideration, net of current portion | | | | 274,260 | | | | - | |
Total Long-Term Liabilities | | | 249,979 | | | | 264,560 | | | | 17,845,347 | | | | 249,979 | |
| | | | | | | | | | | | | | | | |
| | $ | 2,251,848 | | | $ | 2,592,663 | | | $ | 21,088,257 | | | $ | 2,251,848 | |
| | | | | | | | | | | | | | | | |
Commitment and Contingencies | | | | | | | | | |
Commitment and Contingencies (Note 18) | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Stockholders' Equity (Deficit) | | | | | | | | | |
Preferred stock, par value $0.00001; 10,000,000 shares authorized; 0 shares issued and outstanding | | | - | | | | - | | |
Common stock, par value $0.00001; 150,000,000 shares authorized as of December 31, 2014; 77,575,617 and 38,215,054 shares issued and outstanding as of December 31, 2014 and December 31, 2013, respectively | | | 776 | | | | 382 | | |
Redeemable convertible preferred stock net of issuance costs, par value $0.00001; 10,000,000 shares authorized; 1,088 and 0 shares issued and outstanding as of December 31, 2015 and 2014, respectively | | | $ | 1,458,318 | | | $ | - | |
| | | | | | | | | |
Stockholders' (Deficit) Equity | | | | | | | | | |
Common stock, par value $0.00001; 150,000,000 shares authorized; 78,247,864 and 77,575,617 shares issued and outstanding as of December 31, 2015 and 2014, respectively | | | | 783 | | | | 776 | |
Additional paid-in capital | | | 5,203,279 | | | | 2,618 | | | | 16,007,516 | | | | 5,203,279 | |
| | | (571,756 | ) | | | (539,950 | ) | | | (17,683,046 | ) | | | (571,756 | ) |
| | | | | | | | | |
Total Stockholders' Equity (Deficit) | | | 4,632,299 | | | | (536,950 | ) | |
| | | | | | | | | |
Total Liabilities and Stockholders’ Equity (Deficit) | | $ | 6,884,147 | | | $ | 2,055,713 | | |
Total Stockholders' (Deficit) Equity | | | | (1,674,747 | ) | | | 4,632,299 | |
Total Liabilities, Redeemable convertible preferred stock and Stockholders’ (Deficit) Equity | | | $ | 20,871,828 | | | $ | 6,884,147 | |
See accompanying notes to the consolidated financial statements.
6D GLOBAL TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
| | | |
| | | | | | |
| | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Selling general and administrative | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Income (loss) from operations | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Loss on debt extinguishment | | | | | | | | |
Realized gain on sale of marketable securities | | | - | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Income (loss) before income taxes benefit | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net income (loss) per common share - basic | | | | | | | | |
| | | | | | | | |
Weighted average common shares - basic | | | | | | | | |
| | | | | | | | |
Net income (loss) per common share - diluted | | | | | | | | |
| | | | | | | | |
Weighted average common shares - diluted | | | | | | | | |
| | For the Year Ended | |
| | December 31, 2015 (Audited) | | | December 31, 2014 (Audited) | |
| | | | | | |
Revenues | | $ | 12,789,892 | | | $ | 11,797,813 | |
| | | | | | | | |
Cost of revenues | | | 7,728,244 | | | | 7,425,857 | |
| | | | | | | | |
Gross margin | | | 5,061,648 | | | | 4,371,956 | |
| | | | | | | | |
Operating expenses | | | | | | | | |
Selling, general and administrative | | | 9,801,377 | | | | 3,309,079 | |
Professional and legal fees | | | 1,778,612 | | | | 486,654 | |
One-time professional and legal fees | | | 911,456 | | | | - | |
Depreciation and amortization | | | 564,839 | | | | 82,342 | |
Operating expenses | | | 13,056,284 | | | | 3,878,075 | |
| | | | | | | | |
(Loss) income from operations | | | (7,994,636 | ) | | | 493,881 | |
| | | | | | | | |
Other expense (income) | | | | | | | | |
Interest expense, net | | | 281,411 | | | | 147,069 | |
Loss on debt extinguishment | | | - | | | | 57,502 | |
Loss on derivative liability | | | 9,292,720 | | | | - | |
Other income | | | (5,619 | ) | | | (20,000 | ) |
Other expenses, net | | | 9,568,512 | | | | 184,571 | |
| | | | | | | | |
(Loss) income before income tax benefit | | | (17,563,148 | ) | | | 309,310 | |
| | | | | | | | |
Income tax benefit | | | 451,858 | | | | 161,255 | |
| | | | | | | | |
Net (loss) income | | $ | (17,111,290 | ) | | $ | 470,565 | |
| | | | | | | | |
Net (loss) income per common share – basic | | $ | (0.22 | ) | | $ | 0.01 | |
| | | | | | | | |
Weighted average common shares – basic | | | 78,227,127 | | | | 48,500,156 | |
| | | | | | | | |
Net (loss) income per common share – diluted | | $ | (0.22 | ) | | $ | 0.01 | |
| | | | | | | | |
Weighted average common share - diluted | | | 78,227,127 | | | | 48,668,720 | |
See accompanying notes to the consolidated financial statements.
6D GLOBAL TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ (DEFICIT) EQUITY FOR THE YEARS ENDED DECEMBER 31, 2015 and 2014 (Audited)
| | For the Years Ended | |
| | December 31, 2014 | | | December 31, 2013 | |
| | | | | | |
| | | | | | | | |
Other comprehensive income (loss): | | | | | | | | |
Net unrealized gain on marketable securities | | | | | | | | |
Reclassification to realized gain on sale of marketable securities | | | | | | | | |
| | | | | | | | |
Comprehensive income (loss) | | | | | | | | |
| | Redeemable Convertible Preferred Stock | | | Stockholders’ (Deficit) Equity | |
| | Stock | | | Amount | | | Common Stock | | | Additional paid-in capital | | | Accumulated deficit | | | Total (Deficit) Equity | |
| Stock | | | Amount | |
| | | | | | | | | | | | | | | | | | | | | |
Balance at January 1, 2014 | | | - | | | $ | - | | | | 38,215,054 | | | $ | 382 | | | $ | 2,618 | | | $ | (539,950 | ) | | $ | (536,950 | ) |
Promissory note conversion | | | - | | | | - | | | | 300,001 | | | | 3 | | | | 402,499 | | | | - | | | | 402,502 | |
Private placements, net of issuance costs | | | - | | | | - | | | | 2,859,300 | | | | 29 | | | | 4,798,524 | | | | - | | | | 4,798,553 | |
Reverse recapitalization | | | - | | | | - | | | | 36,201,262 | | | | 362 | | | | (362 | ) | | | - | | | | - | |
Distribution to stockholders | | | - | | | | - | | | | - | | | | - | | | | - | | | | (502,371 | ) | | | (502,371 | ) |
Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 470,565 | | | | 470,565 | |
Balance at December 31, 2014 | | | - | | | | - | | | | 77,575,617 | | | $ | 776 | | | $ | 5,203,279 | | | $ | (571,756 | ) | | $ | 4,632,299 | |
Acquisitions | | | - | | | | - | | | | 600,000 | | | | 6 | | | | 9,379,565 | | | | - | | | | 9,379,571 | |
Warrant exercise | | | - | | | | - | | | | 72,247 | | | | 1 | | | | - | | | | - | | | | 1 | |
Issuance of convertible preferred stock | | | 1,088 | | | | 10,000,000 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Bifurcation of anti-dilution derivative | | | - | | | | (7,927,280 | ) | | | - | | | | - | | | | - | | | | - | | | | - | |
Equity issuance costs | | | - | | | | (614,402 | ) | | | - | | | | - | | | | - | | | | - | | | | - | |
Stock based compensation | | | - | | | | - | | | | - | | | | - | | | | 1,424,672 | | | | - | | | | 1,424,672 | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (17,111,290 | ) | | | (17,111,290 | ) |
Balance at December 31, 2015 | | | 1,088 | | | $ | 1,458,318 | | | | 78,247,864 | | | $ | 783 | | | $ | 16,007,516 | | | $ | (17,683,046 | ) | | $ | (1,674,747 | ) |
See accompanying notes to the consolidated financial statements.
6D6D GLOBAL TECHNOLOGIES, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)CASH FLOWS
| | Preferred stock | | | Common stock | | | | | | | | | | | | | |
| | Shares | | | Amount | | | Shares | | | Amount | | | Additional paid in capital | | | Retained earnings (Accumulated deficit) | | | Accumulated Other Comprehensive Income (Loss) | | | Total | |
Balance at January 1, 2013 | | | - | | | $ | - | | | | 38,215,054 | | | $ | 382 | | | $ | 2,618 | | | $ | 322,585 | | | $ | 1,717 | | | $ | 327,302 | |
Distribution to stockholders | | | - | | | | - | | | | - | | | | - | | | | - | | | | (49,972 | ) | | | - | | | | (49,972 | ) |
Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (812,563 | ) | | | - | | | | (812,563 | ) |
Change in net unrealized gain on marketable securities | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,717 | ) | | | (1,717 | ) |
Balance at December 31, 2013 | | | - | | | | - | | | | 38,215,054 | | | | 382 | | | | 2,618 | | | | (539,950 | ) | | | - | | | | (536,950 | ) |
Promissory note conversion | | | - | | | | - | | | | 300,001 | | | | 3 | | | | 402,499 | | | | - | | | | - | | | | 402,502 | |
Private placements, net of issuance costs | | | | | | | | | | | 2,859,300 | | | | 29 | | | | 4,798,524 | | | | - | | | | - | | | | 4,798,553 | |
| | | - | | | | - | | | | 36,201,262 | | | | 362 | | | | (362 | ) | | | - | | | | - | | | | - | |
Distribution to stockholders | | | - | | | | - | | | | - | | | | - | | | | - | | | | (502,371 | ) | | | - | | | | (502,371 | ) |
| | | - | | | | - | | | | - | | | | - | | | | - | | | | 470,565 | | | | - | | | | 470,565 | |
Balance at December 31, 2014 | | | - | | | $ | - | | | | 77,575,617 | | | $ | 776 | | | $ | 5,203,279 | | | $ | (571,756 | ) | | $ | - | | | $ | 4,632,299 | |
| | For the Years Ended | |
| | December 31, 2015 (Audited) | | | December 31, 2014 (Audited) | |
Cash Flows From Operating Activities: | | | | | | |
Net (loss) income | | $ | (17,111,290 | ) | | $ | 470,565 | |
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 564,839 | | | | 82,342 | |
Stock-based compensation | | | 1,424,672 | | | | - | |
Loss on debt extinguishment | | | - | | | | 57,502 | |
Change in contingent consideration liability | | | 145,997 | | | | - | |
Loss on derivative liability | | | 9,292,720 | | | | - | |
Changes in Operating Assets and Liabilities: | | | | | | | | |
Accounts receivable | | | (396,664 | ) | | | (198,824 | ) |
Other receivable | | | (105,799 | ) | | | - | |
Unbilled revenues | | | (429,665 | ) | | | 69,795 | |
Deferred tax benefit | | | (459,512 | ) | | | (161,255 | ) |
Prepaid expenses and other current assets | | | (143,866 | ) | | | (118,450 | ) |
Restricted cash | | | (545,008 | ) | | | (200 | ) |
Security deposits | | | (41,141 | ) | | | 24,632 | |
Accounts payable and accrued liabilities | | | 842,147 | | | | 220,985 | |
Deferred revenue | | | 61,832 | | | | 68,420 | |
Security deposit payable | | | 20,000 | | | | 30,000 | |
Deferred rent | | | 13,986 | | | | (17,763 | ) |
Net Cash (Used in) Provided by Operating Activities | | | (6,866,752 | ) | | | 527,749 | |
| | | | | | | | |
Cash Flows From Investing Activities: | | | | | | | | |
Purchase of property and equipment | | | (260,285 | ) | | | (15,137 | ) |
Internally developed software | | | (208,749 | ) | | | - | |
Consideration paid for acquisitions, net of cash acquired | | | (542,399 | ) | | | - | |
Loans to related parties | | | - | | | | (46,433 | ) |
Net Cash Used in Investing Activities | | | (1,011,433 | ) | | | (61,570 | ) |
| | | | | | | | |
Cash Flows From Financing Activities: | | | | | | | | |
Gross proceeds from factor borrowing | | | 4,167,113 | | | | 11,283,679 | |
Repayments of factor borrowing | | | (5,001,051 | ) | | | (11,320,036 | ) |
Distribution to stockholders | | | - | | | | (45,808 | ) |
Proceeds from the issuance of short-term debt | | | 623,642 | | | | - | |
Proceeds from the issuance of Series A redeemable convertible preferred stock, net of issuance costs | | | 9,385,598 | | | | - | |
Repayment of capital lease obligations | | | (82,897 | ) | | | (57,781 | ) |
Repayment of notes payable | | | (6,600 | ) | | | (261,600 | ) |
Proceeds on issuance of notes payable | | | - | | | | 20,000 | |
Proceeds from private placement, net of issuance costs | | | - | | | | 4,798,553 | |
Net Cash Provided by Financing Activities | | | 9,085,805 | | | | 4,417,007 | |
| | | | | | | | |
Net Change in Cash | | | 1,207,620 | | | | 4,883,186 | |
| | | | | | | | |
Cash, beginning of period | | | 4,888,797 | | | | 5,611 | |
| | | | | | | | |
Cash, end of period | | $ | 6,096,417 | | | $ | 4,888,797 | |
| | | | | | | | |
Supplemental Disclosures of Cash Flow Information: | | | | | | | | |
Cash paid for taxes | | $ | 13,031 | | | $ | 4,495 | |
Cash paid for interest | | $ | 113,635 | | | $ | 151,041 | |
| | | | | | | | |
Non-Cash Transactions: | | | | | | | | |
Reclassification of due from related party to distribution | | $ | - | | | $ | 456,563 | |
Conversion of notes payable into common stock issuable | | $ | - | | | $ | 345,000 | |
Warrant issuance in connection with private placement | | $ | - | | | $ | 1,751,962 | |
Addition of capital leases | | $ | 228,038 | | | $ | 38,281 | |
Common stock issued in connection with acquisitions | | $ | 4,929,000 | | | $ | - | |
Contingent consideration in connection with acquisitions | | $ | 4,922,613 | | | $ | - | |
Cashless exercise of warrants | | $ | 222,299 | | | $ | - | |
Deferred revenue in connection with acquisitions | | $ | 127,334 | | | $ | - | |
See accompanying notes to the consolidated financial statements.
6D GLOBAL TECHNOLOGIES, INC.
6D GLOBAL TECHNOLOGIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF CASH FLOWS
| | For the Years Ended | |
| | December 31, 2014 | | | December 31, 2013 | |
Cash Flows From Operating Activities: | | | | | | |
| | | | | | | | ) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | |
Depreciation and amortization | | | | | | | | |
Amortization of debt issuance costs | | | | | | | | |
Realized gain on sale of marketable securities | | | | | | | | ) |
Loss on debt extinguishment | | | | | | | | |
| | | | | | | | |
Changes in operating assets and liabilities: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | ) |
| | | | | | | | ) |
| | | | | | | | ) |
Prepaid expenses and other current assets | | | | | | | | |
| | | | | | | | ) |
| | | | | | | | |
Accounts payable and accrued liabilities | | | | | | | | |
Net Cash Provided by (Used in) Operating Activities | | | | | | | | ) |
| | | | | | | | |
Cash Flows From Investing Activities: | | | | | | | | |
Purchase of property & equipment | | | | | | | | |
Proceeds from sale of marketable securities | | | | | | | | |
| | | | | | | | ) |
Net Cash Used in Investing Activities | | | | | | | | ) |
| | | | | | | | |
Cash Flows From Financing Activities: | | | | | | | | |
Gross proceeds from line of credit | | | | | | | | |
Repayments of line of credit | | | | | | | | ) |
Gross proceeds from factor borrowing | | | | | | | | |
Repayments of factor borrowing | | | | | | | | ) |
Distribution to stockholders | | | | | | | | ) |
Repayment of capital lease obligations | | | | | | | | ) |
Proceeds from issuance of notes payable | | | | | | | | |
Repayment of notes payable | | | | | | | | ) |
Proceeds from private placements, net of issuance costs | | | | | | | | |
Net Cash Provided by Financing Activities | | | | | | | | |
| | | | | | | | |
| | | | | | | | ) |
| | | | | | | | |
Cash, beginning of period | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Supplemental disclosure of non-cash investing and financing activities: | | | | | |
Capital lease of computer equipment | | | | | | | | |
Conversion of notes payable into common stock issuable | | | | | | | | |
Distribution to stockholders | | | | | | | | |
Line of credit paid via factor | | | | | | | | |
Net unrealized gain on marketable securities | | | | | | | | |
Warrant issuance in connection with private placements | | | | | | | | |
See accompanying notes to the consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNote 1 | – Organization and Operations |
Note 1 – Organization and Operations
6D Global Technologies, Inc. (the “Company or “6D Global”) is a digital business solutions company serving the digital marketing and technology needs of enterprise-class organizations worldwide. 6D Global offers a full suite of services and solutions to help large organizations optimize digital business channels and create better experiences for their customers. Services include web content management, web analytics, marketing automation, mobile applications, business intelligence, marketing cloud, and IT infrastructure staffing solutions. In addition, the Company provides digital marketing and digital technology consulting services to leading enterprises during periods of critical change and growth.
As more fully described below, inon September 29, 2014, CleanTech Innovations Inc. (“CleanTech”) consummated an Agreement and Plan of Share Exchange (the “Exchange Agreement” or the “Exchange”) with Six Dimensions, Inc., a Nevada corporation formerly known as Initial Koncepts, Inc. (“Six Dimensions”), whereby CleanTech acquired all of the issued and outstanding capital stock of Six Dimensions, 29,643,068 shares, in exchange for 38,664,871 shares of Common Stock (an exchange ratio of approximately 1.3 shares of CleanTech common stock for each share of Six Dimensions stock), and, simultaneously therewith, CleanTech completed a private placement equity offering to accredited investors. Pursuant to this private placement, CleanTech received $4,556,100 in gross proceeds and issued 2,201,031 shares of Common Stock to the purchasers thereunder. Pursuant to the Exchange Agreement, in September 2014, CleanTech converted into a Delaware corporation whereby it changed its name to 6D Global Technologies, Inc. (stock symbol: “SIXD”, website: www.6DGlobal.com), increased the number of its authorized shares of capital stock from 28,985,507 to 160,000,000 shares, of which 150,000,000 shares were designated common stock, par value $0.00001 per share (the “Common Stock”) and 10,000,000 shares were designated preferred stock, par value $0.00001 per share (the “Preferred Stock”).
Reverse Recapitalization
Six Dimensions was originally incorporated as Initial Koncepts, Inc. in the State of California on February 9, 2004. On June 25, 2014, Initial Koncepts, Inc. converted from an S-Corporation into a California LLClimited liability company and changed its name to Six Dimensions, LLC. On June 27, 2014, Six Dimensions, LLC converted into a Nevada C-Corporation and changed its name to Six Dimensions, Inc.
On September 29, 2014, the Company undertook the following events:
· | Converted into a Delaware corporation. |
· | Changed its name to 6D Global Technologies, Inc. |
· | Increased the number of its authorized shares of capital stock from 28,985,507 to 160,000,000 of which 150,000,000 shares were designated Common Stock, par value $0.00001 per share and 10,000,000 shares were designated Preferred Stock, par value $0.00001 per share. |
On the same date and concurrently to the transactions described above, the Company also undertook the following transactions;transactions:
· | Share exchange - CleanTech consummated the Exchange Agreement with Six Dimensions, Inc., whereby the Company acquired all of the issued and outstanding capital stock of Six Dimensions in exchange for 38,664,871 shares of Common Stock. |
· | Private placement -- CleanTech completed a private placement equity offering to accredited investors. The Company received $4,556,100 in gross proceeds and issued 2,201,031 shares of Common Stock. |
· | Debt conversion - CleanTech converted approximately $16,000,000 of debt owed to NYGG (Asia) LTD. in exchange for 35,149,883 shares of Common Stock. |
· | Stock split –- CleanTech shares of Common Stock were increased by 1,051,379 after a 2 for 3 reverse stock split. |
The Exchange is being treated as a reverse recapitalization effected by a share exchange for financial accounting and reporting purposes since substantially all of CleanTech's operations were disposed of prior to the consummation of the transaction. Six Dimensions is treated as the accounting acquirer as its stockholders control the Company after the Exchange Agreement, even though CleanTech was the legal acquirer. As a result, the assets and liabilities and the historical operations that are reflected in these financial statements are those of Six Dimensions as if Six Dimensions had always been the reporting company and, on the date of the Exchange Agreement, changed its name and reorganized its capital stock. Since CleanTech had no operations upon the Exchange Agreement taking place, the transaction was treated as a reverse recapitalization for accounting purposes and no goodwill or other intangible assets were recorded by the Company as a result of the Exchange Agreement. Historical common stock amounts and additional paid-in capital have been retroactively adjusted using the exchange ratio of approximately 1.3 shares of CleanTech Common Stock for each one common share of Six Dimensions.
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 2 – Significant
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and Critical Accounting Policiessatisfaction of liabilities in the ordinary course of business.
During the period from September through December 2015, the litigation matters did impair management’s ability to execute on growth initiatives and Practicesconsumed significant liquidity resources. As a result, the Company continued to sustain net losses and relied on the proceeds of the capital raises to supplement cash needs for operations.
In 2014, we completed multiple private placements amounting to $5,809,598 in gross proceeds. In addition, we completed a Stock Purchase Agreement for Convertible Redeemable Preferred Stock in August 2015 amounting to $10,000,000 of gross proceeds to fund expanding the business, potential mergers and acquisitions, and on-going operations. We experienced larger losses as a result of increased legal and professional fees beginning in September 2015 through December 31, 2015 related to the NASDAQ halt of trading of our shares and delisting procedures, along with costs associated with defending claims against us and certain members of the management team from the Discover Growth Fund and Class Action suits of various shareholders.
For the year ended December 31, 2015, the Company had a cash balance of $6,096,417, accounts receivable of $1,713,112 and $3,242,910 in current liabilities as well as an immaterial amount of notes payable. At the current cash consumption rate, the Company may need to consider additional funding sources toward the end of fiscal 2016. The Company is taking proactive measures to reduce operating expenses, drive growth in revenue and expeditiously resolve any remaining legal matters.
The Company anticipates meeting its cash obligations on indebtedness that is payable on or prior to December 31, 2016 from earnings from operations.
The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results.
The consolidated financial statements do not include any adjustments related to this uncertainty and as to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
The following transactions were accounted for using the purchase accounting method which requires, among other things, that the assets acquired and liabilities assumed are recognized at their acquisition date fair value.
Storycode
On March 4, 2015, the Company acquired all of the issued and outstanding membership interests of the two co-founders (the “Interests”) of Topaz Interactive, LLC, an Oregon limited liability company doing business as “Storycode” pursuant to a Securities Purchase Agreement (the “Storycode SPA”) dated as of that date. The purpose of the acquisition of Storycode was to increase our service offering in our existing digital solutions clients and to obtain new client relationships.
Storycode is headquartered in Portland, Oregon and provides mobile development and creative design services for medium and large businesses. Storycode creates mobile applications that feature award-winning UX (user experience) and UI (user interface) design working exclusively with the Adobe DPS platform.
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In consideration for the Interests, the Company paid Ms. Topaz and Mr. Porath, the two members of Storycode (collectively, the “Storycode Members”): cash in the amount of $300,000; an additional $300,000 paid in escrow to be earned by the members upon the one year anniversary of their employment; an aggregate of 300,000 shares of the Company’s common stock, par value $0.00001 per share (the “Common Stock”); and additional, potential earn-out shares of Common Stock based on Storycode’s financial performance for the three years following the closing of the acquisition. The Company also agreed to employment agreements with the Storycode Members. Total acquisition costs for the Storycode acquisition incurred during the year ended December 31, 2015 was $86,161, and is included in selling general and administrative expenses in the Company’s Consolidated Statements of Operations. The purchase price in excess of the fair value of the net book values of the assets acquired and liabilities assumed was allocated to intangible assets based on management’s best estimate of fair values, taking into account all relevant information available at the time of acquisition, and the excess was allocated to goodwill. The goodwill is deductible for tax purposes. The intangible assets are being amortized over their expected period of benefit.
The Company has completed the valuation of the acquisition of Storycode to determine the value of the intangible assets and goodwill.
The Company’s allocation of the purchase price in connection with the acquisition of Storycode was calculated as follows:
Cash | | $ | 300,000 | |
Stock consideration | | | 2,604,000 | |
Contingent consideration | | | 2,733,334 | |
Total consideration | | $ | 5,637,334 | |
The consideration transferred for the Storycode acquisition was allocated across the net assets of the Company as follows:
Description | | Fair Value | | | Weighted Average Useful Life (in years) | |
Cash | | $ | 100,000 | | | | |
Deferred revenue | | | (59,384 | ) | | | |
Trade name | | | 330,000 | | | 7 | |
Customer relationship | | | 900,000 | | | 5 | |
Non-compete agreement | | | 61,000 | | | 1.5 | |
Due from seller | | | 46,368 | | | | |
Goodwill | | | 4,259,350 | | | | |
Total consideration | | $ | 5,637,334 | | | | |
The criteria contained in the Storycode SPA related to the contingent consideration payable to Storycode is from April 1, 2015 through March 31, 2018, and based on performance milestones and other terms set forth in the Storycode SPA, the Storycode Members may receive up to 400,000 restricted shares of 6D Global’s Common Stock.
In addition, the Company after one year of employment with the Company, the Storycode Members will receive $300,000 cash, which was placed in escrow at the closing of the transaction.
The Company determined the fair value of the contingent consideration to be $2,733,334. The potential range of contingent consideration can range from $0 cash and no issuance of Common Stock, in the event that the Storycode Members are not employed by the Company for one year and the performance milestones are not reached, to $300,000 in cash and 400,000 restricted shares of Common Stock. The Company recorded the potential earn-out of 400,000 restricted shares which is part of the purchase price in the amount of $2,604,000 as additional paid-in capital included in stockholders’ equity in the Consolidated Balance Sheets. Since the contingent cash consideration is contingent upon the Storycode Members remaining employees of the Company for a one-year period, the Company will record this as compensation expense in the Consolidated Statements of Operations when earned.
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SwellPath
On March 20, 2015, the Company entered into and consummated a Securities Purchase Agreement (the “SwellPath SPA”) to acquire all of the issued and outstanding shares (the “SwellPath Shares”) of SwellPath, Inc., (“SwellPath”) an Oregon corporation.
SwellPath is a professional services firm that delivers analytics consulting, search engine optimization and digital advertising services to medium and large scale enterprises across North America. SwellPath enables clients to align and maximize their digital marketing initiatives by tracking both on and offline marketing campaigns and performing more effective targeting to enhance return on investment. SwellPath complements the Company’s overall acquisition strategy to provide a full-service digital marketing solutions offering to its clients, particularly in areas where the Company’s clients have expressed needs, while leveraging the Company’s partnership with Adobe Systems Incorporated to expand its Adobe Analytics offering.
The purchase price for the SwellPath Shares was comprised of: (i) cash in the amount of $300,000; (ii) 300,000 shares of the Company’s Common Stock; and (iii) up to an additional 300,000 shares of Common Stock and $650,000, based upon the achievement by SwellPath of certain performance milestones within the first and second anniversaries of the closing of the transaction. In addition, the Company acquired all of the goodwill associated with SwellPath from its founder, Adam Ware, for cash in the amount $300,000. Also, the Company agreed to an employment agreement with Mr. Ware to serve as Vice-President, containing customary terms, conditions and covenants for such an agreement. Total acquisition costs incurred for the SwellPath acquisition during the year ended December 31, 2015 was $83,030 and is included in selling general and administrative expenses in the Company’s Consolidated Statements of Operations. The purchase price in excess of the fair value of the net book values of the identifiable assets acquired and liabilities assumed was allocated to intangible assets based on management’s best estimate of fair values, taking into account all relevant information available at the time of acquisition, and the excess was allocated to goodwill. The goodwill and identifiable intangible assets are not deductible for tax purposes. The intangible assets are being amortized over their expected period of benefit.
The Company has completed the valuation of the acquisition of SwellPath to determine the value of the intangible assets and goodwill.
The Company’s allocation of the purchase price in connection with the acquisition of SwellPath was calculated as follows:
Cash | | $ | 600,000 | |
Stock consideration | | | 2,325,000 | |
Contingent consideration | | | 2,189,279 | |
Total consideration | | $ | 5,114,279 | |
The consideration transferred for the SwellPath acquisition was allocated across the net assets of the Company as follows:
Description | | Fair Value | | | Weighted Average Useful Life (in years) | |
Cash | | $ | 257,601 | | | | |
Deferred revenue | | | (67,950 | ) | | | |
Accrued liability | | | (51,195 | ) | | | |
Deferred tax liability | | | (620,767 | ) | | | |
Trade name | | | 10,000 | | | 3 | |
Customer relationship | | | 1,560,000 | | | 5 | |
Non-compete agreement | | | 67,000 | | | 1.5 | |
Goodwill | | | 3,959,590 | | | | |
Total consideration | | $ | 5,114,279 | | | | |
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following are the criteria contained in the SwellPath SPA related to the contingent consideration payable to SwellPath:
1. | If SwellPath’s financial performance for the period from April 1, 2015 to March 31, 2016 exceeds certain performance milestones and other terms set forth in the SwellPath SPA, the Company is may be required to pay SwellPath up to $650,000 in cash. |
2. | If SwellPath’s financial performance for the period from April 1, 2016 to March 31, 2017 exceeds certain performance milestones and other terms set forth in the SwellPath SPA, SwellPath may receive up to 300,000 restricted shares of 6D Global’s Common Stock. |
The Company determined the fair value of the contingent consideration to be $2,189,279. The potential range of contingent consideration can range from $0 cash and no issuance of Common Stock, in the event SwellPath fails to achieve the minimum financial performance in the required time, to $650,000 in cash and 300,000 shares of Common Stock, in the event SwellPath achieves the financial performance target as of March 31, 2017. The Company recorded contingent consideration in the amount of $472,040 as a liability in its Consolidated Balance Sheets which represents the fair value of the cash contingent consideration. The Company recorded the potential earn-out of 300,000 restricted shares in the amount of $1,717,238 as Additional paid-in capital included in stockholders’ equity in the Consolidated Balance Sheets. As of December 31, 2015, the Company recorded $145,997 of related accretion associated with the cash contingent consideration as interest expense in the Consolidated Statements of Operations. The Company will continue to assess earn-out calculations related to the contingent consideration in future periods and any future adjustments will affect operating income.
Unaudited Pro Forma Results
The following table presents the unaudited pro forma results of the Company for the years ended December 31, 2015 and 2014 as if the acquisitions of Storycode and SwellPath occurred on January 1, 2014. The pro forma results include estimates and assumptions which management believes are necessary. However, pro forma results do not include an anticipated cost savings or their effects of the planned integration of Storycode and SwellPath and are not necessarily indicative of the result that would have occurred if the business combination had been in effect on the dates indicated, or which may result in the future. The unaudited pro forma revenue and net income for Storycode was $145,712 and $6,042, respectively, for the pre-acquisition period. The unaudited pro forma revenue and net income for SwellPath was $472,442 and $904, respectively, for the pre-acquisition period.
| | Unaudited Pro Forma Results of Operations for the Acquisitions of Storycode and SwellPath | |
| | For the Year Ended | |
| | December 31, 2015 (Audited) | | | December 31, 2014 (Audited) | |
| | | | | | |
Revenues | | $ | 13,408,046 | | | $ | 13,455,455 | |
(Loss) income | | $ | (7,987,605 | ) | | $ | 1,254,127 | |
Net (loss) income from operations | | $ | (17,104,343 | ) | | $ | 1,230,637 | |
Basic and diluted (loss) income per share | | $ | (0.22 | ) | | $ | 0.03 | |
Note 4 | – Significant and Critical Accounting Policies and Practices |
The management of the Company is responsible for the selection and use of appropriate accounting policies and the appropriateness of accounting policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. The Company’s significant and critical accounting policies and practices are disclosed below as required by accounting principles generally accepted in the United States of America (“U.S. GAAP”).
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP for year-end financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, since they are year-end statements, the accompanying consolidated financial statements include all of the information and notes required by U.S. GAAP for annual financial statements, but reflect all adjustments consisting of normal, recurring adjustments, that are necessary for a fair presentation of the financial position for the yearyears ended December 31, 2015 and 2014, and the results of operations and cash flows for the annual periods presented. The consolidated financial statements for the year ended December 31, 2013 were derived from the audited financial statements as of that date.
Principles of Consolidation
The Company’s consolidated financial statements include all of its accounts and any intercompany balances have been eliminated in accordance with U.S. GAAP. The Company has one subsidiary,three subsidiaries, Six Dimensions Inc., Storycode, and SwellPath organized as two operating segments that are combined into one reporting segment.
Use of Estimates and Assumptions and Critical Accounting Estimates and Assumptions
The preparation of consolidated financial statements in conformity with U.S. GAAP 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(s) of the financial statements and the reported amounts of revenues and expenses during the reporting period(s).
The preparation of financial statements and related disclosures in conformity with U.S. GAAP, and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and such differences may be material.
Management believes the Company’s critical accounting policies and estimates are those related to revenue recognition, allowances, leases and income taxes.
Cash
Cash consists of checking accounts, marketable securities and money market accounts. The Company considers all highly-liquid investments purchased with an original maturity of three months or less to be cash. The Company maintains cash balances, which, at times, may exceed the amounts insured by the Federal Deposit Insurance Corporation (the “FDIC”).
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information; and determines the allowance for doubtful accounts based on historical write-off experience, customer specific facts and economic conditions.
Management charges balances off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company determines when receivables are past due or delinquent based on how recently payments have been received.
Outstanding account balances are reviewed individually for collectability. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. For the years ended December 31, 2015 and 2014, the allowance for doubtful accounts was not material. Additionally, there were no write-offs of the Company accounts receivables for the years ended December 31, 2015 or 2014. The Company does not have any off-balance-sheet credit exposure to its customers.
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Property and Equipment
Property and equipment is recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation of property and equipment is computed by the straight-line method (after taking into account their respective estimated residual values) over the estimated useful lives of the respective assets as follows:
| | Estimated Useful Life (Years) | |
Machinery and Equipment | | 1 – 3 | |
Furniture | | 4 – 5 | |
Software | | 3 | |
Business Combinations
The Company accounts for its business combinations under the provisions of Accounting Standards Codification ("ASC") Topic 805-10, Business Combinations ("ASC 805-10"), which requires that the purchase method of accounting be used for all business combinations. Assets acquired and liabilities assumed, including non-controlling interests, are recorded at the date of acquisition at their respective fair values. ASC 805-10 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business combinations and are expensed as incurred. If the business combination provides for contingent consideration, the Company records the contingent consideration at fair value at the acquisition date and any changes in fair value after the acquisition date are accounted for as measurement-period adjustments. Changes in fair value of contingent consideration resulting from events after the acquisition date, such as earn-outs, are recognized as follows: 1) if the contingent consideration is classified as equity, the contingent consideration is not re-measured and its subsequent settlement is accounted for within equity, or 2) if the contingent consideration is classified as a liability, the changes in fair value are recognized in earnings.
The estimated fair value of net assets acquired, including the allocation of the fair value to identifiable assets and liabilities, was determined using established valuation techniques. The estimated fair value of the net assets acquired was determined using the income approach to valuation based on the discounted cash flow method. Under this method, expected future cash flows of the business on a stand-alone basis are discounted back to a present value. The estimated fair value of identifiable intangible assets, consisting of customer relationships, the trade names and non-compete agreements acquired were determined using the multi-period excess earnings method, relief of royalty method and discounted cash flow methods, respectively.
The multi-period excess earnings method used to value customer relationships requires the use of assumptions, the most significant of which include: the remaining useful life, expected revenue, survivor curve, earnings before interest and tax margins, marginal tax rate, contributory asset charges, discount rate and tax amortization benefit.
The most significant assumptions under the relief of royalty method used to value trade names include: estimated remaining useful life, expected revenue, royalty rate, tax rate, discount rate and tax amortization benefit. The discounted cash flow method used to value non-compete agreements includes assumptions such as: expected revenue, term of the non-compete agreements, probability and ability to compete, operating margin, tax rate and discount rate. Management has developed these assumptions on the basis of historical knowledge of the business and projected financial information of the Company. These assumptions may vary based on future events, perceptions of different market participants and other factors outside the control of management, and such variations may be significant to estimated values.
The discounted cash flow valuation method requires the use of assumptions, the most significant of which include: future revenue growth, future earnings before interest, taxes, depreciation and amortization, estimated synergies to be achieved by a market participant as a result of the business combination, marginal tax rate, terminal value growth rate, weighted average cost of capital and discount rate.
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Contingent Consideration
The fair value of the Company’s contingent consideration is based on the Company’s evaluation as to the probability and amount of any earn-out that will be achieved based on expected future performance by the acquired entity. The Company utilizes established valuation techniques to assist in the calculation of the contingent consideration at the acquisition date. The Company evaluates the forecast of the acquired entity and the probability of earn-out provisions being achieved when it evaluates the contingent consideration at initial acquisition date and at each subsequent reporting period. The fair value of contingent consideration is measured at each reporting period and adjusted as necessary. The Company evaluates the terms in contingent consideration arrangements provided to former owners of acquired companies who become employees of the Company to determine if such amounts are part of the purchase price of the acquired entity or compensation.
Goodwill and Indefinite Lived Intangible Assets
Goodwill, which represents the excess of purchase price over the fair value of net assets acquired, is carried at cost. Goodwill is not amortized; rather, it is subject to a periodic assessment for impairment by applying a fair value based test. Goodwill is assessed for impairment on an annual basis as of October 1st of each year or more frequently if events or changes in circumstances indicate that the asset might be impaired. When conducting its annual goodwill impairment assessment, the Company initially performs a qualitative evaluation of whether it is more likely than not that goodwill is impaired. If it is determined by a qualitative evaluation that it is more likely than not that goodwill is impaired, the Company then applies a two-step impairment test. In the first step, the Company determines the fair value of its reporting units using a discounted cash flow analysis. If the net book values of a reporting unit exceeds its fair value, the Company would then perform the second step of the impairment test which requires allocation of the reporting unit's fair value to all of its assets and liabilities using the acquisition method prescribed under authoritative guidance for business combinations. Any residual fair value is being allocated to goodwill.
An impairment charge is recognized only when the implied fair value of the Company’s reporting unit’s goodwill is less than its carrying amount.
Long-Lived Assets, Including Definite-Lived Intangible Assets
Long-lived assets, other than goodwill and other indefinite-lived intangibles, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets.
Definite-lived intangible assets primarily consist of trade names, non-compete agreements and customer relationships. Definite-lived assets are principally amortized on a straight-line basis over the estimated useful lives of the assets. For long-lived assets used in operations, impairment losses are only recorded if the asset's carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. The Company measures the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value.
Leases
Lease agreements are evaluated to determine if they are capital leases meeting any of the following criteria at inception: (a) transfer of ownership; (b) bargain purchase option; (c) the lease term is equal to 75 percent or more of the estimated economic life of the leased property; or (d) the present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at lease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor.
If at its inception a lease meets any of the four lease criteria above, the lease is classified by the Company as a capital lease; and if none of the four criteria are met, the lease is classified by the Company as an operating lease.
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Contingencies
Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s consolidated financial statements. Contingencies are inherently unpredictable and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.
Revenue Recognition
The Company provides its services under time-and-materials contracts. Revenues earned under time-and-material arrangements are recognized as services are provided. The Company recognizes revenue from the provision of professional services when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the services have been rendered to the customer, (iii) the sales price is fixed or determinable and (iv) collectability is reasonably assured. Appropriate allowances for discounts are recorded concurrent with revenue recognition.
For fixed price service arrangements, we apply the proportional performance model or a ratable model to recognize revenue. When customer acceptance provisions exist, we are generally able to reliably demonstrate that the service meets, or will meet upon completion, the customer acceptance criteria. If circumstances exist which prevent us from verifying compliance with the acceptance provisions until the service has been completed, revenue is not recognized until compliance can be verified.
Revenues recognized in excess of the amounts invoiced to clients are classified as unbilled revenues in the Company’s Consolidated Balance Sheets. As of December 31, 2015 and 2014 the balance of unbilled revenue was $491,714 and $62,049, respectively.
In accordance with ASC 605, Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses, the Company classifies reimbursed expenses as revenue and the related expense within cost of revenue in the accompanying Consolidated Statements of Operations. For the years ended December 31, 2015 and 2014, the reimbursed expenses of $673,572 and $732,107, respectively were included in revenue.
The Company may record deferred revenue in circumstances where the customer’s contract calls for pre-billing of services. Amounts in deferred revenue are realized when the services are provided and the criteria noted above are met. As of December 31, 2015 and 2014, the balance of deferred revenues was $257,586 and $68,420, respectively.
Advertising Costs
Advertising costs are expensed as incurred and included in selling, general and administrative expenses and amounted to $561,108 and $75,707 for the years ended December 31, 2015 and 2014, respectively.
Research and Development
Because the industries in which the Company competes are characterized by rapid technological advances, the Company’s ability to compete successfully depends heavily upon the Company’s ability to ensure a continual and timely flow of competitive services to the marketplace. Our employees continually train to enhance their skills and review third party software products. Because these expenses are not categorized as Research and Development expense, the Company’s total Research and Development expense was $0 for the years ended December 31, 2015 and 2014.
Operating Expenses
The Company’s operating expenses encompass selling, general and administrative expenses consisting primarily of compensation and related costs for personnel and costs related to the Company’s facilities, finance, human resources, information technology and fees for professional services. Professional services are principally comprised of outside legal, audit, information technology consulting, marketing and outsourcing services as well as the costs related to being a publically traded company.
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Earnings (Loss) Per Share Applicable to Common Stockholders
The Company follows ASC 260, Earnings Per Share (“EPS”), which requires presentation of basic and diluted EPS on the face of the income statements for all entities with complex capital structures, and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. In the accompanying financial statements, basic earnings (loss) per share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of shares of Common Stock outstanding during the period. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.
The following is the computation of (loss) income per share applicable to common stockholders for the periods indicated:
| | For the Years Ended | |
| | December 31, 2015 (Audited) | | | December 31, 2014 (Audited) | |
| | | | | | |
Net loss | | $ | (17,111,290 | ) | | $ | 470,565 | |
Basic and diluted (loss) income per share | | $ | (0.22 | ) | | $ | 0.01 | |
| | | | | | | | |
Weighted average common outstanding: | | | | | | | | |
Basic | | | 78,227,127 | | | | 48,500,156 | |
Diluted | | | 78,227,127 | | | | 48,668,720 | |
| | | | | | | | |
Potentially dilutive securities (1) | | | | | | | | |
Outstanding stock options | | | 1,116,000 | | | | - | |
Common stock warrants | | | 189,806 | | | | 290,394 | |
Convertible preferred stock as converted to common shares | | | 1,904,762 | | | | - | |
| (1) | The impact of potentially dilutive securities on earnings per share is anti-dilutive in a period of net loss. |
Income Taxes
The Company accounts for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities of the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities and for the benefit of net operating loss and tax credit carryforwards. The U.S. GAAP guidance for income taxes prescribes a two-step approach for the financial statement recognition and measurement of income tax positions taken or expected to be taken in an income tax return. The first step evaluates an income tax position in order to determine whether it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position. The second step measures the benefit to be recognized in the financial statements for those income tax positions that meet the more likely than not recognition threshold. U.S. GAAP also provides guidance on derecognition, classification, recognition and classification of interest and penalties, accounting in interim periods, disclosers and transition. Under U.S. GAAP, the Company may recognize a previously unrecognized tax benefit if the tax position is effectively (rather than “ultimately”) settled through examination, negotiation or litigation. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts and circumstances, changes in tax law, effectively settled issues, and new audit activity. Any changes in these factors could result in changes to a tax benefit or tax provision.
Deferred tax assets and/or liabilities, if any, are classified as current and non-current based on the classification of the related asset or liability for financial reporting purposes, or based on the expected reversal date for deferred taxes that are not related to an asset or liability. Valuation allowances are recorded to reduce deferred tax assets to that amount which is more likely than not to be realized. The Company has recorded a full valuation allowance against its net deferred tax asset as of December 31, 2015.
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock-Based Compensation
The Company established an Omnibus Incentive Plan (the “Plan”) during 2015 and issued stock-based awards to certain individuals under this plan. The Company’s board of directors approved the Plan on January 22, 2015 as disclosed in the Company’s Form DEF-14C filed on February 5, 2015 and the Plan became effective on February 25, 2015. The purpose of the Plan is to enhance the Company’s ability to attract and retain highly qualified officers, non-employee directors, key employees, consultants and advisors, and to motivate such service providers to serve the Company and to expend maximum effort to improve the business results and earnings of the Company, by providing to such persons an opportunity to acquire or increase a direct proprietary interest in the operations and future success of the Company. The Plan also allows the Company to promote greater ownership in the Company by such service providers in order to align their interests more closely with the interests of the Company’s stockholders. The Company’s policy going forward will be to issue awards under the Plan.
The Plan will provide the Company with flexibility as to the types of incentive compensation awards that it may provide, including awards of stock options, stock appreciation rights (“SAR”s), restricted stock, restricted stock units, other stock-based awards and cash incentive awards. The number of shares of common stock authorized for issuance under the Plan is 4,800,000, all of which may be granted as incentive stock options under the Internal Revenue Code of 1986 (the “Code”) Section 422.
The Company accounts for its stock-based compensation plans in accordance with ASC 718, Stock Compensation. Accordingly, stock-based compensation for employees and non-employee directors is measured at the grant date based on the estimated fair value of the award using the Black-Scholes option pricing model. This model contains certain assumptions including expected volatility is a combination of the Company’s competitors’ historical volatility over the expected life of the option, the risk-free rate of return based on the Unites States treasury yield curve in effect at the time of the grant for the expected term of the option, the expected life based on the period of time the options are expected to be outstanding using historical data to estimate option exercise and employee termination; and dividend yield based on history and expectation of dividend payments. Stock options generally vest ratably over the terms stated in each Award Agreement and are exercisable over a period up to ten years.
The Company’s stock-based compensation expense is recognized as an expense over the requisite service period and is reduced for estimated future forfeitures which are revised in future periods if actual forfeitures differ from the estimates. Changes in forfeiture estimates impact compensation expense in the period in which the change in estimate occurs.
Redeemable Convertible Preferred Stock
The Company accounts for its Series A Redeemable Convertible Preferred Stock (“Redeemable Preferred Stock”) under the provisions of Accounting Series Release 268, SEC Comments and Interpretations (“ASR 268”), ASC 505 – Equity, ASC 480 – Distinguishing Liabilities from Equity and ASC 815 – Derivatives and Hedging. Accordingly, these shares along with the embedded conversion feature, the redemption feature, and the conversion feature are all part of temporary equity (“mezzanine equity”) in the Company’s Consolidated Balance Sheets based upon the terms and conditions of the Stock Purchase Agreement (“SPA”). In accordance with ASC 480 the initial carrying amount of Redeemable Preferred Stock is equal to the amount of proceeds received upon issuance, as reduced for the derivative liability associated with the dividend anti-dilution protection and a conversion premium which has been bifurcated.
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The valuation of the derivative liability at issuance and as of December 31, 2015, was based on the following Monte Carlo inputs:
| | August 10, 2015 | | | December 31, 2015 | |
Preferred A shares | | | 1,088 | | | | 1,088 | |
Total consideration without discount | | $ | 10,880,000 | | | $ | 10,880,000 | |
Price per share | | $ | 5.25 | | | $ | 5.25 | |
Stock price on valuation date | | $ | 5.10 | | | $ | 1.01 | |
Shares outstanding as of measurement date | | | 78,247,864 | | | | 78,247,864 | |
Warrants and options outstanding as of measurement date | | | 1,440,852 | | | | 1,440,852 | |
Fully diluted shares outstanding as of measurement date | | | 79,688,716 | | | | 79,688,716 | |
Maximum allowed shares | | | 7,960,903 | | | | 70,311,284 | |
Expiration date | | August 10, 2022 | | | August 10, 2022 | |
Risk-free rate | | | 1.13 | % | | | 1.85 | % |
Remaining term (in years) | | | 7.00 | | | | 5.58 | |
Rounded annual volatility | | | 50 | % | | | 50 | % |
Trials | | | 100,000 | | | | 100,000 | |
Recently Issued Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) ASU No. 2014-15, Presentation of Financial Statements-Going Concern-Disclosures of Uncertainties about an entity’s Ability to Continue as a Going Concern. ASU 2014-15 provides new guidance related to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards and to provide related footnote disclosures. This new guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company does not expect the adoption of ASU 2014-15 to have a significant impact on the Company's consolidated results of operations, financial position or cash flows.
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” ASU 2015-03 requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. ASU 2015-03 is effective for interim and annual reporting periods beginning after December 15, 2015. The new guidance will be applied on a retrospective basis and early adoption is permitted. The Company does not expect the adoption of ASU 2015-03 to have a significant impact on the Company's consolidated results of operations, financial position or cash flows.
In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740) – Balance Sheet Classification of Deferred Taxes.” To simplify the presentation of deferred income taxes, the amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The amendments in this Update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. If an entity applies the guidance prospectively, the entity should disclose in the first interim and first annual period of change, the nature of and reason for the change in accounting principle and a statement that prior periods were not retrospectively adjusted. If an entity applies the guidance retrospectively, the entity should disclose in the first interim and first annual period of change the nature of and reason for the change in accounting principle and quantitative information about the effects of the accounting change on prior periods. The Company does not expect the adoption of ASU 2015-17 to have a significant impact on the Company's consolidated results of operations, financial position or cash flows.
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In January 2016, the FASB issued ASU 2016-01 – “Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01, among other changes, requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. This Update also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The amendments in ASU 2016-01 will become effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the effect of the adoption of ASU 2016-01 will have on its consolidated results of operations, financial position or cash flows.
In February 2016, the FASB issued ASU 2016-02 – “Leases (Topic 842).” Under ASU 2016-02, entities will be required to recognize of lease asset and lease liabilities by lessees for those leases classified as operating leases.Among other changes in accounting for leases, a lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option. The amendments in ASU 2016-02 will become effective for fiscal years beginning after December 15, 2018, including interim periods with those fiscal years, for public business entities. The Company is currently evaluating the effect of the adoption of ASU 2016-02 will have on its consolidated results of operations, financial position or cash flows.
In March 2016, the FASB issued ASC 2016-09 – “Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-based Payment Accounting.” The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. In addition to these simplifications, the amendments eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. This should not result in a change in practice because the guidance that is being superseded was never effective. The amendments in ASC 2016-09 will become effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the effect of the adoption of ASU 2016-09 will have on its consolidated results of operations, financial position or cash flows.
In April 2016 the FASB issued ASC 2016-10 – “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing.” The core principle of the guidance in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:
1. | Identify the contract(s) with a customer. |
2. | Identify the performance obligations in the contract. |
3. | Determine the transaction price. |
4. | Allocate the transaction price to the performance obligations in the contract. |
5. | Recognize revenue when (or as) the entity satisfies a performance obligation. |
The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The amendments in this Update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Company is currently evaluating the effect of the adoption of ASU 2016-10 will have on its consolidated results of operations, financial position or cash flows.
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Internally Developed Software
ASC 350, Intangibles – Goodwill and Other, Subtopic 350-40, Internal-Use Software specifies standards of financial accounting and reporting for the costs of internal-use computer software. The Company capitalizes direct costs incurred in the development of internal-use software. For the years ended December 31, 2015 and 2014 the Company capitalized internal-use software development costs of $208,749 and $0, respectively.
Reclassification
Certain previously reported amounts have been reclassified to conform to the presentation used in December 31, 2015 consolidated financial statements. The results of the reclassification did not affect the Company’s consolidated Statement of Operations.
Note 5 | – Fair Value of Financial Instruments |
The Company has categorized its financial assets and liabilities measured at fair value into a three level hierarchy in accordance with U.S. GAAP. Fair value is defined as an exit price, the amount that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability. Financial assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair value. Conversely, financial assets and liabilities that are rarely traded or not quoted have less price observability and are generally measured at fair value using valuation models that require more judgment. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency of the asset, liability or market and the nature of the asset or liability.
The three (3) levels of fair value hierarchy are described below:
Level 1 | Quoted market prices available in active markets for identical assets or liabilities as of the reporting date. |
| |
Level 2 | Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. |
| |
Level 3 | Pricing inputs that are generally observable inputs and not corroborated by market data. |
The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, unbilled revenues, prepaid expense and other current assets, accounts payable, and due to factor, approximate their fair values because of the short maturity of these instruments.
The Company’s capital lease liability and notes payable approximate the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements for the years ended December 31, 20142015 and 2013.2014.
The following tables disclose the assets and liabilities measured at fair value on a recurring basis for the period indicated and the basis for that measurement:
Cash
| | Fair Value Measurement at December 31, 2015 | |
| | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
Liabilities | | | | | | | | | | | | |
Contingent SwellPath acquisition consideration | | $ | 618,037 | | | $ | - | | | $ | - | | | $ | 618,037 | |
Derivative liability | | | 17,220,000 | | | | - | | | | - | | | | 17,220,000 | |
| | $ | 17,838,037 | | | $ | - | | | $ | - | | | $ | 17,838,037 | |
Cash consistsAs of checking accounts, marketable securities and money market accounts. The Company considers all highly-liquid investments purchased with an original maturity of three months or less to be cash.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information; and determines the allowance for doubtful accounts based on historical write-off experience, customer specific facts and economic conditions.
Management charges balances off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company determines when receivables are past due or delinquent based on how recently payments have been received.
Outstanding account balances are reviewed individually for collectability. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. For the years ended December 31, 2014, and 2013, the allowance for doubtful accounts was not material. Additionally there were no write-offs of the Company accounts receivables for the years ended December 31, 2014had no assets or 2013.
The Company does not have any off-balance-sheet credit exposure to its customers.
Property and Equipment
Property and equipment is recordedliabilities measured at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation of property and equipment is computed by the straight-line method (after taking into account their respective estimated residual values) over the estimated useful lives of the respective assets as follows:
| Estimated Useful Life (Years) |
Machinery and Equipment | 1 – 3 |
Furniture | 4 – 4.5 |
| |
Leases
Lease agreements are evaluated to determine if they are capital leases meeting any of the following criteria at inception: (a) Transfer of ownership; (b) Bargain purchase option; (c) The lease term is equal to 75 percent or more of the estimated economic life of the leased property; (d) The present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at lease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor.
If at its inception a lease meets any of the four lease criteria above, the lease is classified by the lessee as a capital lease; and if none of the four criteria are met, the lease is classified by the lessee as an operating lease.
Contingencies
Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes that is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s consolidated financial statements. Contingencies are inherently unpredictable and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.
value.
Revenue Recognition
The Company provides its services primarily under time-and-materials contracts. Revenues earned under time-and-material arrangements are recognized as services are provided. The Company recognizes revenue from the provision of professional services when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the services have been rendered to the customer, (iii) the sales price is fixed or determinable and (iv) collectability is reasonably assured. Appropriate allowances for discounts are recorded concurrent with revenue recognition.
In accordance with ASC 605, Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses, the Company classifies reimbursed expenses as revenue and the related expense within cost of revenue in the accompanying consolidated statements of operations. For the years ended December 31, 2014 and 2013, the reimbursed expenses of $732,107 and $439,973 respectively, were included in revenue.
For fixed price service arrangements the Company applies the proportional performance model to recognize revenue. When customer acceptance provisions exist, the Company is generally able to reliably demonstrate that the service meets, or will meet upon completion, the customer acceptance criteria. If circumstances exist which prevent the Company from verifying compliance with the acceptance provisions until the service has been completed, revenue is not recognized until compliance can be verified.
Revenues recognized in excess of the amounts invoiced to clients are classified as unbilled revenues in the Company’s consolidated balance sheets. For the years ended December 31, 2014 and 2013 the balance of unbilled revenue was $62,049 and $131,844, respectively.
The Company may record deferred revenue in circumstances where the customer’s contract calls for pre-billing of services. Amounts in deferred revenue are realized when the services are provided and the criteria noted above are met. For the years ended December 31, 2014 and 2013, the balance of deferred revenues was $68,420 and $0, respectively.
Advertising Costs
Advertising costs are expensed as incurred and included in selling, general and administrative expenses and amounted to $75,707 and $31,967 for the years ended December 31, 2014 and 2013, respectively.
Research and Development
Because the industries in which we compete are characterized by rapid technological advances, our ability to compete successfully depends heavily upon our ability to ensure a continual and timely flow of competitive services to the marketplace. Total research and development expense was $0 for the years ended December 31, 2014 and 2013.
Operating Expenses
Our operating expenses encompass selling, general and administrative expenses consisting primarily of compensation and related costs for personnel and costs related to our facilities, finance, human resources, information technology and fees for professional services. Professional services are principally comprised of outside legal, audit, information technology consulting, marketing and outsourcing services as well as the costs related to being a publically traded company.
Earnings (Loss) Per Share
The Company follows ASC 260, “Earnings Per Share” (“EPS”), which requires presentation of basic and diluted EPS on the face of the income statements for all entities with complex capital structures, and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. In the accompanying financial statements, basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following is the computation of diluted EPS for the years ended December 31, 2014 and 2013:
| | Year ended December 31, 2014 | |
| | Net income (Numerator) | | | Shares (Denominator) | | | Per Share Amount | |
| | | | | | | | | | | | |
Dilutive shares related to warrants | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year ended December 31, 2013 | |
| | Net loss (Numerator) | | | Shares (Denominator) | | | Per Share Amount | |
| | | | ) | | | | | | | | ) |
Income Taxes
The Company accounts for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities of the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The U.S. GAAP guidance for income taxes prescribes a two-step approach for the financial statement recognition and measurement of income tax positions taken or expected to be taken in an income tax return. The first step evaluates an income tax position in order to determine whether it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position. The second step measure the benefit to be recognized in the financial statements for those income tax positions that meet the more likely than not recognition threshold. U.S. GAAP also provides guidance on derecognition, classification, recognition and classification of interest and penalties, accounting in interim periods, disclosers and transition. Under U.S. GAAP, the Company may recognize a previously unrecognized tax benefits if the tax position is effectively (rather than “ultimately”) settled through examination, negotiation or litigation. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluations based on factor including, but not limited to, changes in facts and circumstances, changes in tax law, effectively settled issues, and new audit activity. Any changes in these factors could result in changes to a tax benefit or tax provision.
Receivables under Factoring Agreement
The Company factors its receivables with recourse and, as a result, accounts for the factoring akin to a secured borrowing. The Company does maintain the gross receivable asset and due to factor liability on its books and records. The financial institution makes available 90% of the face value of the eligible receivables to the Company and retains the remaining 10% as a guaranteed until receipt of the proceeds associated with the factored invoices. During the years ended December 31, 2014 and 2013, the Company recorded factor fees of approximately $97,218 and $97,716, respectively, which are included within interest expense in the consolidated statements of operations.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. Amendments in this ASU create Topic 606, Revenue from Contracts with Customers, and supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, the amendments supersede the cost guidance in Subtopic 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts, and create new Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers. In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is the final version of Proposed ASU 2011-230 – Revenue Recognition (Topic 605) and Proposed ASU 2011–250 – Revenue Recognition (Topic 605): Codification Amendments, both of which have been deleted. The amendments in this ASU are effective for the Company for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the effects of ASU 2014-09 on the financial statements.
In November 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-17, “Business Combinations (Topic 805) Pushdown Accounting a consensus of the FASM Emerging Issues Task Force.” The amendments in this Update provide an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. An acquired entity should determine whether to elect to apply pushdown accounting for each individual change-in-control event in which an acquirer obtains control of the acquired entity. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity’s most recent change-in-control event. An election to apply pushdown accounting in a reporting period after the reporting period in which the change-in-control event occurred should be considered a change in accounting principle in accordance with Topic 250, Accounting Changes and Error Corrections. If pushdown accounting is applied to an individual change-in-control event, that election is irrevocable. The amendments in this ASU 2014-17 became effective on November 18, 2014 and are not expected to have a material impact on the financial statements.
In January 2015, the FASB issued ASU 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20) Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” The amendments in this Update eliminate from U.S. GAAP the concept of extraordinary items. The FASB concluded that the amendments in this Update will not result in a loss of information because although the amendments will eliminate the requirements in Subtopic 225-20 for reporting entities to consider whether an underlying event or transaction is extraordinary, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The amendments in this ASU 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and is not expected to have a material impact on the financial statements.
Reclassification
Certain previously reported amounts have been reclassified to conform to the presentation used in December 31, 2014 consolidated financial statements. The results of the reclassification did not affect our consolidated Statement of Operations.
Note 3 – Property and Equipment, netNote 6 | – Property and Equipment, net |
The following is a summary of property and equipment, net:net for the periods indicated:
| | December 31, 2014 | | | December 31, 2013 | | | December 31, 2015 (Audited) | | | December 31, 2014 (Audited) | |
| | | | | | | | | | | | |
Property and equipment | | $ | 302,699 | | | $ | 249,281 | | | $ | 782,564 | | | $ | 302,699 | |
Less accumulated depreciation and amortization | | | (147,782 | ) | | | (65,440 | ) | | | (309,513 | ) | | | (147,782 | ) |
Property and equipment, net | | $ | 154,917 | | | $ | 183,841 | | | $ | 473,051 | | | $ | 154,917 | |
Depreciation and amortization expense totaled $82,342$170,189 and $39,170$82,342 for the years ended December 31, 2015, and 2014, and 2013, respectively.
Note 7 | – Goodwill and Intangible Assets, net |
Note 4 – Related Party TransactionsGoodwill
The following table summarizes the Company’s goodwill for the periods indicated resulting from the acquisitions by the Company:
| | Goodwill | |
| | | |
Balance at December 31, 2014 | | $ | - | |
Storycode acquisition | | | 4,259,350 | |
SwellPath acquisition | | | 3,959,590 | |
Balance at December 31, 2015 | | $ | 8,218,940 | |
During the year ended December 31, 2015 the Company recognized an adjustment to goodwill to reflect the fair value of the stock consideration for the business acquisitions made during the first quarter of 2015.
Intangible Assets, net
The following table summarizes the Company’s intangible assets, net for the period indicated:
| | | | December 31, 2015 | |
| | Estimated Useful Life (Years) | | Gross Carrying Amount | | Accumulated Amortization | | | Impairment | | Net Book Value | |
| | | | | | | | | | | | |
Trade names | | 3 to 7 | | | $ | 340,000 | | | $ | 41,925 | | | $ | - | | | $ | 298,075 | |
Customer relationships | | 5 | | | | 2,460,000 | | | | 283,475 | | | | - | | | | 2,176,525 | |
Non-compete agreements | | 1.5 | | | | 128,000 | | | | 69,250 | | | | - | | | | 58,750 | |
Total Intangible assets, net | | | | | $ | 2,928,000 | | | $ | 394,650 | | | $ | - | | | $ | 2,533,350 | |
Amortization expense related to intangible assets totaled $394,650 and $0 for the years ended December 31, 2015, and 2014, respectively. As of December 31, 2014 the Company had no intangible assets.
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the Company’s future amortization expense for the periods indicated:
2016 | | $ | 572,653 | |
2017 | | | 570,415 | |
2018 | | | 590,917 | |
2019 | | | 591,928 | |
2020 | | | 152,437 | |
Thereafter | | | 55,000 | |
Total future amortization expense | | $ | 2,533,350 | |
Note 8 | – Related Party Transactions |
Due from Related Party
The Company had a loan outstanding to its largest stockholder. The balance for the year December 31, 2013 was $410,130. The receivable bore interest at 2.64% with no definite repayment terms and during the year ended December 31, 2014 interest totaled $46,433 which was included in the Due from related party account on the Company’s consolidated balance sheet.$46,433. During the year ended December 31, 2014, and prior to the Company becoming a C-Corporation,C Corporation, the loan balance of $456,563 was eliminated as the Company treated the loan balance as a stockholder distribution. No amounts were due from the related party for the yearyears ended December 31, 2015 and 2014.
Stockholder distributions for the yearsperiods ended December 31, 2015 and 2014 totaled $0 and 2013 totaled $502,371 and $49,972 respectively.
Note 5 – Accounts Payable and Accrued LiabilitiesNote 9 | – Accounts Payable and Accrued Liabilities |
Accounts payable and accrued liabilities consist of the following:following for the periods indicated:
| | December 31, 2014 | | December 31, 2013 | | | December 31, 2015 (Audited) | | | December 31, 2014 (Audited) | |
| | | | | | | | | | | |
| | | | | | | | | $ | 1,150,438 | | | $ | 703,725 | |
| | | | | | | | | | 731,010 | | | | 335,576 | |
Total Accounts Payable and Accrued Liabilities | | | | | | | | |
Total accounts payable and accrued liabilities | | | $ | 1,881,448 | | | $ | 1,039,301 | |
Note 6 – Letter of Credit and Restricted CashNote 10 | – Letter of Credit and Restricted Cash |
TheOn January 9, 2015, the Company amended the lease for office space at its corporate headquarters in New York. As a result of the amended lease, the Company has secured a standby letter of credit for the benefit of the landlord for the required security deposit on their office facility in New York.(see Note 18 - Commitments and Contingencies).
The Bank letter of credit is in the amount of $110,422.$354,814. The letter of credit expires in July 20152020 and contains renewal periods of one year.
The letter of credit was collateralized by $110,699$355,707 and $110,499$110,699 of cash for the yearsperiods ended December 31, 20142015 and 2013,2014, respectively, which was reported as restricted onin the consolidated balance sheets.Consolidated Balance Sheets.
In March 2015, the Company established a restricted cash account in the amount of $300,000 related to the Storycode acquisition.
Note 7 – Due to Factor6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On August 6, 2013, the Company signed a one yearone-year agreement with a financial services company for the purchase and sale of accounts receivables withon a recourse basis. The financial services company commenced funding during August 2013. The financial services company advancesadvanced up to 90% of qualified customer invoices, less applicable discount fees, and holdsheld the remaining 10% as a reserve until the customer payspaid the financial services company. The released reserves arewere returned to the Company. The Company was charged 0.7% for the first thirty (30) days outstanding asoutstanding. As well as each subsequent month plus prime plus 1.75% daily for funds outstanding over thirty (30) days.
On August 21, 2014, the Company renewed this agreement which included among other changes, an elimination of the interest rate and the adoption of a Service Fee of 1.15% per month for all periods covered under the renewed agreement. Since inception, uncollectable customer invoices are charged back to the Company after ninety (90) days. ForThe renewed agreement was scheduled to expire in August 2015.
On July 27, 2015, the years endedCompany terminated its factor agreement with the financial services company. As of December 31, 20142015 and December 31, 2013,2014, the advances from the factor, inclusive of fees, amounted to $970,541$0 and $997,160,$970,541, respectively, which were offset against due from factor of $136,603$0 and $106,865,$136,603, respectively. Advances from the factor arewere collateralized by substantially all assets of the Company.
On August 21, 2014,July 27, 2015, the Company renewedimplemented an Asset Based Lending Agreement (the “ABL”) with The California Bank of Commerce. The Company may borrow up to $3,000,000 of their eligible Accounts Receivable. Interest accrues at a rate of 3.75% plus the prime rate with a minimum of 7.00%. In connection with this line of credit the Company paid $22,500 in fees which was recorded in the Company’s Selling, general and administrative expense in its agreementConsolidated Statements of Operations for the year ended December 31, 2015. The line of credit automatically renews annually unless the Company provides prior written notice of its intent to cancel the agreement. Through the ABL the Company will achieve lower interest expenses and greater scalability in their credit facility.
During the term of the ABL the Company shall maintain and satisfy the following financial ratios (each of which shall be determined in accordance with U.S. GAAP, consistently applied: (a) Minimum Income Requirements. Maintain an Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) on a quarterly and non-cumulative basis of at least One Dollar ($1.00) per quarter starting with the same financial services company to continue the same purchasing and salesfourth quarter of its accounts receivable on a recourse basis. The renewed agreement will expire in August 2015.
Note 8 – Notes Payable
In February 2012,As of December 31, 2015, the Company established a revolving Working Capital Linehad an outstanding balance and unused balance in the ABL of Credit (“Credit Line”). The Credit Line is limited to total borrowings of $750,000. The initial contract term will be for one$623,642 and $2,376,358, respectively. For the year and is renewable on an annual basis thereafter. Interest is computed using the rate of 2.50% per annum in excess of the prime floating rate with a floor of 5.75% per annum. The Credit Line is secured by all Company assets with a perfected first security interest in accounts receivable. Advances under the Credit Line will be up to 85% against a pool of eligible receivables. In August 2013, the Company entered into a factoring agreement and the facility was paid off and closed. The total outstanding principal amount for the years ended December 31, 2014 and 2013 was $0.2015, the Company paid $66,456 in interest on the ABL.
In 2013 and prior, the Company issued $580,000 of notes payable to various individuals for business operations and growth opportunities.
Prior to 2013, the Company executed a note for $94,060. The note matures in January 2021 and bears no interest. The monthly fixed principal payment is $550. The note is secured by all assets of the Company. The total outstanding balance as of December 31, 2015 and December 2014 is $53,420 and 2013 is $60,020, and $66,620, respectively.
Future minimum debt repayments at December 31, 20142015 are as follows:
| | | | | |
| | | | | $ | 6,600 | |
| | | | | | 6,600 | |
| | | | | | 6,600 | |
| | | | | | 6,600 | |
2020 | | | | 6,600 | |
| | | | | | | 20,420 | |
| | | | | | $ | 53,420 | |
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On May 27, 2014, the Company sold a $20,000 promissory note maturing in August 2014. The note bore interest at 1% per month with interest payable monthly. The promissory note was subsequently converted into equity.
During May and June of 2014, certain note holders converted their promissory notes into common shares.stock. In total, $345,000 of promissory notes was converted into 300,001 shares of common stock.Common Stock. In connection with the note conversions, the Company recorded a loss on debt extinguishment of $57,502 in the accompanying consolidated statementsConsolidated Statements of operations.Operations.
In June 2014, the Company repaid the remaining $255,000 of outstanding notes payable issued in 2013 and prior that had not converted into equity.
Note 14 | – Stock Based Compensation |
The fair values of stock option grants during the year ended December 31, 2015 were calculated on the date of the grant using the Black-Scholes option pricing model. There were no stock options granted during the year ended December 31, 2014. Compensation expense is recognized over the period of service, generally the vesting period (see Note 93 - Significant and Critical Accounting Policies and Practices). During the year ended December 31, 2015, the Company granted a total of 80,000 stock options to certain members of its Board of Directors.
The following assumptions were used in the Black-Scholes options pricing model to estimate the fair value of stock options on the grant date:
Fair value of Company’s Stock Options Granted | | $ | 292,400 | |
Volatility | | | 45.00 | % |
Exercise price | | $ | 8.60 | |
Estimated life | | | 5.50 | years |
Risk free interest rate (based on 5-year treasury rate) | | | 1.38 | % |
Dividend | | | 0.00 | % |
During the year ended December 31, 2015, the Company granted a total of 1,201,000 options to certain employees and officers of the Company. The following assumptions were used in the Black-Scholes options pricing model to estimate the fair value of stock options on the grant date:
Fair value of Company’s Stock Options Granted | | $ | 2,904,000 | |
Volatility | | | 45.00– 50.00 | % |
Exercise price | | $2.63 to 11.25 | |
Estimated life | | | 6.50 | years |
Risk free interest rate (based on 5-year treasury rate) | | 1.57 to 2.03 | % |
Dividend | | | 0.00 | % |
The following table summarizes the Company’s stock option activity and related information for the period indicated:
| | Number of Shares | | | Weighted Average Grant Date Fair Value | | | Weighted Average Remaining Contractual Term | | | Weighted Average Exercise Price | |
Outstanding at January 1, 2015 | | | - | | | $ | - | | | | - | | | | - | |
Granted | | | 1,281,000 | | | $ | 2.50 | | | | 4.15 | | | | 8.24 | |
Exercised | | | - | | | $ | - | | | | - | | | | - | |
Forfeited | | | (165,000 | ) | | $ | 2.40 | | | | 4.39 | | | | 8.35 | |
Outstanding at December 31, 2015 | | | 1,116,000 | | | $ | 2.51 | | | | 4.10 | | | | 8.23 | |
| | | | | | | | | | | | | | | | |
Exercisable at December 31, 2015 | | | 80,000 | | | | 3.66 | | | | 4.10 | | | | 8.60 | |
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In accordance with ASC 718, Share Based Payment (“ASC 718”), total compensation expense for stock based compensation awards was $1,424,672 for the year ended December 31, 2015. Expenses for stock based compensation are included in the accompanying Consolidated Statements of Operations in cost of goods sold of $123,455 as well as in selling, general and administrative expense of $1,301,217 for the year ended December 31, 2015.
As of December 31, 2015 there was $1,771,728, of total unrecognized stock-based compensation cost, net of estimated forfeitures, related to stock options which is expected to be recognized over the next 4.3 years.
The Black Scholes valuation model requires the Company to estimate key assumptions such as expected volatility, expected terms, risk-free interest rates and dividend yields. The Company determined the assumptions in the Black Scholes valuation model as follows: expected volatility is a combination of the Company’s competitors’ historical volatility; expected term is calculated using the “simplified” method prescribed in ASC 718; and the risk free rate is based on the U.S. Treasury yield on 5 and 7-year instruments in effect at the time of grant. A dividend yield is not used, as the Company has never paid cash dividends and does not currently intend to pay cash dividends other than as required to settle out the dividend derivative liability. The Company periodically reviews the assumptions and modifies the assumptions accordingly.
As part of the requirements of ASC 718, the Company is required to estimate potential forfeitures of stock option and restricted stock unit grants and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock based compensation expense to be recognized in future periods. The fair values of stock option and restricted stock unit grants are amortized as compensation expense on a straight-line basis over the vesting period of the grants. Compensation expense recognized is shown in the operating activities section of the Consolidated Statements of Cash Flows.
During 2014 an additional $354,409 of stock compensation expense was determined to be unrecorded. During the period from September 30, 2014 to September 30, 2015, an additional approximate $397,646 of stock compensation expense was determined to be unrecorded. The Company has since adjusted its consolidated financial statements to include these amounts in their respective periods and has restated its consolidated financial statements accordingly. See Note 22 – Stockholders’ Equity (Deficit)Prior Year Restatement for further information.
The table below shows the Company’s par value, authorized shares, issued shares and outstanding shares of its common and preferred stock as of December 31, 2014 and 2013:
| | December 31, | |
| | 2014 | | | 2013 | |
Common Stock | | | | | | |
Authorized; par value $0.00001 | | | 150,000,000 | | | | 150,000,000 | |
Issued | | | 77,575,617 | | | | 38,215,054 | |
Outstanding | | | 77,575,617 | | | | 38,215,054 | |
| | | | | | | | |
Preferred Stock | | | | | | | | |
Authorized; par value $0.00001 | | | 10,000,000 | | | | - | |
Issued | | | - | | | | - | |
Outstanding | | | - | | | | - | |
Issuance of Common Stock for the periods indicated:
Common Stock | | December 31, 2015 (Audited) | | | December 31, 2014 (Audited) | |
Authorized; par value $0.00001 | | | 150,000,000 | | | | 150,000,000 | |
Issued | | | 78,247,864 | | | | 77,575,617 | |
Outstanding | | | 78,247,864 | | | | 77,575,617 | |
During June 2014, the Company issued 142,362 shares of common stockCommon Stock to investors in private placements at $1.75 per share for total proceeds of $191,000.
During July 2014, the Company issued 7,454 shares of common stockCommon Stock to an investor in a private placement at $1.75 per share for total proceeds of $10,000.
During May and June of 2014, certain note holders converted their promissory notes into common shares.Common Stock. In total, $345,000 of promissory notes was converted into 300,001 shares of common stock.Common Stock. In connection with the note conversions, the Company recorded a loss on debt extinguishment of $57,502 in the accompanying consolidated statementsConsolidated Statements of operations.Operations.
In September 2014, the Company completed a private placement equity offering to accredited investors.investors pursuant to an Agreement and Plan of Share Exchange (the “Exchange Agreement”). The Company received $4,556,100 in gross proceeds and issued 2,201,031 shares of Common Stock. The issuance costs associated with the private placement were $774,213. These costs have been recorded as a reduction to additional paid-in capital as of the year ended December 31, 2014.
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Exchange Agreement completed in September 2014 had the following impact on stockholders’ equity:
· | In January 2014, the beginning balance of common shares, common stockCommon Stock and additional paid in capital were changed to reflect the exchange of 1.3 CleanTech Innovations Inc. (“CleanTech”) shares for each share of Six Dimensions.Dimensions, Inc., a Nevada corporation formerly known as Initial Koncepts, Inc. (“Six Dimensions”). |
· | The stockholders’ equity balances of CleanTech as of September 2014 were added to total stockholders’ equity to reflect the reverse recapitalization transaction. |
On November 21, 2014, the Company completed a private placement equity offering to accredited investors. The Company received $1,052,498 in gross proceeds, and issued 508,453 shares of Common Stock. The issuance costs associated with the private placement were $236,832. These costs have been recorded as a reduction to Additionaladditional paid-in-capital for the year ended December 31, 2014.
ForOn March 4, 2015 and March 20, 2015, the yearCompany issued 300,000 shares, respectively, of its Common Stock to each of Storycode and SwellPath, as part of the respective acquisitions of each of these entities (see Note 2 - Acquisitions).
During the period ended December 31, 2013,2015, 100,588 warrants were exercised through a cashless exercise provision for the issuance of 72,248 shares of the Company’s Common Stock (see Note 16 - Warrants).
Note 16 | – Redeemable Convertible Preferred Stock |
Redeemable Convertible Preferred Stock
The table below shows the Company’s par value, authorized shares, issued shares and before becoming a C-Corporation,outstanding shares of its Redeemable Convertible Preferred Stock for the periods indicated:
Redeemable Convertible Preferred Stock | | December 31, 2015 (Audited) | | | December 31, 2014 (Audited) | |
Authorized; par value $0.00001 | | | 10,000,000 | | | | 10,000,000 | |
Issued | | | 1,088 | | | | - | |
Outstanding | | | 1,088 | | | | - | |
Background
On August 10, 2015, the Company distributed $49,972entered into a Stock Purchase Agreement (“SPA”) with a single institutional investor pursuant to which the Company agreed to issue and sell 1,088 shares of the Company’s newly designated Series A Redeemable Convertible Preferred Stock of the Company, par value $0.00001 per share (the “Redeemable Preferred Stock”), convertible into shares of the Company’s Common Stock, at a fixed conversion price of $5.25 per share, at a purchase price of $10,000 per share with an 8% original issue discount, for total gross proceeds of $10.0 million, or the sale of approximately $10.88 million.
Conversion Feature
The Redeemable Preferred Stock may be converted to shares of the Company’s Common Stock at either the holder or the Company’s option provided certain equity conditions are met.
Redemption Feature
The Stock Purchase agreement contains a redemption and an early redemption option at the Company’s option, not the holders (provided that no Trigger Event has occurred).
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Dividends
The dividend rate amounts to 8.5% per annum subject to certain stockholdersupward or downward adjustments based upon the market value of the Company’s Common Stock, with a maximum dividend rate of 17.0% and had a deficitminimum dividend rate of 0.0%, and will accrue until the earlier of conversion, redemption, or maturity. In addition, the dividend rate will increase by 10 percentage points in total stockholders’ equitythe event of $536,950.certain “triggering events,” including as described below. The Redeemable Preferred Stock will mature seven years following the issuance date, at which time such shares will automatically convert into shares of Common Stock.
ForConversion Premium
Upon conversion, the years endedCompany shall pay the holders of the Redeemable Preferred Stock being converted a conversion premium equal to the amount of dividends that such shares would have otherwise received if they had been held through the dividend maturity date. The conversion premium is only payable in certain circumstances and meets the definition of a contingent dividend. The dividends and conversion premium may be paid in cash or, at the Company’s option, shares of Common Stock. If the Company elects to pay the dividends or conversion premium amount in the form of Common Stock, the number of shares to be issued shall be calculated (subject to adjustment under certain triggering events) by using 90.0% of the average of the five lowest daily volume weighted average prices during the measurement period, less $0.05 per share of Common Stock, not to exceed 100% of the lowest sales price on the last day of such measurement period, less $0.05 per share of Common Stock. The Company will not issue any of its Common Stock that would result in the holder being deemed to beneficially own more than 4.99% of the total Common Stock outstanding at any one-time (which may be increased to 9.99% at the option of the holder). The net proceeds of the transaction are intended to be used to finance potential future acquisitions, global expansion, increase sales and marketing efforts, and for general corporate purposes, including working capital to foster the Company’s continued growth.
Authorized, issued and outstanding stock are as follows for the periods indicated:
Series A Redeemable Convertible Preferred Stock | | December 31, 2015 (Audited) | | | December 31, 2014 (Audited) | |
Stock authorized | | | 1,088 | | | | - | |
Stock outstanding | | | 1,088 | | | | - | |
Par value | | $ | 0.00001 | | | | - | |
Conversion price | | $ | 5.25 | | | | - | |
Dividend rate | | | 26.00 | % | | | - | |
Original issue date | | August 10, 2015 | | | | - | |
Redemption date | | August 10, 2022 | | | | - | |
Triggering Event
On September 10, 2015 the Company’s trading was halted at a closing bid of $2.90. As a result, the “Triggering Event” as defined within the SPA as “a suspension from trading or the failure of the Common Stock to be trading or listed on the NASDAQ Capital Market;" is considered to be met. Accordingly, this event had the following implications on the Redeemable Preferred Stock:
· | The dividend rate will adjust upward by 10 percentage points from the applicable dividend rate. |
· | If the Company elects to pay dividends or the conversion premium amount in Common Stock, the number of shares to be issued will be calculated by using 80.0% of the lowest daily volume weighted average price during any Measurement Period for any conversion by Holder, less $0.05 per share of Common Stock, not to exceed 80.0% of the lowest sales price on the last day of any Measurement Period, less $0.05 per share of Common Stock. |
· | The Company no longer has the option to redeem the shares prior to the dividend maturity date. |
· | As the equity conditions per the SPA were not met at December 31, 2015, the Company does not have the ability to convert the Redeemable Preferred Stock to Common Shares prior to the Dividend Maturity date. |
· | The measurement date is adjusted to the period beginning from the Issuance date and ending 30 trading days after all applicable Conversion shares have actually been received into the Holder’s designated brokerage account. For each trading day during the Measurement Period on which less than all of the conditions of the agreements are not met, 1 Trading Day will be added to what otherwise would have been the end of the Measurement Period. |
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Administrative and legal fees incurred as of December 31, 2015 and 2014 related to the issuance of the Redeemable Preferred Stock are $614,402 and 2013$0, respectively, and are recorded as a reduction to the Company had no issued or outstandingcarrying value of the Redeemable Preferred stock.Stock.
Classification and Accounting of Redeemable Preferred Stock
NoteThe Redeemable Preferred Stock are to be classified as part of temporary equity (mezzanine equity) along with the associated identified financial instruments including the embedded conversion feature and the redemption feature in the Company’s Consolidated Balance Sheets based upon the terms and conditions of the SPA. The initial carrying amount of Redeemable Preferred Stock is equal to the amount of proceeds received upon issuance, as reduced for the derivative liability associated with the dividend anti-dilution protection and conversion premium.
The conversion premium and the dividends associated with the Redeemable Preferred Stock contain an anti-dilution feature within the dividend rate, which fluctuates inversely to the changes in the value of the Company’s stock price. Under ASC 480 Distinguishing Liabilities from Equity (“ASC 480”) the Company’s management noted that this inverse relationship triggers liability treatment of such features. Accordingly, the conversion premium and the dividends are identified as a derivative liability which require bifurcation from the Redeemable Preferred Stock. Initial and subsequent measurement of these feature will be recorded at fair value, with changes in fair value recognized in earnings on a quarterly basis.
The fair value of the conversion premium and dividend anti-dilution features were determined to be $7,927,280 upon issuance at August 10, – Warrants2015 and $17,220,000 as of December 31, 2015. The change between the two valuations of $9,292,720 is recorded as part of the Loss on derivative liability.
Below is the activity for the Company’s preferred issuances for the periods presented:
| | Redeemable Convertible Preferred Stock | |
| | Shares | | | Amount | |
December 31, 2014 | | | - | | | $ | - | |
Issuance of preferred stock | | | 1,088 | | | | 10,000,000 | |
Bifurcation of anti-dilution features | | | - | | | | (7,927,280 | ) |
Equity issuance costs | | | - | | | | (614,402 | ) |
December 31, 2015 | | | 1,088 | | | $ | 1,458,318 | |
On September 29, 2014, in connection with the Exchange Agreement, the Company completed a private placement equity offering to accredited investors, raising $4,556,100 in gross proceeds. For its assistance in this private placement of equity, the Company paid a placement agent $356,250commissions representing 10% of the gross proceeds and issued it warrants to purchase 258,155 shares of the Company’s common stock.Common Stock. The fair value of the warrants was calculated using the Black-Scholes model and the following assumptions: estimated life of five years, volatility of 46.5%, risk-free interest rate of 1.77% and dividend yield of 0%. The fair value of the warrants at grant date was $1,660,526.
On November 21, 2014, the Company completed a private placement equity offering to accredited investors, raising $1,052,498 in gross proceeds. For its assistance in this private placement of equity, the Company paid a placement agent commissions representing 10% of the gross proceeds and issued it warrants to purchase 32,239 shares of the Company’s common stock.Common Stock. The fair value of the warrants was calculated using the Black-Scholes model and the following assumptions: estimated life of five years, volatility of 46.5%, risk-free interest rate of 1.63% and dividend yield of 0%. The fair value of the warrants at grant date was $91,436.
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During the year ended December 31, 2015, 100,588 warrants were exercised through a cashless exercise provision for the issuance of 72,247 shares of the Company’s Common Stock with an exercise price of $2.21.
The fair values of warrants during the year ended December 31, 2015 were calculated on the date of the grant using the Black-Scholes option pricing model. The Black Scholes valuation model requires the Company to estimate key assumptions such as expected volatility, expected terms, risk-free interest rates and dividend yields. The Company determined the assumptions in the Black Scholes valuation model as follows: expected volatility is a combination of the Company’s competitors’ historical volatility; expected term is calculated using the “simplified” method prescribed in ASC 718; and the risk free rate is based on the U.S. Treasury yield on 5 and 7-year instruments in effect at the time of grant. A dividend yield is not used, as the Company has never paid cash dividends and does not currently intend to pay cash dividends other than as required to settle out the dividend derivative liability. The Company periodically reviews the assumptions and modifies the assumptions accordingly.
The following table summarizes the warrant activity for the periods indicated:
| | Warrants | | | Weighted- Average Exercise Price | |
Balance at December 31, 2014 (Audited) | | | 290,394 | | | $ | 2.21 | |
Granted | | | - | | | | - | |
Exercised | | | (100,588 | ) | | $ | 2.21 | |
Balance at December 31, 2015 (Audited) | | | 189,806 | | | $ | 2.21 | |
The warrants outstanding at December 31, 2015 are immediately exercisable at $2.21, and have a weighted average remaining term of approximately 3.69 years.
The Company uses the basis for the accounting of warrants issued in connection with the private placement to the placement agent in accordance with ASC 480 “DistinguishingDistinguishing Liabilities from Equity”Equity and ASC 815 “DerivativesDerivatives and Hedging.” The warrants were considered an issuance cost for the private placement and therefore were deducted from the gross proceeds reducing equity.
Note 11 – Commitments and Contingencies
Note 18 | – Commitments and Contingencies |
Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes that is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s consolidated financial statements. Contingencies are inherently unpredictable and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.
Legal Proceedings
The defense costs related to the legal proceeding against the Company may be offset by payment of our claims from our insurance carriers.
Discover Growth Fund v. 6D Global Technologies, Inc., et al., Case No. 15-cv-7618 (PKC) (S.D.N.Y.)
On September 28, 2015, Discover Growth Fund (“Discover”) filed an action in the United States District Court for the Southern District of New York (the “District Court”) against 6D Global Technologies, Inc., its officers and directors, and certain third-parties. In its complaint, Discover alleges, among other things, that it was fraudulently induced into executing the Stock Purchase Agreement (the “SPA”), because the Company allegedly made misrepresentations regarding Benjamin Wey - also a defendant in the pending action - and his alleged involvement with the Company. Discover’s complaint further asserts claims for violations of federal securities laws, rescission, breach of contract, and fraud, all substantially arising out of the same factual allegations.
Discover’s suit was assigned to District Court Judge P. Kevin Castel. Discover made a motion in the District Court for a pre-judgment attachment of the Company’s assets in aid of arbitration, and for a temporary restraining order pending a decision on its motion for attachment of the Company’s assets, which was initially granted by the court and then revised. The Company opposed Discover’s attachment motion and cross-moved to compel arbitration of Discover’s claims in accordance with the terms of the SPA.
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On October 30, 2015, Judge Castel completely denied Discover’s motion for an attachment of the Company’s assets and vacated the temporary restraining order. The Court found that the plaintiff had not satisfied their burden of proof regarding any alleged wrongdoing by the Company, or its officers and directors. As of the date of this filing, Discover has not filed for arbitration of its underlying claims.
The Company vigorously disputes Discover’s underlying claims and intends to aggressively defend them if any arbitration is filed by Discover. The extent of the Company’s potential liability in this matter has not yet been determined. And as a result, no accrual for this exposure was made in the consolidated financial statements.
Puddu et al. v. 6D Global Technologies, Inc., et al., Case No. 15-cv-8061 (RWS) (S.D.N.Y.)
On October 13, 2015, an individual named Sixto Castillo IV filed a putative class action complaint in the United States District Court for the Southern District of New York against the Company, certain officers and directors, and certain third-parties, putatively on behalf of the Company’s stockholders. The lawsuit seeks damages arising from alleged material misstatements and omissions concerning defendant Benjamin Wey, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act (15 U.S.C. §§ 78j(b) and 78t(a), respectively) and Rule 10b-5 promulgated thereunder (17 C.F.R. § 240.10b-5). Plaintiffs Joseph Puddu, Mark Ghitis, Valery Burlak, and Adam Butter, on behalf of the putative class, subsequently filed an amended complaint and second amended complaint on March 23, 2016 and April 4, 2016, respectively.
Plaintiffs allege, among other things, that defendants made false and/or misleading statements and/or failed to disclose: (1) the extent of Benjamin Wey’s purported involvement in the Company’s operations, and (2) Benjamin Wey’s purported beneficial ownership of more than 5% of the Company’s stock.
Plaintiffs seek an undetermined amount of compensatory damages allegedly sustained by the putative class a result of these purported misstatements and omissions.
The Company vigorously disputes the allegations made in the complaint and intends to assert an aggressive defense. The extent of the Company’s potential liability in this matter has not yet been determined. And as a result, no accrual for this exposure was made in the consolidated financial statements.
Scott v. Wei et al. and 6D Global Technologies, Inc., Case No. 1:15-cv-09691 (S.D.N.Y.)
On December 11, 2015, an individual named Allan Scott filed a shareholder action in the United States District Court for the Southern District of New York derivatively on behalf of 6D Global Technologies Inc. against certain officers and directors of the Company, certain third-parties, and the Company itself (as a nominal defendant). Mr. Scott seeks damages and injunctive relief arising from alleged breaches of fiduciary duties, unjust enrichment, and purported material misstatements and omissions in violation Section 14 of the Exchange Act (15 U.S.C. § 78n) and Rule 14a-9 promulgated thereunder (17 C.F.R. § 240.14a-9).
Specifically, the complaint alleges, among other things, that defendants have harmed the Company: (1) by permitting defendant Benjamin Wei to manipulate the share price and trading volume of the Company’s stock, (2) by lacking adequate internal controls to prevent such alleged manipulation, and (3) by failing to disclose Wei’s purported actions and involvement in the Company. Mr. Scott seeks an award to the Company in an undetermined amount for damages it allegedly sustained as a result of these alleged violations, as well as injunctive relief requiring 6D Global to reform and improve its corporate governance and internal procedures. The lawsuit has been stayed by the Court pending the outcome of the motion to dismiss that defendants intend to file in the Puddu lawsuit.
The Company and the named directors and officers dispute the allegations made in the complaint and intend to amount an aggressive defense. The extent of the potential liability in this matter has not yet been determined. And as a result, no accrual for this exposure was made in the consolidated financial statements.
Cottam v. Glob. Emerging Capital Grp. et al., Case No. 16-cv-04584 (S.D.N.Y.)
The Company has learned that on June 16, 2016, an individual named John Cottam filed a complaint in the United States District Court for the Southern District of New York against the Company, its CEO, and certain third-parties. To the Company’s knowledge, neither the Company nor its CEO has been served with this complaint.
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
With regard to the Company and its CEO, Mr. Cottam seeks damages arising from an alleged breach of contract, as well as purported material misstatements or omissions in violation of Section 10(b) of the Securities Exchange Act (15 U.S.C. § 78j(b)) and Rule 10b-5 promulgated thereunder (17 C.F.R. § 240.10b-5). Specifically, the complaint alleges, among other things, that defendants induced Mr. Cottam to invest in a private offering of Company shares by misrepresenting (i) the nature of a reorganization facilitated by the offering; (ii) certain restrictions on the selling of Company shares; and (iii) the involvement of non-party Benjamin Wey in the offering. Mr. Cottam further alleges that the Company and its CEO breached a subscription agreement by purportedly failing to issue Mr. Cottam the contracted for number of shares.
Plaintiff seeks an undetermined amount of compensatory and punitive damages allegedly sustained as a result of defendants’ purported breaches, misstatements, and omissions.
The Company and its CEO dispute the allegations made in the complaint and, if served, intend to mount an aggressive defense. The extent of the potential liability in this matter has not yet been determined. And as a result, no accrual for this exposure was made in the consolidated financial statements.
Operating Leases
The Company is obligated under various operating lease agreements for office facilities in California, Florida, New York, and Ohio. As a result of the acquisitions, the Company is also obligated under operating leases for facilities in Oregon and Minnesota. In addition, the Company leases office facilities on a month-to-month basis in Minnesota and Colorado.
Rent expense under all office leases aggregated $342,170to $918,045 and $261,642$342,170 for the years ended December 31, 20142015 and 2013,2014, respectively. Rent expense was recorded in selling general and administrative expenses in the accompanying consolidated statementsConsolidated Statements of operations.Operations.
Future minimum payments of the Company’s operating leases are as follows:
2016 | | $ | 1,148,759 | |
2017 | | | 1,117,905 | |
2018 | | | 968,639 | |
2019 | | | 792,846 | |
2020 | | | 476,112 | |
Thereafter | | | 766,401 | |
Total | | $ | 5,270,662 | |
Equipment Lease
Rent expenses under all equipment leases aggregated $92,114 and $81,036 for the years ended December 31, 2015 and 2014, respectively. The Company is also obligated under various operating lease agreements for equipment. Rent expenses under all equipment leases aggregated $81,036 and $63,506 for the years ended December 31, 2014 and 2013, respectively. Rent expenses under all equipment leases are recorded in selling general and administrative expenses in the accompanying consolidated statementsConsolidated Statements of operations.Operations.
Ohio Office Lease
On June 21, 2013, the Company signed a lease commitment for its office and apartment space in Cincinnati, Ohio. The lease expires on August 30, 2018 and requires annual payments of $53,676 with increases in increments of 3% each year thereafter. Rent expense will be recognized on a straight line basis over the term of the lease. The lease contains one option to renew the lease for a term of sixty (60) months at the then prevailing market rates.6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
New York Office Lease
Future minimumOn January 9, 2015, the Company signed an amendment to its corporate headquarter lease. The amendment covers an additional 8,887 square feet of floor space in the same building as the original lease. The new floor space lease expires in March 31, 2020. This lease requires base annual rental payments of $488,785 for the Company’s operating leases are as follows:
| | $ | 295,336 | |
| | | 240,798 | |
| | | 260,633 | |
| | | 191,679 | |
| | | - | |
| | | - | |
| | $ | 988,446 | |
term of the lease. Lease payments will be recognized on a straight-line basis over the term of the lease. As part of this lease agreement, among other requirements, the Company is obligated to obtain a Letter of Credit in the amount of $244,393 which will expire on July 31, 2020 (see Note 10 - Letter of Credit and Restricted Cash).
New York Office Sub-lease
On February 15, 2014, the Company signed a twenty-four (24) month agreement to sub-lease a portion of itits office facilities in New York City expiring in February 29, 2016. The lease requires base annual rental payments to the Company of $120,000 for the term of the lease. Rental income will be recognized on a straight-line basis over the term of the lease. As part of the lease agreement, the Company received a $30,000 security deposit, which is shown as a liability on the accompanying consolidated balance sheets.Consolidated Balance Sheets. On April 1, 2015, the Company amended and extended the sub-lease through August 31, 2018 and increased the rental payments to include variable increases to offset a portion of increases from the Company’s corporate headquarter lease.
On April 1, 2015, the Company signed a forty-one (41) month agreement to sub-lease a portion of its office facilities in New York City expiring August 31, 2018. The lease requires increasing rental payments over the next year of the lease, followed by base annual rental payments to the Company of $102,000, plus variable increases for the remaining term of the lease. As part of the lease agreement, the Company received a $20,000 security deposit, which is shown as a liability on the accompanying Consolidated Balance Sheets. Rental income will be recognized on a straight-line basis over the term of the lease.
California Office Leases
On April 29, 2014, the Company signed a lease amendment for its office facilities in San Ramon, California. The amendment extends the lease past the May 31, 2014 expiration date on a month to month basis with monthly rental payments of $2,836. On June 30, 2014, the Company cancelled the lease, and the lease expired on September 30, 2014.
On April 16, 2014, the Company signed a thirty-eight (38) month lease agreement for its office facilities in Pleasanton, California expiring on August 31, 2017. The lease requires base annual rent of approximately $34,000 for the first year, with increases in increments of 3% each year thereafter. The lease contains a two (2) month rent abatement period starting in July 2014. Rent expense will be recognized on a straight line basis over the term of the lease. The lease contains one option to renew for a term of thirty-six (36) months.
Oregon Office Lease
On September 24, 2015 the Company signed an eighty-five month agreement for up to approximately 12,187 square feet of office and warehouse space which commences on March 1, 2016 and expires on March 31, 2023. The lease requires an initial base annual rental payments of $188,466 with increases in base rent of approximately 3%. Rental income will be recognized on a straight-line basis over the term of the lease. As part of the lease agreement, the Company paid a $27,819 security deposit, which will be shown as a security deposit asset on the accompanying Consolidated Balance Sheets.
Deferred Rent
To induce the Company to enter into certain operating leases, landlords have granted free rent for various months over the term of occupancy. Rent expenses recorded on the straight-line basis in excess of rents paid is recognized as deferred rent. For the years ended December 31, 20142015 and 2013,2014, deferred rent was $55,429$69,415 and $73,192,$55,429, respectively, which is shown as a liability in the consolidated balance sheets.Consolidated Balance Sheets.
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company’s capital lease obligations for computer software and hardware as of December 31, 20142015 are as follows:
| | $ | 64,549 | | |
| | | 54,617 | | | $ | 148,811 | |
| | | 41,232 | | | | 124,167 | |
| | | 27,186 | | | | 72,910 | |
| | | - | | | | - | |
2020 | | | | - | |
| | | - | | | | - | |
| | | 187,584 | | | | 345,888 | |
Amount representing interest | | | 22,844 | | | | 31,179 | |
Present value of future minimum lease payments | | | 164,740 | | | | 314,709 | |
Current portion of capital lease obligations | | | 53,610 | | | | 129,857 | |
Capital lease obligations, net of current portion | | $ | 111,130 | | | $ | 184,852 | |
Future minimum payments of the Company’s capital leases are as follows:
2016 | | $ | 129,857 | |
2017 | | | 114,066 | |
2018 | | | 70,786 | |
2019 | | | - | |
2020 | | | - | |
Thereafter | | | - | |
Total | | $ | 314,709 | |
| | $ | 53,612 | |
| | | 47,404 | |
| | | 37,352 | |
| | | 26,372 | |
| | | - | |
| | | - | |
| | $ | 164,740 | |
Note 19 | – Concentrations and Credit Risks |
Note 12 – Concentrations and Credit Risks
Revenues
For the yearsyear ended December 31, 2014 and 2013,2015, the Company had two and one significant customer, respectively,customers that accounted for more than 10% of the Company’s total revenues. revenues: one company generated $1,438,151, a second company generated $2,867,298 in revenues for services provided in the CMS business segment. For the year ended December 31, 2014, the Company had two significant customers that accounted for more than 10% of the Company’s total revenues: one company generated $1,572,140 and a second company generated $1,699,599 in revenues for services provided in the CMS business segment.
The Company’s sales to its top five customers accounted for approximately 52%56% and 41%52% of revenues during the yearsyear ended December 31, 2015 and 2014, and 2013, respectively. During the year ended December 31, 2015, the Company had one foreign customer accounting for 22% of its revenues. During the year ended December 31, 2014, the Company had one foreign customer accounting for just under 9% of its revenues. During the year ended December 31, 2013, the Company had no foreign customers.
Accounts Receivable
For the years ended December 31, 20142015 and 2013,2014, the Company had approximately 57%56% and 53%57% of its accounts receivable balance held by the largest five customers, respectively. During each of the years ended December 31, 20142015 and 2013,2014, the Company had three and two customers accounting for more than 10% each of its accounts receivables balances, respectively.
Accounts Payable
For the years ended December 31, 20142015 and 2013,2014, the Company had approximately 26%42% and 28%26% of its accounts payable balances held by its toplargest five vendors, respectively. During each of these same periods, the Company had one and none of its customersvendors accounting for more than 10% each of the Company’s accounts payables balances, respectively.
Note 13 – F-33Income Taxes
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Effective June 27, 2014, the Company converted into a C-Corporation. Going forward, the Company will be subject to federal and state income taxes and will have to recognize income tax expense and deferred taxes for financial statement purposes. As a result,Deferred taxes are computed based on the Company recorded a deferred tax asset of $161,452 and a deferred tax liability or benefit in future years of ($197) principally accounting for the differencereversal of temporary differences in the recognition of income or deduction of expenses between financial reporting and tax reporting purposes, increased by net operating loss carryforwards of which expire through 2035.
Federal and state net operating loss carryforwards are approximately $6,846,000 and $53,692 at December 31, 2015 and 2014, respectively. A valuation allowance has been established for the full amount of the net deferred tax assets to reduce such net assets to zero, as it relatesa result of the significant uncertainty regarding their ultimate realization. The aggregate valuation allowance increased $2,570,000 in 2015. The net difference, if any, between the provision for taxes and taxes currently payable is reflected in the balance sheet as deferred taxes. Deferred tax assets and/or liabilities, if any, are classified as current and non-current based on the classification of the related asset or liability for financial reporting purposes, or based on the expected reversal date for deferred taxes that are not related to the deductibility of accruals, expenses and depreciation, respectively,an asset or liability. Valuation allowances are recorded to reduce deferred tax assets to that amount which is more likely than not to be realized. The Company has recorded a full valuation allowance against its net deferred tax asset as of December 31, 2014 in the accompanying consolidated balance sheet.2015.
The provision for income taxes includes the following:
| | Years Ended December 31, | | |
| | 2014 | | 2013 | | |
| | | | | | | December 31, 2015 (Audited) | | | December 31, 2014 (Audited) | |
Current: | | | | | | | | | | | |
| | | | | | | | | $ | (7,654 | ) | | $ | - | |
| | | | | | | | - | | | | - | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | (7,654 | ) | | | - | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | $ | (415,969 | ) | | $ | (136,111 | ) |
| | | | | | | | (43,543 | ) | | | (25,144 | ) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | (459,512 | ) | | | (161,255 | ) |
| | | | | | | | | | | | | | | |
| | | | ) | | | | | | $ | 451,858 | | | $ | 161,255 | |
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The effects of temporary differences and tax loss carryforwards that give rise to significant portions of federal deferred tax assets and deferred tax liabilities at December 31, 2014 are presented below:below for the periods indicated:
| | | December 31, 2015 (Audited) | | | December 31, 2014 (Audited) | |
| | December 31, 2014 | | | | | | | |
Deferred tax assets: | | | | | | | | | |
| | | | | | | | | |
Net operating loss carry-forwards | | $ | 53,692 | | | $ | 2,680,597 | | | $ | 53,692 | |
| | | | | | | | | | | | |
Accrued compensated absences | | | 60,164 | | | | - | | | | 60,164 | |
| | | | | |
Charitable contributions | | | | 2,451 | | | | - | |
Acquisition costs | | | | 76,705 | | | | - | |
Deferred revenues | | | 26,294 | | | | - | | | | 26,294 | |
| | | | | |
Share based compensation | | | | 555,504 | | | | - | |
Deferred rent | | | 21,302 | | | | 27,066 | | | | 21,302 | |
| | | | | | | | | | | | |
Net deferred tax assets | | | 161,452 | | | | 3,342,323 | | | | 161,452 | |
| | | | | | | | | | | | |
Valuation allowance | | | | (2,570,190 | ) | | | - | |
| | | | | | | | | |
Deferred tax liabilities: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Property and equipment | | | (197 | ) | | | - | | | | (197 | ) |
| | | | | |
Prepaid expenses | | | | (135,003 | ) | | | | |
Depreciation and amortization | | | | (637,130 | ) | | | - | |
Total deferred tax liabilities | | | (197 | ) | | | (772,133 | ) | | | (197 | ) |
| | | | | | | | | | | | |
Net deferred tax assets | | $ | 161,255 | | | $ | - | | | $ | 161,255 | |
On June 25, 2014, Initial Koncepts, Inc. converted from an S-Corporation into a California limited liability company (“LLC”) and changed its name to Six Dimensions, LLC. From inception through June 26, 2014, the Company was taxed as an S-Corporation under the Internal Revenue Code of 1986, as amended and applicable state statutes. Under an S-Corporation election, the income of the Company flows through to the stockholders to be taxed at the individual level rather than the corporate level. Accordingly, the Company had no tax liability at the federal level (with limited exceptions) as long as the S-Corporation election was in effect. On June 27, 2014, Six Dimensions, LLC converted into a Nevada C-Corporation and changed its name to Six Dimensions, Inc.
When the Company was an S-Corporation, the income allocable to each shareholder is subject to examination by federal and state taxing authorities. In the event of an examination of the income tax returns, the tax liability of the stockholders could be changed if an adjustment in the income is ultimately determined by the taxing authorities.
Deferred taxes are computed based on the tax liability or benefit in future years of the reversal of temporary differences in the recognition of income or deduction of expenses between financial and tax reporting purposes. The net difference, if any, between the provision for taxes and taxes currently payable is reflected in the balance sheet as deferred taxes. Deferred tax assets and/or liabilities, if any, are classified as current and non-current based on the classification of the related asset or liability for financial reporting purposes, or based on the expected reversal date for deferred taxes that are not related to an asset or liability. Valuation allowances are recorded to reduce deferred tax assets to that amount which is more likely than not to be realized.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company’s income tax returns are open to examination by federal, state and foreign tax authorities, generally for the years ended December 31, 20112012 and later, with certain state jurisdictions open for audit for earlier years. The Company has no amount recorded for any unrecognized tax benefits as of December 31, 2014 and 2013,2015, nor did the Company record any amount for the implementation of ASC 740. The Company’s policy is to record estimated interest and penalty related to the underpayment of income taxes or unrecognized tax benefits as a component of its income tax provision. During the years ended 2014 and 2013, theThe Company did not recognize any interest or penalties in its consolidated statements of operations and there are no accruals for interest or penalties at December 31, 2014 or 2013.
2015. The Company is not currently under examination by any tax jurisdiction.
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The difference between the total income taxes computed at the federal statutory rate and the benefit rom income taxes consists of the following:
| | For the Year Ended December 31, 2014 | |
| | | | |
Federal statutory rate | | | 34.00 | % |
| | | | |
State taxes net of federal benefit | | | 7.69 | % |
| | | | |
Changes in tax filing status | | | 39.14 | % |
| | | | |
Non-deductible expenses | | | (5.72 | )% |
| | | | |
Other | | | (0.38 | )% |
| | | | |
Income tax benefit – Federal | | | 74.73 | % |
As a result of the Company’s mid-year conversion to a C-Corporationfollowing for the year ended December 31, 2014, the Company had net operating loss (“NOL”) carry–forwards for Federal income tax purposes of $147,943 that may be offset against future taxable income through 2034. The tax benefit of $40,948 has been recorded with respect to these net operating loss carry-forwards as the management of the Company believes that the realization of the Company’s net deferred tax assets of approximately $35,739 was considered more likely than not.periods indicated:
| | December 31, 2015 (Audited) | | | December 31, 2014 (Audited) | |
| | | | | | |
Federal statutory rate | | | 34.00 | % | | | 34.00 | % |
| | | | | | | | |
State taxes net of federal benefit | | | 2.21 | % | | | 5.16 | % |
| | | | | | | | |
Changes in valuation allowance | | | (14.63 | )% | | | - | % |
| | | | | | | | |
Changes in tax filing status | | | - | % | | | 8.99 | % |
| | | | | | | | |
Non-deductible expenses | | | (18.75 | )% | | | 3.99 | % |
| | | | | | | | |
Other | | | (0.26 | )% | | | - | % |
| | | | | | | | |
Income tax benefit – Federal | | | 2.57 | % | | | 52.14 | % |
The Company is subject to U.SU.S. federal income taxes and income taxes in various states in the U.S. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. Due to the Company’s NOL’s, all years remain open to examination by the major domestic taxing jurisdictions to which the Company is subject. In addition, all the NOL’s and credit carryforwards that may be used in future years are still subject to adjustment. The Company is not currently under examination by any tax jurisdiction.
Note 14 – Business and Geographic Segment InformationNote 21 | – Business Geographic Segment Information |
ASC 280, Segment Reporting,, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer, who reviews the financial performance and the results of operations of the segments prepared in accordance with U.S. GAAP when making decisions about allocating resources and assessing performance of the Company. The Company has determined that its two reportable segments are Content Management Systems (“CMS”)CMS and Information Technology (“IT”)IT Staffing. CMS offers web content management solutions, marketing cloud solutions, mobile applications, analytics, front-end user experience and design, and marketing automation. The IT Staffing segment provides contract and contract-to-hire IT professional staffing services. During the current year, the Company has allocated additional selling, general, and administrative expenses and other expenses to the CMS business segment to reflect the Company’s focus on the digital market space most serviced by the CMS business Segment. Costs excluded from segment operating income include various corporate expenses such as share-based compensation expense, income taxes, other income and expenses, various nonrecurring charges, and other separately managed general and administrative costs.
There are currently no intersegment revenues. Asset information by operating segment is not presented below since the chief operating decision maker does not review this information by segment. The reporting segments follow the same accounting policies used in the preparation of the Company’s consolidated financial statements which are described in Note 24 – Significant and Critical Accounting Policies and Practices.
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Segment information relating to the Company’s results of operations was as follows:follows for the periods indicated:
| | For the Years Ended | |
Revenues | | December 31, 2015 (Audited) | | | December 31, 2014 (Audited) | |
| | | | | | |
CMS | | $ | 11,229,654 | | | $ | 6,863,959 | |
IT Staffing | | | 1,560,238 | | | | 4,933,854 | |
Total | | $ | 12,789,892 | | | $ | 11,797,813 | |
| | For the Years Ended | |
Gross Margin | | December 31, 2015 (Audited) | | | December 31, 2014 (Audited) | |
| | | | | | |
CMS | | $ | 4,737,208 | | | $ | 3,243,563 | |
IT Staffing | | | 324,440 | | | | 1,128,393 | |
Total | | $ | 5,061,648 | | | $ | 4,371,956 | |
| | For the Years Ended | |
Business Segment Performance | | December 31, 2015 (Audited) | | | December 31, 2014 (Audited) | |
| | | | | | |
CMS | | $ | (4,267,719 | ) | | $ | 813,722 | |
IT Staffing | | | (406,759 | ) | | | (237,499 | ) |
Total | | $ | (4,674,478 | ) | | $ | 576,223 | |
| | Years Ended | |
Revenues | | December 31, 2014 | | | December 31, 2013 | |
| | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | For the Years Ended | |
Net (Loss) Income | | December 31, 2015 (Audited) | | | December 31, 2014 (Audited) | |
Business Segment Performance | | $ | (4,674,478 | ) | | $ | 576,223 | |
Interest expense, net | | | (281,411 | ) | | | (147,069 | ) |
Depreciation and amortization | | | (564,839 | ) | | | (82,342 | ) |
Income tax benefit | | | 451,858 | | | | 161,255 | |
Stock Based Compensation to Employees and Board of Directors | | | (1,424,672 | ) | | | - | |
Compensation expense of former principals of acquired companies | | | (250,000 | ) | | | - | |
Acquisition related expenses | | | (169,191 | ) | | | - | |
One-time Professional and Legal fees | | | (911,456 | ) | | | - | |
Loss on debt extinguishment | | | - | | | | (57,502 | ) |
Loss on derivative liability | | | (9,292,720 | ) | | | - | |
Other income | | | 5,619 | | | | 20,000 | |
Net (loss) income | | $ | (17,111,290 | ) | | $ | 470,565 | |
Note 22– Prior Year Restatement
In connection with completing the consolidated financial statements as of December 31, 2015, the Company identified that prior to the 2014 recapitalization, personal shares of common stock had been granted by the Founder and CEO to various employees and contractors for services provided to the Company. The shares have a grant date of September 20, 2014 and vest over a period of four years. The corresponding 2014 and 2015 expense will be reflected within the 2015 Company’s Consolidated Statements of Operations.
6D GLOBAL TECHNOLOGIES, INC.
| | Years Ended | |
Gross Margin | | December 31, 2014 | | | December 31, 2013 | |
| | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | Years Ended | |
Profit (Loss) | | December 31, 2014 | | | December 31, 2013 | |
| | | | | | | | |
| | | | ) | | | | ) |
| | | | | | | | ) |
In accordance with the guidance provided by the SEC’s Staff Accounting Bulletin 99, Materiality (“SAB 99”) and Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), the Company has determined that the impact of adjustments relating to the corrections of this accounting error are not material to previously issued annual audited and unaudited consolidated financial statements. Accordingly, these changes are disclosed herein and will be disclosed prospectively.
As a result of the aforementioned correction of accounting errors, the relevant quarterly and annual financial statements have been restated as follows (all amounts in $USD except per share data):
Item | | As of September 30, 2014 as Previously Reported | | | As of September 30, 2014 as Corrected | | | Difference Increase (Decrease) | |
Current Assets | | | 6,238,952 | | | | 6,238,952 | | | | - | |
Current Liabilities | | | 2,175,634 | | | | 2,175,634 | | | | - | |
Working Capital | | | 4,063,318 | | | | 4,063,318 | | | | - | |
Total Assets | | | 6,498,465 | | | | 6,498,465 | | | | - | |
Long Term Liabilities | | | 245,756 | | | | 245,756 | | | | - | |
Total Liabilities | | | 2,421,390 | | | | 2,421,390 | | | | - | |
Total Equity | | | 4,077,075 | | | | 4,077,075 | | | | - | |
Item | | As of December 31, 2014 as Previously Reported | | | As of December 31, 2014 as Corrected | | | Difference Increase (Decrease) | |
Current Assets | | | 6,594,456 | | | | 6,594,456 | | | | - | |
Current Liabilities | | | 2,001,869 | | | | 2,001,869 | | | | - | |
Working Capital | | | 4,592,587 | | | | 4,592,587 | | | | - | |
Total Assets | | | 6,884,147 | | | | 6,884,147 | | | | - | |
Long Term Liabilities | | | 249,979 | | | | 249,979 | | | | - | |
Total Liabilities | | | 2,251,848 | | | | 2,251,848 | | | | - | |
Total Equity | | | 4,632,299 | | | | 4,632,299 | | | | - | |
Item | | As of March 31, 2015 as Previously Reported | | | As of March 31, 2015 as Corrected | | | Difference Increase (Decrease) | |
Current Assets | | | 4,862,542 | | | | 4,862,542 | | | | - | |
Current Liabilities | | | 2,566,956 | | | | 2,566,956 | | | | - | |
Working Capital | | | 2,295,586 | | | | 2,295,586 | | | | - | |
Total Assets | | | 14,906,830 | | | | 14,906,830 | | | | - | |
Long Term Liabilities | | | 4,368,495 | | | | 4,368,495 | | | | - | |
Total Liabilities | | | 6,935,451 | | | | 6,935,451 | | | | - | |
Total Equity | | | 7,971,379 | | | | 7,971,379 | | | | - | |
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Item | | As of June 30, 2015 as Previously Reported | | | As of June 30, 2015 as Corrected | | | Difference Increase (Decrease) | |
Current Assets | | | 3,707,612 | | | | 3,707,612 | | | | - | |
Current Liabilities | | | 3,073,374 | | | | 3,073,374 | | | | - | |
Working Capital | | | 634,238 | | | | 634,238 | | | | - | |
Total Assets | | | 13,700,149 | | | | 13,700,149 | | | | - | |
Long-Term Liabilities | | | 690,203 | | | | 690,203 | | | | - | |
Total Liabilities | | | 3,763,577 | | | | 3,763,577 | | | | - | |
Total Equity | | | 9,936,572 | | | | 9,936,572 | | | | - | |
Item | | As of September 30, 2015 as Previously Reported | | | As of September 30, 2015 as Corrected | | | Difference Increase (Decrease) | |
Current Assets | | | 11,626,581 | | | | 11,626,581 | | | | - | |
Current Liabilities | | | 3,289,524 | | | | 3,289,524 | | | | - | |
Working Capital | | | 8,337,057 | | | | 8,337,057 | | | | - | |
Total Assets | | | 21,411,714 | | | | 21,411,714 | | | | - | |
Long-Term Liabilities | | | 13,026,037 | | | | 13,026,037 | | | | - | |
Total Liabilities | | | 16,315,561 | | | | 16,315,561 | | | | - | |
Total Deficit | | | (5,181,709 | ) | | | (5,181,709 | ) | | | - | |
Item | | Quarter Ended September 30, 2014 as Previously Reported | | | Quarter Ended September 30, 2014 as Corrected | | | Difference Increase (Decrease) | |
Revenues | | | 2,709,066 | | | | 2,709,066 | | | | - | |
Cost of revenues | | | 1,713,409 | | | | 1,713,409 | | | | - | |
Gross margin | | | 995,657 | | | | 995,657 | | | | - | |
Operating expenses | | | 874,389 | | | | 1,038,358 | | | | 163,969 | |
Income (loss) from operations | | | 121,268 | | | | (42,701 | ) | | | (163,969 | ) |
Other expense | | | (81,934 | ) | | | (81,934 | ) | | | - | |
Income (loss) before tax expense | | | 39,334 | | | | (124,635 | ) | | | (163,969 | ) |
Net income (loss) | | | 31,589 | | | | (132,380 | ) | | | (163,969 | ) |
Basic EPS | | | - | | | | - | | | | - | |
Diluted EPS | | | - | | | | - | | | | - | |
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Item | | Year-to-date September 30, 2014 as Previously Reported | | | Year-to-date September 30, 2014 as Corrected | | | Difference Increase (Decrease) | |
Revenues | | | 8,299,053 | | | | 8,299,053 | | | | - | |
Cost of revenues | | | 4,952,021 | | | | 4,952,021 | | | | - | |
Gross margin | | | 3,347,032 | | | | 3,347,032 | | | | - | |
Operating expenses | | | 2,504,776 | | | | 2,668,745 | | | | 163,969 | |
Income from operations | | | 842,256 | | | | 678,287 | | | | (163,969 | ) |
Other expense | | | (163,371 | ) | | | (163,371 | ) | | | - | |
Income before tax expense | | | 678,885 | | | | 514,916 | | | | (163,969 | ) |
Net income | | | 731,007 | | | | 567,038 | | | | (163,969 | ) |
Basic EPS | | | 0.02 | | | | 0.02 | | | | - | |
Diluted EPS | | | 0.02 | | | | 0.02 | | | | - | |
Item | | Quarter Ended December 31, 2014 as Previously Reported | | | Year Ended December 31, 2014 as Corrected | | | Difference Increase (Decrease) | |
Revenues | | | 3,498,760 | | | | 3,498,760 | | | | - | |
Cost of revenues | | | 2,473,836 | | | | 2,473,836 | | | | - | |
Gross margin | | | 1,024,924 | | | | 1,024,924 | | | | - | |
Operating expenses | | | 1,373,299 | | | | 1,563,739 | | | | 190,440 | |
Loss from operations | | | (348,375 | ) | | | (538,815 | ) | | | (190,440 | ) |
Other expense | | | (21,200 | ) | | | (21,200 | ) | | | - | |
Loss before tax benefit | | | (369,575 | ) | | | (560,015 | ) | | | (190,440 | ) |
Net loss | | | (260,442 | ) | | | (450,882 | ) | | | (190,440 | ) |
Basic EPS | | | (0.01 | ) | | | (0.01 | ) | | | - | |
Diluted EPS | | | (0.01 | ) | | | (0.01 | ) | | | - | |
Item | | Year-to-date December 31, 2014 as Previously Reported | | | Year-to-date December 31, 2014 as Corrected | | | Difference Increase (Decrease) | |
Revenues | | | 11,797,813 | | | | 11,797,813 | | | | - | |
Cost of revenues | | | 7,425,857 | | | | 7,425,857 | | | | - | |
Gross margin | | | 4,371,956 | | | | 4,371,956 | | | | - | |
Operating expenses | | | 3,878,075 | | | | 4,232,484 | | | | 354,409 | |
Income from operations | | | 493,881 | | | | 139,472 | | | | (354,409 | ) |
Other expense | | | (184,571 | ) | | | (184,571 | ) | | | - | |
Income before tax expense | | | 309,310 | | | | (45,099 | ) | | | (354,409 | ) |
Net income | | | 470,565 | | | | 116,156 | | | | (354,409 | ) |
Basic EPS | | | 0.01 | | | | 0.01 | | | | - | |
Diluted EPS | | | 0.01 | | | | 0.01 | | | | - | |
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Item | | Quarter Ended March 31, 2015 as Previously Reported | | | Quarter Ended March 31, 2015 as Corrected | | | Difference Increase (Decrease) | |
Revenues | | | 3,275,585 | | | | 3,275,585 | | | | - | |
Cost of revenues | | | 1,903,828 | | | | 1,903,828 | | | | - | |
Gross margin | | | 1,371,757 | | | | 1,371,757 | | | | - | |
Operating expenses | | | 1,900,615 | | | | 2,082,247 | | | | 181,632 | |
Loss from operations | | | (528,858 | ) | | | (710,490 | ) | | | (181,632 | ) |
Other expense | | | (33,004 | ) | | | (33,004 | ) | | | - | |
Loss before tax benefit | | | (561,862 | ) | | | (743,494 | ) | | | (181,632 | ) |
Net loss | | | (379,445 | ) | | | (561,077 | ) | | | (181,632 | ) |
Basic EPS | | | (0.01 | ) | | | (0.01 | ) | | | - | |
Diluted EPS | | | (0.01 | ) | | | (0.01 | ) | | | - | |
Item | | Quarter Ended June 30, 2015 as Previously Reported | | | Quarter Ended June 30, 2015 as Corrected | | | Difference Increase (Decrease) | |
Revenues | | | 3,220,343 | | | | 3,220,343 | | | | - | |
Cost of revenues | | | 2,041,679 | | | | 2,041,679 | | | | - | |
Gross margin | | | 1,178,664 | | | | 1,178,664 | | | | - | |
Operating expenses | | | 3,064,487 | | | | 3,175,577 | | | | 111,090 | |
Loss from operations | | | (1,885,823 | ) | | | (1,996,913 | ) | | | (111,090 | ) |
Other expense | | | (148,024 | ) | | | (148,024 | ) | | | - | |
Loss before tax benefit | | | (2,033,847 | ) | | | (2,144,937 | ) | | | (111,090 | ) |
Net loss | | | (1,762,637 | ) | | | (1,873,727 | ) | | | (111,090 | ) |
Basic EPS | | | (0.02 | ) | | | (0.02 | ) | | | - | |
Diluted EPS | | | (0.02 | ) | | | (0.02 | ) | | | - | |
Item | | Year-to-date June 30, 2015 as Previously Reported | | | Year-to-date June 30, 2015 as Corrected | | | Difference Increase (Decrease) | |
Revenues | | | 6,495,928 | | | | 6,495,928 | | | | - | |
Cost of revenues | | | 3,945,507 | | | | 3,945,507 | | | | - | |
Gross margin | | | 2,550,421 | | | | 2,550,421 | | | | - | |
Operating expenses | | | 4,965,102 | | | | 5,257,824 | | | | 292,722 | |
Loss from operations | | | (2,414,681 | ) | | | (2,707,403 | ) | | | (292,722 | ) |
Other expense | | | (181,028 | ) | | | (181,028 | ) | | | - | |
Loss before tax benefit | | | (2,595,709 | ) | | | (2,888,431 | ) | | | (292,722 | ) |
Net loss | | | (2,142,082 | ) | | | (2,434,804 | ) | | | (292,722 | ) |
Basic EPS | | | (0.04 | ) | | | (0.04 | ) | | | - | |
Diluted EPS | | | (0.04 | ) | | | (0.04 | ) | | | - | |
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Item | | Quarter Ended September, 30 2015 as Previously Reported | | | Quarter Ended September 30, 2015 as Corrected | | | Difference Increase (Decrease) | |
Revenues | | | 3,115,726 | | | | 3,115,726 | | | | - | |
Cost of revenues | | | 1,857,173 | | | | 1,857,173 | | | | - | |
Gross margin | | | 1,258,553 | | | | 1,258,553 | | | | - | |
Operating expenses | | | 3,194,060 | | | | 3,298,985 | | | | 104,925 | |
Loss from operations | | | (1,935,507 | ) | | | (2,040,432 | ) | | | (104,925 | ) |
Other expense | | | (4,479,676 | ) | | | (4,479,676 | ) | | | - | |
Loss before tax benefit | | | (6,415,183 | ) | | | (6,520,108 | ) | | | (104,925 | ) |
Net loss | | | (6,408,718 | ) | | | (6,513,643 | ) | | | (104,925 | ) |
Basic EPS | | | (0.22 | ) | | | (0.22 | ) | | | - | |
Diluted EPS | | | (0.22 | ) | | | (0.22 | ) | | | - | |
Item | | Year-to-date September 30, 2015 as Previously Reported | | | Year-to-date September 30, 2015 as Corrected | | | Difference Increase (Decrease) | |
Revenues | | | 9,611,654 | | | | 9,611,654 | | | | - | |
Cost of revenues | | | 5,802,680 | | | | 5,802,680 | | | | - | |
Gross margin | | | 3,808,974 | | | | 3,808,974 | | | | - | |
Operating expenses | | | 8,159,162 | | | | 8,556,809 | | | | 397,647 | |
Loss from operations | | | (4,350,188 | ) | | | (4,747,835 | ) | | | (397,647 | ) |
Other expense | | | (4,660,704 | ) | | | (4,660,704 | ) | | | - | |
Loss before tax benefit | | | (9,010,892 | ) | | | (9,408,539 | ) | | | (397,647 | ) |
Net loss | | | (8,550,800 | ) | | | (8,948,447 | ) | | | (397,647 | ) |
Basic EPS | | | (0.25 | ) | | | (0.25 | ) | | | - | |
Diluted EPS | | | (0.25 | ) | | | (0.25 | ) | | | - | |
Note 15 23– Subsequent Events
Acquisitions
StorycodeOn January 1, 2016, the Company entered into a written employment agreement with Mark Szynkowski, the Company’s Chief Financial Officer. Mr. Szynkowski previously was an at-will employee without an employment agreement. Refer to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 19, 2016 or further details regarding this employment agreement.
On March 4, 2015 6D Global Technologies, Inc., acquired all of the issued and outstanding membership interest of Topaz Interactive, LLC, an Oregon limited liability company doing business as “Storycode” pursuant to a Securities Purchase Agreement of that date.
Storycode is headquartered in Portland, Oregon and provides mobile development and creative design services for medium and large businesses. Storycode creates mobile applications that feature award-winning UX (user experience) and UI (user interface) design working exclusively with the Adobe DPS platform. Storycode was founded by Katherine Topaz and Jason Porath, accomplished entrepreneurs and technology industry executives who have over 45 years of combined experience in creative and digital marketing. Storycode employees will joinJanuary 14, 2016, the Company as partand NYGG (Asia) Ltd., and on behalf of its expanding team of technology experts.
In consideration foraffiliates (the “Stockholders”), entered into a stockholders’ agreement (the “Stockholders’ Agreement”) in regards to the Interests, the Registrant paid the members of Storycode: cash in the amount of Three Hundred Thousand Dollars ($300,000); an additional Three Hundred Thousand Dollars ($300,000) paid in escrow to be earned by the members upon the one year anniversary of their employment; an aggregate of Three Hundred Thousand (300,000) shares of the Company’s common stock, par value $0.00001 per share (the “Common Stock”); and additional, potential earn out35,629,883 shares of Common Stock based on Storycode’s financial performance forowned by the three years followingStockholders (the “Shares”). Pursuant to the closingStockholders’ Agreement, the Stockholders granted to Tejune Kang, Chairman and CEO of the acquisition. The Company, also agreedand any successor to employment agreements with Ms. Topaz and Mr. Porath.
SwellPath
On March 20, 2015 6D Global Technologies, Inc., entered into and consummated a Securities Purchase Agreement to acquire allor designee of the issued and outstanding sharesCEO, as Stockholders’ proxy with the full power to vote the Shares at any annual or special meeting of SwellPath, Inc., (“SwellPath”) an Oregon corporation.
SwellPath is headquarteredstockholders, or in Portland, Oregon and has an additional office in Minneapolis, Minnesota. SwellPath is a professional services firm that delivers analytics consulting, search engine optimization and digital advertising services to medium and large scale enterprises across North America. SwellPath enables clients to align and maximize their digital marketing initiativesconnection with any action taken by tracking both on and offline marketing campaigns and performing more effective targeting to enhance return on investment. SwellPath complements the Company’s overall acquisition strategy to provide a full-service digital marketing solutions offering to its clients, particularly in areas where the Company’s clients have expressed needs, while leveraging the Company’s partnership with Adobe Systems Incorporated to expand its Adobe Analytics offering.
The purchase price for the SwellPath Shares was comprised of: (i) cashwritten consent, in the amount of Three Hundred Thousand Dollars ($300,000); (ii) Three Hundred Thousand (300,000) shares ofsame manner and in the Company’s common stock, par value $0.00001 per share (the “Common Stock”); and (iii) up to an additional Three Hundred Thousand (300,000)same proportion as shares of Common Stock that are not held by the Stockholders are voted or consents are given. Refer to the Company’s Form 8-K filed with the Securities and Six Hundred Fifty Thousand Dollars ($650,000), based uponExchange Commission on January 20, 2016 for further details regarding the achievement by SwellPath of certain performance milestones within the first and second anniversaries of the closing of the transaction. In addition,Stockholders’ Agreement.
During 2015, the Company acquired allhad entered into a Loan and Security Agreement through California Bank of Commerce for a term of one year which automatically renews yearly. The agreement includes an Interest Rate of 3.75% plus the goodwill associatedprime rate with SwellPath from its founder, Adam Ware, for casha minimum of 7.00% in addition to specific performance covenants which provides California Bank of Commerce with recourse in the amount Three Hundred Thousand Dollars ($300,000). Also, the Company agreed to an employment agreement with Mr. Ware to serve as Vice-President, containing customary terms, conditions and covenants for such an agreement.”
Incentive Plan
On January 22, 2015, the Board approved the Company’s 2015 Omnibus Incentive Plan (the “Plan”) pursuant to whichevent that the Company is authorizeddeemed to issue up to 4,800,000 sharesbe out of Common Stock to qualified participants. On January 27,2015, NYGG (Asia), Ltd., Kang Kapital LLC, Kang Family LLC, and TKO, LLC, who collectively own 58,400,444 shares of Common Stock (representing 75.28 percent of the voting power of the Company on such date) executed a written consent adopting the Plan (the “Written Consent”). The Company filed and commenced mailing of an Information Statement on Schedule 14C on February 5, 2015, disclosing the adoption of the Plan by the Board and by the stockholders pursuant to the Written Consent. In accordance with Rule 14c-2 of the Exchange Act, the Plan became effective on February 25, 2015.covenant.
6D GLOBAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company had entered into a First Amendment to Loan and Security Agreement effective March 1st, 2016. The amendment provides succession of specific sections of the original loan agreement as follows;
· | Percentage of Net Collateral available was changed from 85% to 80%. All other terms and provisions herein are unchanged. |
· | Depending on the interest rate determined with respect to this First Amendment, and from and after the March 1, 2016 reference date, the “Interest Rate” shall be either the “Standard Rate” Rate of 4.75% plus the prime rate with a minimum of 8.00% or the “Preferred Rate��� Rate of 3.75% plus the prime rate with a minimum of 7.00%. To the extent the Interest Rate is calculated with reference to the Base Rate, any change in the Interest Rate shall be effective as of the date of any change in the Base Rate. Subject to the Company satisfying the certain conditions such as the Company satisfies or exceeds each and every one of the financial ratio and covenant thresholds, suspension of trading of Guarantor’s securities as a publicly traded company is lifted and Guarantor is then actively listed as a publicly traded company, and current or new litigation is dismissed, or is settled or resolved on terms and conditions acceptable to Lender, the interest rate for any current accounting period shall be the Preferred Rate. |
If the Preferred Rate Conditions set forth in the agreement are not satisfied, then the Interest Rate for any Current Accounting Period shall be the Standard Rate; provided however, imposition of interest at the Standard Rate shall be subject to the provisions of this First Amendment and the Loan Agreement related to the imposition of the Alternative Interest Rate, Special Credit Accommodation Fees, the Default Interest Rate, and/or other fees and charges imposed under the Loan Agreement.
The Company was informed by the California Bank of Commerce on May 1st, 2016 that we are out of covenant in the following section:
The company was informed on May 1st, 2016 that the California Bank of Commerce is entitled to and will assess interest at the Alternative Interest Rate of a 6% increase to the Interest Rate in the Loan Agreement of 3.75% plus the prime rate as provided for in the covenants. F-43