On March 7, 2017, we completed the sale and issuance of 8% Convertible Unsecured Promissory Notes (the “2017 Notes”) for aggregate proceeds to us of $1.25 million from four accredited investors, including one of the Company’s then-directors, Dhruwa N. Rai, and David Luci, who became a director of the Company in February 2018. The 2017 Notes were issued pursuant to Securities Purchase Agreements between the Company and each investor. The 2017 Notes bear interest at 8% per annum until maturity in March 2020, with interest being paid annually on the first, second and third anniversaries of the issuance of the 2017 Notes beginning in March 2018. From and after an event of default and for so long as the event of default is continuing, the 2017 Notes will bear default interest at the rate of 10% per annum. The 2017 Notes can be prepaid by us at any time without penalty. As of May 5,September 30, 2018, we were not current in the payment ofall interest payments due on one of the 2017 Notes and werehave been paid in discussion with the holder of the 2017 Note for which we are not current in the payment of interest to negotiate longer payment terms until we are able to raise more capital.full.
The 2017 Notes are convertible into shares of our common stock at a conversion price equal to $2.80. The holders of the 2017 Notes have the right, at their option, at any time and from time to time to convert, in part or in whole, the outstanding principal amount and all accrued and unpaid interest under the 2017 Notes into shares of the Company’s common stock at the conversion price.
The 2017 Notes rank junior to our secured credit facility with Sterling National Bank. The 2017 Notes also include certain negative covenants including, without the investors’ approval, restrictions on dividends and other restricted payments and reclassification of its stock.
The group’s financial instruments consist primarily of cash and cash equivalent, accounts receivable, accounts payable, contingent consideration liabilityliabilities and accrued liabilities. The carrying amounts of accounts receivable, accounts payable, cash and cash equivalents and accrued liabilities are considered to be the same as their fair value, due to their short-term nature.
Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The current accounting guidance for fair value measurements defines a three-level valuation hierarchy for disclosures as follows:
A financial asset or liability’s classification within the hierarchy is determined based upon the lowest level input that is significant to the fair value measurement.
The following table sets forth the financial assets, measured at fair value, by level within the fair value hierarchy as of September 30, 20172018 and December 31, 2016:2017:
The following table presents the change in level 3 instruments:instruments (Contingent consideration):
| | Three Months | | Nine Months Ended September 30, 2018 | | | | | | Opening balance | | $ | 3,374,660 | | Paid/settlements(net) | | | (2,694,437 | ) | Closing balance | | $ | 680,223 | |
Ended
March 31, 2018
| |
| | |
Opening balance | | | 3,374,660 | |
Paid/settlements | | | (1,881,338 | ) |
Closing balance | | | 1,493,322 | |
The following table presents the change in level 3 instruments (Warrant liability):
| | Nine Months Ended September 30, 2018 | |
| | | |
Opening balance | | $ | | |
Warrant Liability created during the period | | | |
|
Closing balance | | $ | 1,689,899 | |
Contingent consideration pertaining to the acquisitions referred to in note 3 above as of March 31,September 30, 2018 has been classified under level 3 as the fair valuationvalue of such contingent consideration has been donedetermined using one or more of the significant inputs which are not based on observable market data.
The fair value of the contingent consideration was estimated using a discounted cash flow technique with significant inputs that are not observable in the market. The significant inputs not supported by market activity included our probability assessments of expected future cash flows related to the acquisitions during the earn-out period, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the respective terms of the share purchase agreements.
The fair value of the Warrants referred to in note 16 were determined utilizing a Black-Scholes option pricing model with the following assumptions: expected term of 5 years; expected volatility of 111.8%; risk free interest rate of 2.37% and an expected dividend yield of zero.
NOTE 13. | NON-CONTROLLING INTEREST: |
The subsidiaries of the Company are all direct or indirect wholly-owned subsidiaries and there are no non-controlling interest is held by the Companyinterests as of March 31,September 30, 2018.
In prior periods when the Company held non-controlling interests in one of its subsidiaries the,the Company attributed relevant gains and losses to such non-controlling interests in each financial year. During the threenine months ended March 31,September 30, 2018 and 2017 the profit attributable to the holders of non-controlling interests amounted to $0 and $3,516, respectively, as the Company no longer held any non-controlling interests following its 2017 fiscal year.$18,504, respectively.
NOTE 14. | RESTRUCTURING AND STREAMLINING COSTS: |
During the quarternine ended March 31,September 30, 2018, the Company streamlined its operations by eliminating redundant positions across its acquired entities, which resulted in a restructuring charge of approximately $127,100.
NOTE 15. | AMENDMENT OF PREFERRED STOCK TERMS AND WARRANT ISSUANCE: |
On June 22, 2018, we entered into an Amendment Agreement with Lone Star Value Investors, LP (“LSV”), pursuant to which we and LSV agreed to the amendment and restatement of the certificate of designations (the “Amendment”) for our Series A Preferred Stock (the “Series A Preferred”) and the issuance of warrants (the “Amendment Warrants”) for the purchase of 5,000,000 shares of our common stock to holders of the Series A Preferred (the “Warrant Issuance”), provided that the Amendment and the Warrant Issuance were subject to approval by our stockholders at our 2018 annual meeting of stockholders (the “2018 Annual Meeting”).
As the Amendment and the Warrant Issuance were approved by our stockholders at the 2018 Annual Meeting, the Amendment, was filed with the Delaware Secretary of State following stockholder approval, providing for, among other things:
| (a) | the payment of the March 31, 2018 dividend payment in-kind in shares of Series A Preferred; |
| (b) | elimination of any prior default in respect of non-payment of accrued dividends through the filing effective date of the Amendment (the “Effective Date”); |
| (c) | payment in-kind in shares of Series A Preferred of dividends for all dividend periods from April 1, 2018 through March 31, 2020 at a rate of 2% per annum of the liquidation preference (the “Adjusted Rate”); and |
| (d) | commencing April 1, 2020, we will pay cash dividends per share at a rate per annum equal to the Adjusted Rate multiplied by the liquidation preference; provided, however, dividends for periods ending after April 1, 2020 may be paid at the election of our Board of Directors in-kind through the issuance of additional shares of Series A Preferred for up to four dividend periods in any consecutive 36-month period, determined on a rolling basis. |
In addition, the Amendment revised the change of control definition to mean a change in control of at least 70% of the voting power of all shares of stock of the Company and clarified that a change of control shall not be deemed to be a dissolution, liquidation or winding up of the Company. The Amendment also eliminated voting rights with respect to the authorization, creation or issuance of any securities ranking senior or equal to the Series A Preferred.
Following our 2018 Annual Meeting, promptly following the effectiveness of the Amendment, the Company issued an aggregate of 15,325 shares of our Series A Preferred to holders of our Series A Preferred, on a pro rata basis, as payment of accrued in-kind dividends owed on such preferred stock and completed the Warrant Issuance to holders of the Series A Preferred at such time.
The Amendment Warrants are only exercisable for cash, with an exercise price of $1.50 per share, for five years from the date of issuance. In the event that the closing price of our common stock is $2.00 or higher for ten trading days out of a fifteen consecutive trading day period, the Company shall have the option, in its sole discretion, to elect to accelerate the termination date of the Amendment Warrants to such date that is 30 days (or more, in the Company’s sole discretion) following the date of such election. Following such accelerated termination date, any unexercised Amendment Warrants shall automatically be canceled without any further obligations on the part of the Company or the holders of such Amendment Warrants. The Amendment Warrants were valued utilizing a Black-Scholes option pricing model with the following assumptions: expected term of 5 years; expected volatility of 111.8%; risk free interest rate of 2.37% and an expected dividend yield of zero. The calculated aggregate fair value of $1,712,000 was reflected within stockholders’ equity as a dividend paid to the Series A Preferred stockholders and also reflected as an adjustment to income available to common stockholders for calculation of net income (loss) per common share for both the three and nine month periods ended September 30, 2018.
NOTE 16. | PRIVATE PLACEMENT TRANSACTION: |
On July 25, 2018, we entered into a securities purchase agreement (the “Initial Securities Purchase Agreement”) with certain institutional and accredited investors (“Initial Purchasers”) for the sale of 5,000,000 shares of our common stock (“Initial Shares”) and warrants to purchase a total of 4,000,001 shares (“Initial Warrant Shares”) of our common stock (“Initial Purchaser Warrants”) for total consideration of approximately $6,000,000 (“Initial Investment”). On July 30, 2018, we issued an aggregate of 3,250,000 of the Initial Shares to the Initial Purchasers, with the remaining Initial Shares to be issued pursuant to pre-funded Warrants, subject to adjustment. The $6,000,000 purchase price paid by the Initial Purchasers on July 30, 2018 represents the entire purchase price for the Initial Shares and the Initial Purchaser Warrants (excluding the exercise price to be paid upon the exercise of Initial Purchaser Warrants), including upon the issuance of additional Shares (through the adjustment of a pre-funded warrant) and for additional Warrant Shares issuable upon the occurrence of certain events described below.
On August 21, 2018, we entered into a second securities purchase agreement (the “Second Securities Purchase Agreement”, and together with the Initial Securities Purchase Agreement, the “Purchase Agreements”) with an accredited investor (the “Additional Purchaser”, and with the Initial Purchaser, the “Purchasers”) for the sale of 500,417 shares of our common stock, via a pre-funded warrant due to share issuance limitations (the “Additional Shares”, and with the Initial Shares, the “Common Stock”), and warrants to purchase 400,333 shares (the “Additional Warrant Shares”, and with the Initial Warrant Shares, the “Warrant Shares”) of our common stock (the “Additional Purchaser Warrants”, and with the Initial Purchaser Warrants, the “Purchaser Warrants”) for gross proceeds of approximately $600,000 (the “Additional Investment”). The Additional Investment was made in connection with, and substantially on the same terms and using the same forms as, the private placement of the Initial Shares and Initial Purchaser Warrants (such private placement and the Additional Investment, the “Private Placement”). The $600,000 purchase price paid by the Additional Purchaser on August 21, 2018 represents the entire purchase price for the Additional Shares and the Additional Purchaser Warrants (excluding the exercise price to be paid upon the exercise of Additional Purchaser Warrants), including upon the issuance of additional Shares (through the adjustment of a pre-funded warrant, all pre-funded warrants with the Purchaser Warrants, the “Warrants”) and for additional Warrant Shares issuable upon the occurrence of certain events described below.
The initial price per share of Common Stock equaled $1.20 and the initial per share exercise price of the Purchaser Warrants equaled $1.60. The per share purchase price and the exercise price were subject to adjustment as described below. The Initial Purchaser Warrants are immediately exercisable, subject to ownership limitations described below, and expire five years after the date of issuance. The Initial Purchaser Warrants are exercisable on a cashless basis six months after the issuance date if there is no effective registration statement registering the resale of the shares underlying the Initial Purchaser Warrants. The Additional Purchaser was not issued any shares at the closing of the Additional Investment, due to Nasdaq stock issuance limitations at the time of closing, but the Additional Shares will be issued upon the exercise of a pre-funded warrant for no additional consideration to the Company. The Additional Purchaser Warrants and the Additional Purchaser’s pre-funded warrant are currently exercisable, subject to ownership limitations described below, and expire five years after the date of issuance. The Warrants contain provisions for the adjustment of the number of shares issuable upon the exercise of the warrant and of the exercise price in the event of stock dividends, splits, mergers, asset sales, tender or exchange offers, reclassifications, reorganizations or recapitalizations, combinations, or the like.
The per share purchase price (through the pre-funded Warrants) and Warrant exercise price was automatically adjusted lower (the “Price Adjustment”) to 80% (with respect to the purchase price of the Common Stock) and 110% (with respect to the exercise price of the Warrants) of the lowest of the average daily prices on the 6 trading days following each of: (i) the date our stockholders approved the Private Placement transaction (such approval was obtained on September 27, 2018) and (ii) the date a registration statement covering the resale of securities being issued in the Private Placement was declared effective by the Securities and Exchange Commission (the “SEC”) (such registration statement on Form S-1, file no. 333-227011, was declared effective on October 23, 2018 (the “Effective Registration”)). Due to the Price Adjustment, the lowest purchase price of $0.29 for the Common Stock issued at closing under the Purchase Agreements and pursuant to the pre-funded Warrants was achieved, and all 22,758,621 shares registered under the Effective Registration as issued or issuable under the Purchase Agreements and pursuant to the pre-funded Warrants were issued to the selling stockholders. In addition, the exercise price of the Purchaser Warrants was subject to the Price Adjustment, which has resulted in 22,544,139 shares of common stock being issuable under the Purchaser Warrants when exercised. The Purchaser Warrants have been fully adjusted and neither the exercise price or the number of shares issuable under such warrants are subject to further adjustment, except pursuant to typical anti-dilution provisions.
In accordance with the exercise provisions of the Purchaser Warrants, the 22,544,139 shares issuable under the Purchaser Warrants following the full Price Adjustment was determined by holding constant the aggregate exercise price of $7,040,534.40 for the Purchaser Warrants at the time of closing of the Private Placement (which was calculated based on 4,400,334 total Purchaser Warrants at the closing date multiplied by the exercise price of $1.60, which equals $7,040,534.40), and then dividing the $7,040,534.40 aggregate exercise price by the post-Price Adjustment exercise price of $0.3123 to get 22,544,139 shares. As 18,206,897 shares of common stock issuable pursuant to the Purchaser Warrants were previously registered under the Effective Registration, 4,337,242 additional shares of common stock are to be registered pursuant to a new registration statement to cover all of the shares issuable under the Purchaser Warrants following the final Price Adjustment.
The Company has allocated the aggregate gross proceeds received to the Purchaser Warrants, the Initial Shares issued and the pre-funded warrants. Due to the reset features present in the Purchaser Warrants along with the existence of down-round protection in the event of future financing transactions at lower prices, the Purchaser Warrants were determined to be derivative financial instruments and therefore, have been recorded as a liability (“Warrant Liability”) in the accompanying consolidated balance sheets. The Purchaser Warrants were initially recorded at fair value with fair value determined utilizing a Black-Scholes option pricing model with the following assumptions: expected term of 5 years; expected volatility of 111.8%; risk free interest rate of 2.37% and an expected dividend yield of zero. The calculated aggregate fair value of $1,429,000 was reflected as Warrant Liability. The remaining proceeds received under the Purchase Agreements were allocated to the Initial Shares and pre-funded warrants and recorded within stockholder’s equity. The fair value of the Purchaser Warrants was reassessed at the end of the reporting period to reflect the Price Adjustment and number of shares issuable upon exercise occurring as a result of the shareholder approval of the Private Placement. The resulting increase in the fair value of the Purchaser Warrants of $261,330 was reflected as “Changes in Fair Value of Warrant Liability” within the accompanying consolidated statements of operations and comprehensive income (loss).
Under the terms of all of the Warrants, a selling stockholder may not exercise Warrants to the extent such exercise would cause such selling stockholder, together with its affiliates and attribution parties, to beneficially own a number of shares of common stock which would exceed 4.99% or 9.99%, as applicable, of our then outstanding common stock following such exercise, excluding for purposes of such determination shares of common stock issuable upon exercise of the Warrants which have not been exercised. In addition, the Warrants have transaction-specific anti-dilution provisions.
A.G.P. / Alliance Global Partners (“AGP”) acted as exclusive placement agent for the issuance and sale of the securities in the Private Placement. We agreed to pay AGP an aggregate fee equal to 7% of the gross proceeds received by us from the sale of the securities in the transaction, plus expenses. We also agreed to grant to AGP or its designees warrants to purchase up to 150,000 shares of our common stock (the “Placement Agent Warrants”). The Placement Agent Warrants are currently exercisable and terminate on July 27, 2022. The Placement Agent Warrants have an exercise price of $1.32 per share. The terms of the Placement Agent Warrants are otherwise substantially similar to the terms of the Private Placement Warrants, except the Placement Agent Warrants have customary anti-dilution provisions and do not have the Price Adjustment mechanism. The Placement Agent Warrants were valued at the date of grant utilizing a Black-Scholes option pricing model with substantially similar assumptions to those used for the Purchaser Warrants. The resulting fair value of $49,000 was recorded within stockholder’s equity as a cost of the Private Placement transaction.
ITEM 2. | MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements (and notes thereto) included in our Annual Report on Form 10-K for the year ended December 31, 2017. This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. See “Special"Special Note Regarding Forward-Looking Statements”Statements" included elsewhere herein.
We use the terms “we,” “our,” “us,” “AMERI”"we," "our," "us," "AMERI" and “the Company”"the Company" in this report to refer to AMERI Holdings, Inc. and its wholly-owned subsidiaries.
Company History
We were incorporated under the laws of the State of Delaware in February 1994 as Spatializer Audio Laboratories, Inc., which was a shell company immediately prior to our completion of a “reverse merger” transaction on May 26, 2015, in which we caused Ameri100 Acquisition, Inc., a Delaware corporation and our newly created, wholly owned subsidiary, to be merged with and into Ameri and Partners Inc (“Ameri and Partners”), a Delaware corporation (the “Merger”). On May 26, 2015, we completed the Merger, in which we caused Ameri100 Acquisition, Inc., a Delaware corporation and our newly created, wholly owned subsidiary, to be merged with and into Ameri and Partners (doing business as Ameri100), a Delaware corporation. As a result of the Merger, Ameri and Partners became our wholly owned operating subsidiary. The Merger was consummated under Delaware law, pursuant to an Agreement of Merger and Plan of Reorganization, dated as of May 26, 2015 (the “Merger Agreement”), and in connection with the Merger we changed our name to AMERI Holdings, Inc. We are headquartered in Princeton, New Jersey.Suwanee, Georgia.
Overview
We specialize in delivering SAP cloud, digital and enterprise services to clients worldwide. Our SAP focus allows us to provide technological solutions to a broad and growing base of clients. Our model inverts the conventional global delivery model wherein offshore IT service providers are based abroad and maintain a minimal presence in the United States. With a strong SAP focus, our client partnerships anchor around SAP cloud and digital services. We pursue an acquisition strategy that seeks to disrupt the established business model of offshore IT service providers.
We partnered with NEC Corporation of America (NEC), in February 2017, to offer SAP HANA Migration services. Through this partnership, the Company will offer solutions to its clients aspiring to make the transition from SAP ECC (on-premise) applications to SAP HANA applications. NEC is a leading technology integrator providing integrated communications, analytics, security, biometrics and technology solutions.
We generate revenue by providing consulting services under written service contracts with our customers. The service contracts we enter into generally fall into two categories: (1) time-and-materials contracts and (2) fixed-price contracts.
When a customer enters into a time-and-materials or fixed-price (or a periodic retainer-based) contract, the revenue is recognized in accordance with the deliverables of each contract. If the deliverables involve separate units of accounting, the consideration from the arrangement is measured and allocated to the separate units, based on vendor specific objective evidence of the value for each deliverable.
The revenue under time and materials contracts is recognized as services are rendered and performed at contractually agreed upon rates. Revenue pursuant to fixed-price contracts is recognized under the proportional performance method of accounting. We routinely evaluate whether revenue and profitability should be recognized in the current period. We estimate the proportional performance on fixed-price contracts on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project.
For the three months ended March 31,September 30, 2018 and March 31,September 30, 2017, sales to five major customers accounted for 39%40% and 41%43% of our total revenue, respectively. One of our customers contributed 13% and 14% of our revenue for the three months ended September 30, 2018.and for the comparable period in 2017.
For the nine months ended September 30, 2018 and September 30, 2017, sales to five major customers accounted for 38% and 39% of our total revenue, respectively. Two of our customers contributed 13% and 11%10% of our revenue for the threenine months ended March 31,September 30, 2018. For the comparable period in 2017, two customersone customer contributed 11% and 10% of our revenue, respectively.revenue.
We continue to explore strategic alternatives to improve the market position and profitability of our product and service offerings in the marketplace, generate additional liquidity for the Company, and enhance our valuation. We expect to pursue our goals during the next twelve months through organic growth and through other strategic alternatives. Some of these alternatives have included, and could continue to include, selective acquisitions. The Company has obtained financing and additional capital from the sale of equity and incurrence of indebtedness in the past, and continues to consider capital raising and financing from the sale of various types of equity and incurrence of indebtedness to provide capital for our business plans and operations in the future.
Matters that May or Are Currently Affecting Our Business
The main challenges and trends that could affect or are affecting our financial results include:
| · | Our ability to raise additional capital, if and when needed; |
| · | Our ability to enter into additional technology-management and consulting agreements, to diversify our client base and to expand the geographic areas we serve; |
| · | Our ability to attract competent, skilled professionals and on-demand technology partners for our operations at acceptable prices to manage our overhead; |
| · | Our ability to acquire other technology services companies and integrate them with our existing business; and |
| · | Our ability to control our costs of operation as we expand our organization and capabilities. |
RESULTS OF OPERATIONS
Results of Operations for the Three Months Ended March 31,September 30, 2018 Compared to the Three Months Ended March 31,September 30, 2017 and for the Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
| | Three Months Ended March 31, 2018 | | | Three Months Ended March 31, 2017 | | | Three Months Ended September 30, 2018 | | | Three Months Ended September 30, 2017 | | | Nine Months Ended September 30, 2018 | | | Nine Months Ended September 30, 2017 | |
| | | | | | | | | | | | | | | | | | |
Revenue | | $ | 11,063,010 | | | $ | 12,340,927 | | | $ | 10,576,254 | | | $ | 12,529,928 | | | $ | 32,715,104 | | | $ | 37,139,114 | |
Cost of revenue | | | 8,720,125 | | | | 9,039,577 | | | | 8,230,456 | | | | 9,966,490 | | | | 25,637,422 | | | | 28,941,535 | |
Gross profit | | | 2,342,885 | | | | 3,301,350 | | | | 2,345,798 | | | | 2,563,438 | | | | 7,077,682 | | | | 8,197,579 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general and administration | | | 2,878,942 | | | | 3,033,455 | | |
Selling general and administration | | | | 2,655,902 | | | | 5,685,905 | | | | 8,059,432 | | | | 13,559,632 | |
Acquisition related expenses | | | 10,000 | | | | 209,344 | | | | 227,952 | | | | 5,694 | | | | 237,952 | | | | 390,174 | |
Depreciation and amortization | | | 820,736 | | | | 689,100 | | | | 636,495 | | | | 817,284 | | | | 2,266,513 | | | | 2,332,041 | |
Changes in estimate for consideration payable | | | | (7,274,929 | ) | | | - | | | | (7,140,310 | ) | | | (400,000 | ) |
Operating expenses | | | 3,709,678 | | | | 3,931,899 | | | | (3,754,580 | ) | | | 6,508,883 | | | | 3,423,587 | | | | 15,881,847 | |
Operating (loss) | | | (1,366,793 | ) | | | (630,549 | ) | |
Operating income (loss) | | | | 6,100,378 | | | | (3,945,445 | ) | | | 3,654,095 | | | | (7,684,268 | ) |
Interest expenses | | | (211,159 | ) | | | (90,806 | ) | | | | ) | | | (132,973 | ) | | | (584,074 | ) | | | (388,122 | ) |
Changes in fair value of warrant liability | | | | (261,330 | ) | | | - | | | | (261,330 | ) | | | - | |
Others, net | | | 6,199 | | | | (4,149 | ) | | | 75,747 | | | | 17,446 | | | | 83,736 | | | | 21,921 | |
Total other income (expenses) | | | (204,960 | ) | | | (94,955 | ) | |
(Loss) before income taxes | | | (1,571,753 | ) | | | (725,504 | ) | |
Income (loss) before income taxes | | | | 5,724,401 | | | | (4,060,972 | ) | | | 2,892,427 | | | | (8,050,469 | ) |
Tax benefit / (provision) | | | - | | | | - | | | | (24,934 | ) | | | - | | | | (24,934 | ) | | | - | |
(Loss) after income taxes | | | (1,571,753 | ) | | | (725,504 | ) | |
| | | | 5,699,467 | | | | (4,060,972 | ) | | | 2,867,493 | | | | (8,050,469 | ) |
Net income attributable to non-controlling interest | | | - | | | | 3,516 | | | | - | | | | (6,632 | ) | | | - | | | | (18,504 | ) |
Net (loss) attributable to the Company | | | (1,571,753 | ) | | | (721,988 | ) | |
Net income (loss) attributable to the Company | | | | 5,699,467 | | | | (4,067,604 | ) | | | 2,867,493 | | | | (8,068,973 | ) |
Dividend on preferred stock | | | (557,417 | ) | | | (499,965 | ) | | | (1,816,452 | ) | | | (541,864 | ) | | | (2,478,005 | ) | | | (1,546,655 | ) |
Net (loss) attributable to common stock holders | | | (2,129,170 | ) | | | (1,221,953 | ) | |
Net (loss) attributable to common stockholders | | | | 3,883,015 | | | | (4,609,468 | ) | | | 389,488 | | | | (9,615,628 | ) |
Other comprehensive income (loss), net of tax | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange translation | | | 29,791 | | | | 5,335 | | | | 1,719 | | | | (14,234 | ) | | | (800 | ) | | | (11,084 | ) |
Comprehensive (loss) | | $ | (2,099,379 | ) | | $ | (1,216,618 | ) | |
Comprehensive income/(loss) attributable to the Company | | | (2,099,379 | ) | | | (1,220,134 | ) | |
Comprehensive income (loss) | | | $ | 3,884,734 | | | $ | (4,623,702 | ) | | $ | 388,688 | | | $ | (9,626,712 | ) |
Comprehensive income (loss) attributable to the Company | | | | 3,884,734 | | | | (4,617,070 | ) | | | 388,688 | | | | (9,608,208 | ) |
Comprehensive income/(loss) attributable to the non-controlling interest | | | - | | | | 3,516 | | | | - | | | | (6,632 | ) | | | - | | | | (18,504 | ) |
| | | (2,099,379 | ) | | | (1,216,618 | ) | | | 3,884,734 | | | $ | (4,623,702 | ) | | $ | 388,688 | | | $ | (9,626,712 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Basic income (loss) per share | | $ | (0.11 | ) | | $ | (0.09 | ) | | $ | 0.18 | | | $ | (0.31 | ) | | $ | 0.02 | | | $ | (0.66 | ) |
Diluted income (loss) per share | | $ | (0.11 | ) | | $ | (0.09 | ) | | $ | 0.16 | | | $ | (0.31 | ) | | $ | 0.02 | | | $ | (0.66 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Basic weighted average number of common shares outstanding | | | 18,654,197 | | | | 14,094,536 | | | | 21,657,181 | | | | 14,715,947 | | | | 19,683,610 | | | | 14,472,322 | |
Diluted weighted average number of common shares outstanding | | | 18,654,197 | | | | 14,094,536 | | | | 24,184,264 | | | | 14,715,947 | | | | 20,630,142 | | | | 14,472,322 | |
Revenues
Revenues for the three months ended March 31,September 30, 2018 decreased by $1.28$1.95 million, or 10%16%, as compared to the three months ended March 31,September 30, 2017, mainly due to a large project in the first quarter of 2017 for which there was no comparable large project inbecause we did not pursue certain low margin professional services business during the three months ended March 31,September 30, 2018.
For the three months ended March 31,September 30, 2018 and March 31,September 30, 2017, sales to five major customers accounted for approximately 39%40% and 41%43% of our total revenue, respectively. For the three months ended March 31,September 30, 2018, twoone of our customers contributed 13% and 11% of our revenue, and for the three months ended March 31,September 30, 2017, twoone of our customerscustomer contributed 11% and 10%14% of our revenue. We derived most of our revenues from our customers located in North America for the three months ended March 31,September 30, 2018 and March 31,September 30, 2017.
Revenues for the nine months ended September 30, 2018 decreased by $4.42 million, or 12%, as compared to the nine months ended September 30, 2017, mainly due to a large project in the nine months of 2017 for which there was no comparable large project in the first nine months ended September 30, 2018 and because we did not pursue certain low margin professional services business in 2018.
For the nine months ended September 30, 2018 and September 30, 2017, sales to five major customers accounted for 38% and 39% of our total revenue, respectively. Two of our customers contributed 13% and 10% of our revenue for the nine months ended September 30, 2018. For the comparable period in 2017, one of our customers contributed 11% of our revenue. We derived most of our revenues from our customers located in North America for the nine months ended September 30, 2018 and September 30, 2017.
Gross Margin
Our gross margin was 21%22% for the three months ended March 31,September 30, 2018, as compared to 27%20% for the three months ended March 31,September 30, 2017. The reductionincrease in gross margin was due to ending of a large projectan increase in 2017project-based revenue which carried acarries higher margin.margin in the three months ended September 30, 2018 as compared to three months ended September 30, 2017.
Our gross margin was 22% for the nine months ended September 30, 2018 and for the nine months ended September 30, 2017.
Our target gross margins in future periods are anticipated to be in the range of 20% to 25% based on a mix of project revenues and professional service revenues. However, there is no assurance that we will achieve such anticipated gross margins.
Selling, General and Administration Expenses
Selling, general and administration (“SG&A”) expenses include all costs, including rent costs, which are not directly associated with revenue-generating activities, as well as the non-cash expense for stock-based compensation. These include employee costs, corporate costs and facilities costs. Employee costs include administrative salaries and related employee benefits, travel, recruiting and training costs. Corporate costs include reorganization costs, legal, accounting and outside consulting fees. Facilities costs primarily include rent and communications costs.
SG&A expenses for the three months ended March 31,September 30, 2018 were $2.9$2.6 million, as compared to $3.0$5.7 million for the three months ended March 31,September 30, 2017. SG&A expenses, excluding stock-based compensation expenses restructuring expenses and the full quarter effect of Ameri California which was only partially included in the first quarter of 2017, decreased by approximately $400,000$650,000 in the three months ended March 31,September 30, 2018 as the Company continues to restructure and streamline its acquired entities.
SG&A expenses for the nine months ended September 30, 2018 were $8.1 million, as compared to $13.6 million for the nine months ended September 30, 2017. SG&A expenses, excluding stock-based compensation expenses decreased by approximately $1.2 million in the nine months ended September 30, 2018 as the Company continues to restructure and streamline its acquired entities.
Depreciation and Amortization
Depreciation and amortization expense amounted to $0.6 million for the three months ended September 30, 2018, as compared to $0.8 million for the three months ended March 31, 2018, as comparedSeptember 30, 2017. Depreciation and amortization expense amounted to $0.7$2.3 million for the threenine months ended March 31,September 30, 2018 and September 30, 2017. We capitalized the customer lists acquired during various acquisitions, resulting in increased amortization costs. The customer lists from each acquisition are amortized over a period of 60 months.
Operating LossIncome (Loss)
Our operating lossincome was $1.4$6.1 million for the three months ended March 31,September 30, 2018, as compared to $0.6$(3.9) million for the three months ended March 31,September 30, 2017. Our operating income for the three months ended September 30, 2018 was primarily driven by lower stock-based compensation expenses, changes in our estimates relating to acquisition considerations and continued reduction in our operating expenses.
Our operating income was $3.7 million for the nine months ended September 30, 2018, as compared to $(7.7) million for the nine months ended September 30, 2017. Our operating income for the nine months ended September 30, 2018was primarily driven by lower stock-based compensation expenses, changes in our estimates relating to acquisition considerations and continued reduction in our operating expenses.
Interest Expense
Our interest expense for the three months ended March 31,September 30, 2018 was $0.2$0.19 million as compared to $0.1$0.13 million for the three months ended March 31,September 30, 2017.
Our interest expense for the nine months ended September 30, 2018 was $0.6 million as compared to $0.4 million for the nine months ended September 30, 2017. The increase was mainly due to additionalthe full year effect of interest expenses incurred on the 2017 Notes and promissory notes issued to the former stockholders of Ameri California in March 2017.
Income Taxes
We recorded noa provision for income tax benefit or provisiontaxes of $0.02million and $0 million for the three months ended March 31September 30, 2018 or March 31 2017.and for the three months ended September 30, 2017, respectively.
We recorded a provision for income taxes of $0.02 million and $0 million for the nine months ended September 30, 2018 and for the nine months ended September 30, 2017, respectively.
Acquisition Related Expenses
We had acquisition related expenditures of $0.01$0.23 million and $0.2$0.01 million during the three months ended March 31,September 30, 2018 and for March 31,September 30, 2017, respectively, and $0.24 million and $0.39 million during the nine months ended September 30, 2018 and for September 30, 2017, respectively. These expenses included legal, professional services, valuation and due diligence services and other acquisition related fees incurred in connection with our acquisitions. The decrease was due to the decline in acquisition related activities in the three months ended March 31, 2018 as compared to the year ended March 31, 2017.
Liquidity and Capital Resources
Our cash position was $1.8approximately $2 million as of March 31,September 30, 2018, as compared to $4.9 million as of December 31, 2017, a decrease of $3.1approximately $2.9 million primarily due to the use of funds towards working capital and earn-out payments.
Cash used for operating activities was $0.5$1.6 million during the threenine months ended March 31,September 30, 2018 and was primarily a result of net changes in working capital requirements. Cash used in investing activities was $1.0$3.7 million during the threenine months ended March 31,September 30, 2018. Cash used forprovided by financing activities was $1.6$2.4 million during the threenine months ended March 31,September 30, 2018.
The Company has been unable to make payments in respect of certain outstanding notes, certain earn-out payments that are due and a dividend on its Series A Preferred stock because of a lack of available cash. The Company is working to raise capital from which it would be able to pay the amounts owed; however, there can be no assurance that the Company will be able to raise any capital or pay the amounts owed.
Public OfferingPrivate Placement
On November 21, 2017,July 25, 2018, we completed an underwritten public offeringentered into a securities purchase agreement (the “Initial Securities Purchase Agreement”) with certain institutional and accredited investors (“Initial Purchasers”) for the sale of 1,475,0005,000,000 shares of our common stock at(“Initial Shares”) and warrants to purchase a total of 4,000,001 shares (“Initial Warrant Shares”) of our common stock (“Initial Purchaser Warrants”) for total consideration of approximately $6,000,000 (“Initial Investment”). On July 30, 2018, we issued an aggregate of 3,250,000 of the Initial Shares to the Initial Purchasers, with the remaining Initial Shares to be issued pursuant to pre-funded Warrants, subject to adjustment. The $6,000,000 purchase price paid by the Initial Purchasers on July 30, 2018 represents the entire purchase price for the Initial Shares and the Initial Purchaser Warrants (excluding the exercise price to be paid upon the exercise of Initial Purchaser Warrants), including upon the issuance of additional Shares (through the adjustment of a pre-funded warrant) and for additional Warrant Shares issuable upon the occurrence of certain events described below.
On August 21, 2018, we entered into a second securities purchase agreement (the “Second Securities Purchase Agreement”, and together with the Initial Securities Purchase Agreement, the “Purchase Agreements”) with an accredited investor (the “Additional Purchaser”, and with the Initial Purchaser, the “Purchasers”) for the sale of 500,417 shares of our common stock, via a pre-funded warrant due to share issuance limitations (the “Additional Shares”, and with the Initial Shares, the “Common Stock”), and warrants to purchase 400,333 shares (the “Additional Warrant Shares”, and with the Initial Warrant Shares, the “Warrant Shares”) of our common stock (the “Additional Purchaser Warrants”, and with the Initial Purchaser Warrants, the “Purchaser Warrants”) for gross proceeds of approximately $600,000 (the “Additional Investment”). The Additional Investment was made in connection with, and substantially on the same terms and using the same forms as, the private placement of the Initial Shares and Initial Purchaser Warrants (such private placement and the Additional Investment, the “Private Placement”). The $600,000 purchase price paid by the Additional Purchaser on August 21, 2018 represents the entire purchase price for the Additional Shares and the Additional Purchaser Warrants (excluding the exercise price to be paid upon the exercise of Additional Purchaser Warrants), including upon the issuance of additional Shares (through the adjustment of a pre-funded warrant, all pre-funded warrants with the Purchaser Warrants, the “Warrants”) and for additional Warrant Shares issuable upon the occurrence of certain events described below.
The initial price per share of Common Stock equaled $1.20 and the initial per share exercise price of $4.115the Purchaser Warrants equaled $1.60. The per share purchase price and the exercise price were subject to adjustment as described below. The Initial Purchaser Warrants are immediately exercisable, subject to ownership limitations described below, and expire five years after the date of issuance. The Initial Purchaser Warrants are exercisable on a cashless basis six months after the issuance date if there is no effective registration statement registering the resale of the shares underlying the Initial Purchaser Warrants. The Additional Purchaser was not issued any shares at the closing of the Additional Investment, due to Nasdaq stock issuance limitations at the time of closing, but the Additional Shares will be issued upon the exercise of a pre-funded warrant for no additional consideration to the Company. The Additional Purchaser Warrants and the Additional Purchaser’s pre-funded warrant are currently exercisable, subject to ownership limitations described below, and expire five years after the date of issuance. The Warrants contain provisions for the adjustment of the number of shares issuable upon the exercise of the warrant and of the exercise price in the event of stock dividends, splits, mergers, asset sales, tender or exchange offers, reclassifications, reorganizations or recapitalizations, combinations, or the like.
The per share purchase price (through the pre-funded Warrants) and Warrant exercise price was automatically adjusted lower (the “Price Adjustment”) to 80% (with respect to the purchase price of the Common Stock) and 110% (with respect to the exercise price of the Warrants) of the lowest of the average daily prices on the 6 trading days following each of: (i) the date our stockholders approved the Private Placement transaction (such approval was obtained on September 27, 2018) and (ii) the date a registration statement covering the resale of securities being issued in the Private Placement was declared effective by the Securities and Exchange Commission (the “SEC”) (such registration statement on Form S-1, file no. 333-227011, was declared effective on October 23, 2018 (the “Effective Registration”)). Due to the Price Adjustment, the lowest purchase price of $0.29 for the Common Stock issued at closing under the Purchase Agreements and pursuant to the pre-funded Warrants was achieved, and all 22,758,621 shares registered under the Effective Registration as issued or issuable under the Purchase Agreements and pursuant to the pre-funded Warrants were issued to the selling stockholders. In addition, the exercise price of the Purchaser Warrants was subject to the Price Adjustment, which has resulted in 22,544,139 shares of common stock being issuable under the Purchaser Warrants when exercised. The Purchaser Warrants have been fully adjusted and neither the exercise price or the number of shares issuable under such warrants are subject to further adjustment, except pursuant to typical anti-dilution provisions.
In accordance with the exercise provisions of the Purchaser Warrants, the 22,544,139 shares issuable under the Purchaser Warrants following the full Price Adjustment was determined by holding constant the aggregate exercise price of $7,040,534.40 for the Purchaser Warrants at the time of closing of the Private Placement (which was calculated based on 4,400,334 total Purchaser Warrants at the closing date multiplied by the exercise price of $1.60, which equals $7,040,534.40), and then dividing the $7,040,534.40 aggregate exercise price by the post-Price Adjustment exercise price of $0.3123 to get 22,544,139 shares. As 18,206,897 shares of common stock issuable pursuant to the Purchaser Warrants were previously registered under the Effective Registration, 4,337,242 additional shares of common stock are to be registered pursuant to a new registration statement to cover all of the shares issuable under the Purchaser Warrants following the final Price Adjustment.
The Company has allocated the aggregate gross proceeds received to the Purchaser Warrants, the Initial Shares issued and the pre-funded warrants. Due to the reset features present in the Purchaser Warrants along with the existence of down-round protection in the event of future financing transactions at lower prices, the Purchaser Warrants were determined to be derivative financial instruments and therefore, have been recorded as a liability (“Warrant Liability”) in the accompanying consolidated balance sheets. The Purchaser Warrants were initially recorded at fair value with fair value determined utilizing a Black-Scholes option pricing model with the following assumptions: expected term of 5 years; expected volatility of 111.8%; risk free interest rate of 2.37% and an expected dividend yield of zero. The calculated aggregate fair value of $1,429,000 was reflected as Warrant Liability. The remaining proceeds received under the Purchase Agreements were allocated to the Initial Shares and pre-funded warrants and recorded within stockholder’s equity. The fair value of the Purchaser Warrants was reassessed at the end of the reporting period to reflect the Price Adjustment and number of shares issuable upon exercise occurring as a result of the shareholder approval of the Private Placement. The resulting increase in the fair value of the Purchaser Warrants of $261,330 was reflected as “Changes in Fair Value of Warrant Liability” within the accompanying consolidated statements of operations and comprehensive income (loss).
Under the terms of all of the Warrants, a selling stockholder may not exercise Warrants to the extent such exercise would cause such selling stockholder, together with its affiliates and attribution parties, to beneficially own a number of shares of common stock which would exceed 4.99% or 9.99%, as applicable, of our then outstanding common stock following such exercise, excluding for purposes of such determination shares of common stock issuable upon exercise of the Warrants which have not been exercised. In addition, the Warrants have transaction-specific anti-dilution provisions.
A.G.P. / Alliance Global Partners (“AGP”) acted as exclusive placement agent for the issuance and sale of the securities in the Private Placement. We agreed to pay AGP an aggregate fee equal to 7% of the gross proceeds received by us from the sale of the securities in the transaction, plus expenses. We also agreed to grant to AGP or its designees warrants to purchase up to an aggregate of 1,475,000150,000 shares of our common stock at a price of $0.01 per warrant.(the “Placement Agent Warrants”). The warrantsPlacement Agent Warrants are currently exercisable and terminate on July 27, 2022. The Placement Agent Warrants have a per share exercise price of $4.115, were exercisable as of November 21, 2017 and expire five years from that date. The gross proceeds to us from this offering were approximately $6,084,375, before deducting underwriting discounts and commissions and other estimated offering expenses. In connection with the offering, we uplisted our common stock from the OTCQB Marketplace to trading on The Nasdaq Capital Market under the ticker symbol “AMRH”, and we listed the publicly offered warrants for trading on The Nasdaq Capital Market under the ticker symbol “AMRHW”.
On January 24, 2018, we received confirmation from our transfer agent, Corporate Stock Transfer, Inc., which also serves as the warrant agent for the public warrant, that through such date certain holders of warrants had cumulatively exercised warrants for the purchase of a total of 153,060 shares of our common stock, at an exercise price of $4.115$1.32 per share,share. The terms of the Placement Agent Warrants are otherwise substantially similar to the terms of the Private Placement Warrants, except the Placement Agent Warrants have customary anti-dilution provisions and do not have the Price Adjustment mechanism. The Placement Agent Warrants were valued at the date of grant utilizing a Black-Scholes option pricing model with substantially similar assumptions to those used for gross proceeds to usthe Purchaser Warrants. The resulting fair value of $629,841.90.$49,000 was recorded within stockholder’s equity as a cost of the Private Placement transaction.
We incurred recurring losses as a result of costs and expenses related to our selling, general and administration activities.activities and acquisition strategy. As of March 31,September 30, 2018, we had negative working capital of $15.2$2.27 million and cash of $1.8$2.06 million. Our principal sources of cash have included bank borrowings, the private placement of common stock, warrants and convertible notes and the public offering of securities.common stock and warrants. Our operating expenses are likely to continue to grow and, as a result, we will need to generate significant additional revenues to cover such expenses.
During the quarter ended September 30, 2018, we were unable to make payments in respect of certain deferred purchase price obligations owed to two former members of Ameri Arizona due to a lack of available cash. The aggregate gross proceeds received by the Company from the Private Placement on July 30, 2018 were approximately $6,600,000, and we used a portion of such proceeds for the repayment of certain outstanding obligations. We are working to raise additional capital from which we will be able to pay other amounts owed; however, there can be no assurance that the Company will be able to raise any capital or pay the amounts owed.
Our financial statements as of March 31,September 30, 2018 have been prepared under the assumption that we will continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to raise additional funding through the issuance of equity or debt securities, as well as to attain further operating efficiencies and, ultimately, to generate additional revenues. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. We can give no assurances that additional capital that we are able to obtain, if any, will be sufficient to meet our needs. The foregoing conditions raise substantial doubt about our ability to continue our operations.
Available Credit Facility, Borrowings and Repayment of Debt
On July 1, 2016, the Company entered into a Loan and Security Agreement (the “Loan Agreement”), with its wholly-owned subsidiaries Ameri and Partners Inc. and Ameri Georgia, as borrowers (the “Borrowers”), the Company and its wholly-owned subsidiaries Linear Logics, Corp. and WinHire Inc. (dissolved in March 2017) serving as guarantors, the Company’s former Chief Executive Officer, serving as a validity guarantor, and Sterling National Bank, N.A. (as lender and as agent, “Sterling”). The Company joined Ameri California, Virtuoso and Ameri Arizona as borrowers under the Loan Agreement following their respective acquisition.
Under the Loan Agreement, the Borrowers can borrow up to an aggregate of $10 million, which includes up to $8 million in principal for revolving loans (the “Revolving Loans”"Revolving Loans") for general working capital purposes, up to $2 million in principal pursuant to a term loan (the “Term Loan”"Term Loan") for the purpose of a permitted business acquisition and up to $200,000 for letters of credit. A portion of the proceeds of the Loan Agreement were also used to repay the November 20, 2015 credit facility that was entered into between the Company, its wholly-owned subsidiary Ameri Georgia and Federal National Payables, Inc.
The maturity of the loans under the Loan Agreement are as follows:
Revolving Loan Maturity Date: July 1, 2019; provided, however, that the Revolving Loan Maturity Date will extend and renew automatically for successive one-year terms on each anniversary of the initial Revolving Loan Maturity Date (each an “Anniversary Date”"Anniversary Date") thereafter, unless not less than sixty (60) days prior to any such Anniversary Date, written notice of non-renewal is given by either party to the other, in which case the Revolving Loan Maturity Date will be such next Anniversary Date.
Term Loan Maturity Date: The earliest of (a) the date following acceleration of the Term Loan and/or the Revolving Loans; (b) the Revolving Loan Maturity Date; or (c) July 1, 2019.
Interest under the Loan Agreement is payable monthly in arrears and accrues as follows:
| (a) | in the case of Revolving Loans, a rate per annum equal to the sum of (i) the Wall Street Journal Prime Rate plus (ii) 2.00%; |
| (b) | in the case of the Term Loan, a rate per annum equal to the sum of (i) the Wall Street Journal Prime Rate plus (ii) 3.75%; and |
| (c) | in the case of other obligations of the Borrowers, a rate per annum equal to the sum of (i) the greater of (A) 3.25% or (B) Wall Street Journal Prime Rate plus (ii) 3.75%. |
The Loan Agreement also requires the payment of certain fees, including, but not limited to letter of credit fees and an unused Revolving Loans fee.
The Loan Agreement contains financial and other covenant requirements, including, but not limited to, financial covenants that require the Borrowers to not permit capital expenditures above $150,000 in any fiscal year, maintain a fixed charge coverage ratio of not less than 2.00 to 1.00 and maintain certain debt to EBITDA ratios. The Loan Agreement also requires the Company and Borrowers to obtain Sterling’sSterling's consent before making any permitted acquisitions. The amounts borrowed by the Borrowers under the Loan Agreement are guaranteed by the guarantors, and the Loan Agreement is secured by substantially all of the Borrowers’ assets.
The principal amount of the Term Loan will be repaid as follows: (i) equal consecutive monthly installments in the amount of $33,333.33 each,Interest paid on the first day of each calendar month and (ii) one final payment of the entire remaining principal balance, together with all accrued unpaid interest on the Term Loan maturity date.during the nine months ended September 30, 2018 amounted to $71,301. On August 2, 2018, we repaid the Term Loan.
On August 28, 2017, pursuantJuly 9, 2018, we received a Notice of Default and Acceleration of Obligations from Sterling National Bank. The Notice asserted events of default resulting from the Company’s failure to an amendment ofcomply with certain financial covenants set forth in the Loan Agreement and the impaired financial condition of the Company. In the Notice, Sterling National Bank declares that all amounts due in respect of its loans shall be due and payable on August 31, 2018, and the Borrowers are required to pay Sterling National Bank all amounts due as obligations on or before the Termination Date. On August 31, 2018, we and certain of our subsidiaries obtainedreceived an incremental term loanextension notice from Sterling National Bank in which the amountTermination Date from August 31, 2018 to September 30, 2018. On October 4, 2018, Sterling National Bank again extended the Termination Date until December 31, 2018. Until the Termination Date, Sterling National Bank will continue to fund the Revolving Loans to the Borrowers at its discretion; however, Sterling National Bank may decline to advance funds to the Borrowers at any time in its sole discretion. It is anticipated that, on the Termination Date, the financing commitments shall terminate and no further loans, advances or other extensions of $343,200.58, which amount was an additioncredit will be made to and comprised a partor for the benefit of the existing Term Loan under the existing Loan Agreement. In January 2018, we repaid the incremental term loan.Borrowers.
If the obligations are not in compliance withsatisfied by the financial covenants contained inTermination Date, all outstanding obligations will bear interest at the default rate under the Loan Agreement with Sterling National Bank. We received waivers fromand Sterling National Bank for our non-compliance with the Loan Agreement for the quarters ended March 31, 2017, June 30, 2017, September 30, 2017 and December 31, 2017 in exchange for the paymentmay exercise any or all of a fee of $5,000 for each quarterly waiver. As a result of our ongoing non-compliance with covenants of the Loan Agreement, Sterling National Bank notified us that it would not provide any further waivers for such non-compliance and advised us to find a new lender. Pursuant to its notice letter, Sterling National Bank has indicated it may continue to provide the Company with financing while the Company looks for a new lender; however, the bank has reserved its rights to exercise alland remedies available to it, including, but not limited to, declining to advance further funds under the Revolving Loans, terminatingloan documents, including foreclosing on any and all loans and accelerating all obligations owed to it, and retainingcollateral. While the Company’s accounts receivable. We are in the process of seeking a new lender and/or financing sources to replace Sterling National Bank, but there can be no assuranceNotice does not state that Sterling National Bank is presently exercising, or will not stop advancing funds under the Loan Agreement or terminate its loans and accelerate their repaymentexercise prior to our finding replacement financingthe Termination Date, its rights and remedies available upon an event of default, it reserves its right to do so at any time in its sole discretion. The exercise of certain remedies may have a material adverse effect on the liquidity, financial condition and results of operations of the Company and could cause the Company to become bankrupt or that we will be able to find any new financing at all.
insolvent.
If Sterling National Bank elects to claim all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit, we may be unable repay the amounts due. If that were to occur, Sterling National Bank could proceed against the collateral granted to it to secure our indebtedness to it.
We pledged substantially all of our assets as collateral under the Loan Agreement. The Loan Agreement is also supported by a validity guaranty from our former Chief Executive Officer. If Sterling National Bank accelerates the repayment of our loans, there is no assurance that we will have sufficient assets to repay the loans. A default under the Loan Agreement may also result in an event of default under the 2017 Notes. We are currently looking for additional sources of financing, however there is no guarantee that we will have additional financing available to us.
Interest paid on the Term Loan during the three months ended March 31, 2018 amounted to $32,348. Principal repaid on the Term Loan during the three months ended March 31, 2018 was $443,200. The short term and long-term outstanding balances on the Term Loan as of March 31, 2018 were $400,000 and $1,023,466, respectively. The outstanding balance of the Revolving Loans as of March 31, 2018 was $2,942,510.
Our Indian subsidiary Bigtech had a term loan of $11,750 and a line of credit for $322,298 as of March 31, 2018. The Bigtech line of credit is with an Indian bank, HDFC Bank Limited, and was entered into on September 3, 2015 for Bigtech’s working capital requirements. The line of credit is for up to $416,667 with an interest rate of 11.85% per annum and maturity in June 2020. The Bigtech term loan accrues interest at the rate of 10.30% per annum and matures in 2020. Both the term loan and the line of credit were already in place when the Company acquired Bigtech. Interest paid during the three months ended March 31, 2018 amounted to $390 for the term loan and $8,723 line of credit held by Bigtech.
On March 7, 2017, we completed the sale and issuance the 2017 Notes for aggregate proceeds to us of $1.25 million from four accredited investors, including one of the Company’s then-directors, Dhruwa N. Rai, and David Luci, who became a director of the Company in February 2018. The 2017 Notes were issued pursuant to Securities Purchase Agreements between the Company and each investor. The 2017 Notes bear interest at 8% per annum until maturity in March 2020, with interest being paid annually on the first, second and third anniversaries of the issuance of the 2017 Notes beginning in March 2018. From and after an event of default and for so long as the event of default is continuing, the 2017 Notes will bear default interest at the rate of 10% per annum. The 2017 Notes can be prepaid by us at any time without penalty. As of May 5,September 30, 2018 we were not current in the payment ofall interest payments due on one of the 2017 Notes and werehave been paid in discussion with the holder of the 2017 Note for which we are not current in the payment of interest to negotiate longer payment terms until we are able to raise more capital.full.
The 2017 Notes are convertible into shares of our common stock at a conversion price equal to $2.80. The holders of the 2017 Notes have the right, at their option, at any time and from time to time to convert, in part or in whole, the outstanding principal amount and all accrued and unpaid interest under the 2017 Notes into shares of the Company’s common stock at the conversion price.
The 2017 Notes rank junior to our secured credit facility with Sterling National Bank. The 2017 Notes also include certain negative covenants including, without the investors’ approval, restrictions on dividends and other restricted payments and reclassification of its stock.
Accounts Receivable
Accounts receivable for the period ended March 31,September 30, 2018 were $8.5$7.8 million as compared to $8.8 million as on December 31, 2017.
Accounts Payable
Accounts payable for the period ended March 31,September 30, 2018 were $5.3$4.2 million as compared to $5.3 million as on December 31, 2017.
Accrued Expenses
Accrued expenses for the period ended March 31,September 30, 2018 were $2.2$1.8 million as compared to $2.6 million as on December 31, 2017.
Operating Activities
Our largest source of operating cash flows is cash collections from our customers for different information technology services we render under various statements of work.customers. Our primary uses of cash for operating activities are for personnel-related expenditures, leased facilities and taxes.
Off- Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Impact of Inflation
We do not believe that inflation had a significant impact on our results of operations for the periods presented. On an ongoing basis, we attempt to minimize any effects of inflation on our operating results by controlling operating costs and, whenever possible, seeking to ensure that billing rates reflect increases in costs due to inflation.
For all significant foreign operations, the functional currency is the local currency. Assets and liabilities of these operations are translated at the exchange rate in effect at each period end. Statements of Operations accounts are translated at the exchange rate prevailing as of the date of the transaction. The gains or losses resulting from such translation are reported under accumulated other comprehensive income (loss) as a separate component of equity. Realized gains and losses from foreign currency transactions are included in other income, net for the periods presented.
Recent Accounting Pronouncements
See Note 2 to our unaudited condensed consolidated financial statements for additional information.
Critical Accounting Policies
Revenue Recognition. We recognize revenue in accordance with the Accounting Standard Codification 605 “Revenue Recognition.” Revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller’s price to buyer is fixed and determinable, and (4) collectability is reasonably assured. We recognize revenue from information technology services as the services are provided. Service revenues are recognized based on contracted hourly rates, as services are rendered or upon completion of specified contracted services and acceptance by the customer.
Stock-Based Compensation. Stock-based compensation expense for awards of equity instruments to employees and non-employee directors is determined based on the grant-date fair value of those awards. We recognize these compensation costs net of an estimated forfeiture rate over the requisite service period of the award. Forfeitures are estimated on the date of grant and revised if actual or expected forfeiture activity differs materially from original estimates.
Impairment. Long-lived assets, which include property, plant and equipment, and certain other assets to be held and used by us, are reviewed when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable based on estimated future cash flows. If this assessment indicates that the carrying values will not be recoverable, as determined based on undiscounted cash flows over the remaining useful lives, an impairment loss is recognized based on the fair value of the asset.
Income Taxes. We provide for income taxes utilizing the asset and liability method of accounting. Under this method, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each balance sheet date, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. If it is determined that it is more likely than not that future tax benefits associated with a deferred income tax asset will not be realized, a valuation allowance is provided. The effect on deferred income tax assets and liabilities of a change in the tax rates is recognized in income in the period that includes the enactment date. Tax benefits earned on employee stock awards in excess of recorded stock-based compensation expense are credited to additional paid-in capital. Our provision for income taxes also includes the impact of provisions established for uncertain income tax positions, as well as the related interest.
Accounts Receivable. We extend credit to clients based upon management’s assessment of their credit-worthiness on an unsecured basis. We provide an allowance for uncollectible accounts based on historical experience and management evaluation of trend analysis. We include any balances that are determined to be uncollectible in allowance for doubtful accounts.
Business Combination. We account for business combinations using the acquisition method, which requires the identification of the acquirer, the determination of the acquisition date and the allocation of the purchase price paid by the acquirer to the identifiable tangible and intangible assets acquired, the liabilities assumed, including any contingent consideration and any non-controlling interest in the acquiree at their acquisition date fair values. Goodwill represents the excess of the purchase price over the fair value of net assets acquired, including the amount assigned to identifiable intangible assets. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related costs are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in our consolidated financial statements from the acquisition date.
Goodwill and Purchased Intangibles. We evaluate goodwill and purchased intangible assets for impairment at least annually, or as circumstances warrant. Goodwill is evaluated at the reporting unit level by comparing the fair value of the reporting unit with its carrying amount. For purchased intangible assets, if our annual qualitative assessment indicates possible impairment, we test the assets for impairment by comparing the fair value of such assets to their carrying value. In determining the fair value, we utilize various estimates and assumptions, including discount rates and projections of future cash flows. If an impairment is indicated, a write down to the implied fair value of goodwill or fair value of intangible asset is recorded.
Valuation of Contingent Earn-out Consideration. Acquisitions may include contingent consideration payments based on the achievement of certain future financial performance measures of the acquired company. Contingent consideration is required to be recognized at fair value as of the acquisition date. We estimate the fair value of these liabilities based on financial projections of the acquired companies and estimated probabilities of achievement. We believe our estimates and assumptions are reasonable, however, there is significant judgment involved. We evaluate, on a routine, periodic basis, the estimated fair value of the contingent consideration and changes in estimated fair value, subsequent to the initial fair value estimate at the time of the acquisition, will be reflected in income or expense in the consolidated statements of operations. Changes in the fair value of contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of revenue and/or earnings estimates and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria. Any changes in the estimated fair value of contingent consideration may have a material impact on our operating results.
Special Note Regarding Forward-Looking Information
Some of the statements in this Quarterly Report on Form 10-Q and elsewhere constitute forward-looking statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements involve known and unknown risks, uncertainties and other factors that may cause results, levels of activity, growth, performance, tax consequences or achievements to be materially different from any future results, levels of activity, growth, performance, tax consequences or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, those listed below.
The forward-looking statements included in this Form 10-Q and referred to elsewhere are related to future events or our strategies or future financial performance, including statements concerning our 2018 outlook, future revenue and growth, customer spending outlook, general economic trends, IT service demand, future revenue and revenue mix, utilization, new service offerings, significant customers, competitive and strategic initiatives, growth plans, potential stock repurchases, future results, tax consequences and liquidity needs. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “believe,” “anticipate,” “anticipated,” “expectation,” “continued,” “future,” “forward,” “potential,” “estimate,” “estimated,” “forecast,” “project,” “encourage,” “opportunity,” “goal,” “objective,” “could,” “expect,” “expected,” “intend,” “plan,” “planned,”"may," "should," "believe," "anticipate," "anticipated," "expectation," "continued," "future," "forward," "potential," "estimate," "estimated," "forecast," "project," "encourage," "opportunity," "goal," "objective," "could," "expect," "expected," "intend," "plan," "planned," or the negative of such terms or comparable terminology. These forward-looking statements inherently involve certain risks and uncertainties, although they are based on our current plans or assessments which are believed to be reasonable as of the date of this Form 10-Q. Factors that may cause actual results, goals, targets or objectives to differ materially from those contemplated, projected, forecasted, estimated, anticipated, planned or budgeted in such forward-looking statements include, among others, the following possibilities: (1) failure to obtain new customers or retain significant existing customers; (2) the loss of one or more key executives and/or employees; (3) changes in industry trends, such as a decline in the demand for Enterprise Resource Planning and Enterprise Performance Management solutions, custom development and system integration services and/or declines in industry-wide information technology spending, whether on a temporary or permanent basis and/or delays by customers in initiating new projects or existing project milestones; (4) inability to execute upon growth objectives, including new services and growth in entities acquired by our Company; (5) adverse developments and volatility involving geopolitical or technology market conditions; (6) unanticipated events or the occurrence of fluctuations or variability in the matters identified as delays in, or the failure of, our sales pipeline being converted to billable work and recorded as revenue; (8) termination by clients of their contracts with us or inability or unwillingness of clients to pay for our services, which may impact our accounting assumptions; (9) inability to recruit and retain professionals with the high level of information technology skills and experience needed to provide our services; (10) failure to expand outsourcing services to generate additional revenue; (11) any changes in ownership of the Company or otherwise that would result in a limitation of the net operating loss carry forward under applicable tax laws; (12) the failure of the marketplace to embrace advisory and product-based consulting services; (13) changes in our utilization levels; (14) competition in our markets; (15) our ability to grow and manage growth profitably; our ability to access additional capital; (16) changes in applicable laws or regulations; (17) the failure to fully integrate acquired businesses; and (18) poor performance of acquired businesses following the closing of the acquisition. In evaluating these statements, you should specifically consider various factors described above. These factors may cause our actual results to differ materially from those contemplated, projected, anticipated, planned or budgeted in any such forward-looking statements.
Although we believe that the expectations in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, growth, earnings per share or achievements. However, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Except as otherwise required, we undertake no obligation to update any of the forward-looking statements after the date of this Form 10-Q to conform such statements to actual results.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
Management’sManagement's Report on Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’sSEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report on Form 10-Q, we have carried out an evaluation of the effectiveness of the design and operation of our Company’sCompany's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our Company’sCompany's management, including our Company’sCompany's Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our company’scompany's Chief Executive Officer and Chief Financial Officer concluded that our company’scompany's disclosure controls and procedures are not yet effective as of the end of the period covered by this report as noted below in management’smanagement's report on internal control over financial reporting. This is largely due to the fact that we are acquiring privately held companies as part of our growth strategy and our control procedures over all acquired subsidiaries will not be effective until such time as we are able to fully integrate the acquisition with our company and set processes and procedures for the acquired entities. We are working to improve and harmonize our financial reporting controls and procedures across all of our companies. There have been no changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
Disclosure controls and procedures and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time period specified in the SEC’sSEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Management’sManagement's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. Our management has assessed the effectiveness of our internal control over financial reporting as of March 31,September 30, 2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with generally accepted accounting principles; providing reasonable assurance that receipts and expenditures are made in accordance with authorizations of management and our directors; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. As a result of this assessment, our management concluded that, as of March 31,September 30, 2018, our internal control over financial reporting was not yet effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. This is largely due to the fact that we are acquiring privately held companies as part of our growth strategy and our control procedures over all acquired subsidiaries will not be effective until such time as we are able to fully integrate the acquisition with our company and set processes and procedures for the acquired entities. We are working to improve and harmonize our financial reporting controls and procedures across all of our companies.
This Quarterly Report on Form 10-Q does not include an attestation report of our independent auditors regarding internal control over financial reporting. Management’sManagement's report was not subject to attestation by our independent auditors pursuant to temporary rules of the SEC that permit our company to provide only management’smanagement's report in this Quarterly Report on Form 10-Q.
See Part II – Item 5 for additional information regarding controls the Company has recently implemented with respect to its payment processes as a result of an email fraud directed at the Company during the quarter ended September 30, 2018.
Inherent Limitations on Effectiveness of Controls
Internal control over financial reporting has inherent limitations which include but is not limited to the use of independent professionals for advice and guidance, interpretation of existing and/or changing rules and principles, segregation of management duties, scale of organization and personnel factors. Internal control over financial reporting is a process, which involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis, however these inherent limitations are known features of the financial reporting process and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
There were changes to correct certain internal control inadequacies, due to the privately held nature of acquired subsidiaries in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the period covered by this report that have not materially affected, or are not reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
On May 1, 2018, MACT Holdings LLC, one of the former members of our subsidiary, Ameri Arizona, filed suit against us in the United States District Court for the Southern District of New York seeking damages in an amount equal to such former member’s potion of accrued but unpaid earn-out payments of approximately $236,950 in respect of the 2017 earn-out period, plus attorneys’ fees and expenses. The Company intendsAll such amounts had been paid as of August 3, 2018. Such former member has also asserted that he had elected to resolve such suit in as timely and cost efficient a manner as is commercially reasonable. The Company is workingreceive cash instead of stock consideration of 560,000 shares of common stock issued to raise capital from which it would be able to pay the amounts owed; however, there can be no assurance thathim on July 30, 2018, but the Company will be able to raisedisputes the assertion and is vigorously defending any capital or pay the 2017 earn-out amounts.claims related thereto.
In addition to the information set forth under Item 1A of Part I to our Annual Report on Form 10-K for the year ended December 31, 2017, the information set forth at the end of Management’sManagement's Discussion and Analysis entitled “Special"Special Note Regarding Forward-Looking Information,”" and updates noted below, you should consider that there are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. If any of these risks actually occur, our business, financial condition or results of operation may be materially and adversely affected. In such case, the trading price of our common stock could decline and investors could lose all or part of their investment. These risk factors may not identify all risks that we face and our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations.
Risk Factors Relating to Our Indebtedness
We have received a substantial amountnotice from our senior secured commercial lender for the termination of indebtedness,our revolving credit facility, which may limittermination could significantly impair our operating flexibilityoperations and could adversely affect our results of operations and financial condition.
As of March 31,On July 9, 2018, we had approximately $4.4 million in borrowings outstanding under our $10 million Loan Agreement withreceived a Notice of Default and Acceleration of Obligations from Sterling National Bank, which provides for upBank. The Notice asserted events of default resulting from the Company’s failure to $8 million in Revolving Loans for general working capital purposes, up to $2 million in principal pursuant to the Term Loan for the purpose of a permitted business acquisition and up to $200,000 for letters of credit.
Our indebtedness could have important consequences to our investors, including, but not limited to:
| · | increasing our vulnerability to, and reducing our flexibility to respond to, general adverse economic and industry conditions; |
| · | requiring the dedication of a substantial portion of our cash flow from operations to the payment of principal of, and interest on, our indebtedness, thereby reducing the availability of such cash flow to fund working capital, capital expenditures, acquisitions, joint ventures or other general corporate purposes; |
| · | limiting our flexibility in planning for, or reacting to, changes in our business, the competitive environment and the industry in which we operate; |
| · | placing us at a competitive disadvantage as compared to our competitors that are not as highly leveraged; and |
| · | limiting our ability to borrow additional funds and increasing the cost of any such borrowing. |
We are not in compliancecomply with thecertain financial covenants containedset forth in the Loan Agreement withand the impaired financial condition of the Company. In the Notice, Sterling National Bank. WeBank declares that all amounts due in respect of its loans shall be due and payable on August 31, 2018, and the Borrowers are required to pay Sterling National Bank all amounts due as obligations on or before the Termination Date. On August 31, 2018, we received waiversan extension notice from Sterling National Bank in which the Termination Date from August 31, 2018 to September 30, 2018. On October 4, 2018, Sterling National Bank again extended the Termination Date until December 31, 2018. Until the Termination Date, Sterling National Bank will continue to fund the Revolving Loans to the Borrowers at its discretion; however, Sterling National Bank may decline to advance funds to the Borrowers at any time in its sole discretion. It is anticipated that, on the Termination Date, the financing commitments shall terminate and no further loans, advances or other extensions of credit will be made to or for our non-compliance withthe benefit of the Borrowers.
If the obligations are not satisfied by the Termination Date, all outstanding obligations will bear interest at the default rate under the Loan Agreement for the quarters ended March 31, 2017, June 30, 2017, September 30, 2017 and December 31, 2017 in exchange for the payment of a fee of $5,000 for each quarterly waiver. As a result of our ongoing non-compliance with covenants of the Loan Agreement, Sterling National Bank notified us that it would not providemay exercise any further waivers for such non-compliance and advised us to find a new lender. Pursuant to its notice letter, Sterling National Bank has indicated it may continue to provide the Company with financing while the Company looks for a new lender; however, the bank has reservedor all of its rights to exercise alland remedies available to it, including, but not limited to, declining to advance further funds under the Revolving Loans, terminatingloan documents, including foreclosing on any and all loans and accelerating all obligations owed to it, and retainingcollateral. While the Company’s accounts receivable. We are in the process of seeking a new lender and/or financing sources to replace Sterling National Bank, but there can be no assuranceNotice does not state that Sterling National Bank is presently exercising, or will not stop advancing funds under the Loan Agreement or terminate its loans and accelerate their repaymentexercise prior to our finding replacement financing or that we will be able to find any new financing at all.
If Sterling National Bank elects to claim all amounts outstanding to be immediately duethe Termination Date, its rights and payable and terminate all commitments to extend further credit, we may be unable repay the amounts due. If that were to occur, Sterling National Bank could proceed against the collateral granted to it to secure our indebtedness to it. We pledged substantially all of our assets as collateral under the Loan Agreement. The Loan Agreement is also supported by a validity guaranty from our former Chief Executive Officer. If Sterling National Bank accelerates the repayment of our loans, there is no assurance that we will have sufficient assets to repay the loans. A default under the Loan Agreement may also result inremedies available upon an event of default, underit reserves its right to do so at any time in its sole discretion. The exercise of certain remedies may have a material adverse effect on the 2017 Notes. We are currently looking for additional sourcesliquidity, financial condition and results of financing, however there is no guarantee that we will have additional financing availableoperations of the Company and could cause the Company to us.become bankrupt or insolvent.
In addition, we have an outstanding aggregate of $1.25 million in 8% Convertible Unsecured Promissory Notes, which were issued to four accredited investors, including one of the Company’s then-directors, Dhruwa N. Rai, and David Luci, who became a director of the Company in February 2018. The 2017 Notes bear interest at 8% per annum until maturity in March 2020, with interest being paid annually on the first, second and third anniversaries of the issuance of the 2017 Notes beginning in March 2018. From and after an event of default and for so long as the event of default is continuing, the 2017 Notes will bear default interest at the rate of 10% per annum. The 2017 Notes can be prepaid by us at any time without penalty. As of May 5, 2018, we were not current in the payment of interest on one of the 2017 Notes and were in discussion with the holder of the 2017 Note for which we are not current in the payment of interest to negotiate longer payment terms until we are able to raise more capital.
On March 10, 2017, we issued as consideration to the selling stockholders of Ameri California unsecured promissory notes issued for the aggregate principal amount of $3,750,000 (which notes bear interest at a rate of 6% per annum and mature on June 30, 2018). On February 28, 2018, we entered into an Amendment to 6% Unsecured Promissory Note and Waiver Agreement by and between the Company and Moneta Ventures Fund I, L.P. The Amendment amended the terms of the Company’s 6% Unsecured Promissory Note Due June 30, 2018, issued on March 20, 2017, by and between the Company and Moneta. Among other things, the Amendment provided for the extension of the maturity of the Moneta Note to August 31, 2018, amendment of the payment terms of the Moneta Note, waiver by Moneta of the existence of any Company event of default pursuant to the Moneta Note as of February 28, 2018 and waiver by the Company of certain restrictions with respect to the resale of certain restricted common stock of the Company held by Moneta. Pursuant to the Amendment, the Company was obligated to pay $0.5 million to Moneta on April 30, 2018; however, the Company has been unable to make such payment due to a lack of available cash. The Company is working to raise capital from which it would be able to pay the amount owed; however, there can be no assurance that the Company will be able to raise any capital or pay the amounts owed pursuant to the Amendment.
Our level of indebtedness may make it difficult to servicerepay our debt and may adversely affect our ability to obtain additional financing, use operating cash flow in other areas of our business or otherwise adversely affect our operations.
Upon the occurrence of an event of default under our Loan Agreement, our lender could elect to accelerate payments due and terminate all commitments to extend further credit. Consequently, we may not have sufficient assets to repay the loans under the Loan Agreement.
As stated above, we are not in compliance with the financial covenants contained in the Loan Agreement, which is an event of default under our Loan Agreement. The lender thereunder could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lender under the Credit Facility could proceed against the collateral granted to them to secure that indebtedness. The Company has pledged substantially all of its assets as collateral under the Credit Facility. If the lender accelerates the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay the Credit Facility.
| UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
The Company has been unable to make payments in respect of certain outstanding notes, certain earn-out payments that are due and a dividend on its Series A Preferred stock because of a lack of available cash. The Company is working to raise capital from which it would be able to pay the amounts owed; however, there can be no assurance that the Company will be able to raise any capital or pay the amounts owed.
We are not in compliance with the financial covenants contained in the Loan Agreement with Sterling National Bank. We received waivers from Sterling National Bank for our non-compliance with the Loan Agreement for the quarters ended March 31, 2017, June 30, 2017, September 30, 2017 and December 31, 2017 in exchange for the payment of a fee of $5,000 for each quarterly waiver. As a result of our ongoing non-compliance with covenants of the Loan Agreement, Sterling National Bank notified us that it would not provide any further waivers for such non-compliance and advised us to find a new lender. Pursuant to its notice letter, Sterling National Bank has indicated it may continue to provide the Company with financing while the Company looks for a new lender; however, the bank has reserved its rights to exercise all remedies available to it, including, but not limited to, declining to advance further funds under the Revolving Loans, terminating all loans and accelerating all obligations owed to it, and retaining the Company’s accounts receivable. We are in the process of seeking a new lender and/or financing sources to replace Sterling National Bank, but there can be no assurance that Sterling National Bank will not stop advancing funds under the Loan Agreement or terminate its loans and accelerate their repayment prior to our finding replacement financing or that we will be able to find any new financing at all.
If Sterling National Bank elects to claim all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit, we may be unable repay the amounts due. If that were to occur, Sterling National Bank could proceed against the collateral granted to it to secure our indebtedness to it. We pledged substantially all of our assets as collateral under the Loan Agreement. The Loan Agreement is also supported by a validity guaranty from our former Chief Executive Officer. If Sterling National Bank accelerates the repayment of our loans, there is no assurance that we will have sufficient assets to repay the loans. A default under the Loan Agreement may also result in an event of default under the 2017 Notes (as defined below). We are currently looking for additional sources of financing, however there is no guarantee that we will have additional financing available to us.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
On July 30, 2018, we have accrued approximately $0.6 millioncompleted a Private Placement of common stock and warrants. See Note 16 to our Unaudited Condensed Consolidated Financial Statements for the Quarter Ended September 30, 2018 for additional information regarding the Private Placement.
On October 10, 2018, we issued an aggregate of 72,250 restricted shares of our common stock to the former shareholders of Bigtech for the payment of dividend onan earn-out owed to them. The former shareholders of Bigtech previously made representations to us regarding their knowledge and experience, ability to bear economic risk and investment purpose with respect to the restricted shares they received.
In the third and fourth quarters of 2018, we issued an aggregate of 15,325 shares of our Series A Preferred Stock due for the quarter ended March 31, 2018. We have been unable to declare and pay such dividend due to a lackholders of available cash. We are negotiating with our Series A Preferred Stock, holders regarding theon a pro rata basis, as payment of accrued in-kind dividends owed on such preferred stock.
The foregoing issuances were exempt from registration under Section 4(a)(2) of the accrued dividendSecurities Act as sales by an issuer not involving a public offering. None of the foregoing issuances were registered under the Securities Act, or the securities laws of any state, and were offered and sold in reliance on the exemption from registration afforded by Section 4(a)(2) and corresponding provisions of state securities laws, which exempts transactions by an issuer not involving any public offering. In each case, the issuances were made, without any general solicitation or advertising, to amenda limited number of sophisticated investors with knowledge and experience of financial and business matters related to an investment in the termsCompany’s securities. In addition, the securities issued in the foregoing issuances were restricted securities bearing transfer restrictions and the recipients acquired such securities for their own respective accounts without a view to resell or distribute them. Such securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements and certificates evidencing such shares contain a legend stating the same. Accordingly, the foregoing issuances are subject to the private placement exemption from registration provided by Section 4(a)(2) of its Series A Preferred Stock.the Securities Act.
3. | MINE SAFETY DISCLOSURES |
Not applicable.
ITEM 5.DEFAULTS UPON SENIOR SECURITIES | OTHER INFORMATION |
None.On July 9, 2018, we received a Notice of Default and Acceleration of Obligations from Sterling National Bank. The Notice asserted events of default resulting from the Company’s failure to comply with certain financial covenants set forth in the Loan Agreement and the impaired financial condition of the Company. In the Notice, Sterling National Bank declares that all amounts due in respect of its loans shall be due and payable on August 31, 2018, and the Borrowers are required to pay Sterling National Bank all amounts due as obligations on or before the Termination Date. On August 31, 2018, we received an extension notice from Sterling National Bank in which the Termination Date from August 31, 2018 to September 30, 2018. On October 4, 2018, Sterling National Bank again extended the Termination Date until December 31, 2018. Until the Termination Date, Sterling National Bank will continue to fund the Revolving Loans to the Borrowers at its discretion; however, Sterling National Bank may decline to advance funds to the Borrowers at any time in its sole discretion. It is anticipated that, on the Termination Date, the financing commitments shall terminate and no further loans, advances or other extensions of credit will be made to or for the benefit of the Borrowers.
If the obligations are not satisfied by the Termination Date, all outstanding obligations will bear interest at the default rate under the Loan Agreement and Sterling National Bank may exercise any or all of its rights and remedies under the loan documents, including foreclosing on any and all collateral. While the Notice does not state that Sterling National Bank is presently exercising, or will exercise prior to the Termination Date, its rights and remedies available upon an event of default, it reserves its right to do so at any time in its sole discretion. The exercise of certain remedies may have a material adverse effect on the liquidity, financial condition and results of operations of the Company and could cause the Company to become bankrupt or insolvent.
Not applicable.
During the quarter ended September 30, 2018, one of the Company’s payee’s email was compromised and a direction was sent to the Company fraudulently directing the Company to pay approximately $125,000, which amount was owed to the Company payee, to a fraudulent bank account, and the Company paid the amount. Approximately two months after the payment, the payee informed the Company that its email was compromised and it had not received the payment. Upon learning of the incident, the Company filed a report with its bank to recover the funds, and the Company’s bank in turn filed a complaint with the bank where the funds were paid. Both banks are U.S. domiciled banks and are regulated by the U.S. Treasury system. The Company also filed a report with the Federal Bureau of Investigations. The Company is presently evaluating if it has insurance coverage for this incident under its cyber crime and related policies. The Company is also evaluating its rights against the depository bank where the funds were sent. The Company has not made any adjustments to its financial statements as a result of the incident as it believes that it will ultimately recover the funds, however, the Company cannot give any assurance that such funds will be recovered. The Company has implemented additional controls in its payment processes whereby any changes to existing banks accounts for any payments will be confirmed under a dual-control process before any payment is made.
2729
Exhibit | Description |
| |
| Share Purchase Agreement, dated as of November 20, 2015, by and among Ameri Holdings, Inc., Bellsoft, Inc., and all of the shareholders of Bellsoft, Inc. (filed as Exhibit 10.12.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on November 23, 2015 and incorporated herein by reference). |
| Agreement of Merger and Plan of Reorganization, dated as of July 22, 2016, by and among Ameri Holdings, Inc., Virtuoso Acquisition Inc., Ameri100 Virtuoso Inc., Virtuoso, L.L.C. and the sole member of Virtuoso, L.L.C. (filed as Exhibit 2.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on July 27, 2016 and incorporated herein by reference). |
| Membership Interest Purchase Agreement, dated as of July 29, 2016, by and among Ameri Holdings, Inc., DC&M Partners, L.L.C., all of the members of DC&M Partners, L.L.C., Giri Devanur and Srinidhi “Dev” Devanur (filed as Exhibit 2.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on August 1, 2016 and incorporated herein by reference). |
| Share Purchase Agreement, dated as of March 10, 2017, by and among Ameri Holdings, Inc., ATCG Technology Solutions, Inc., all of the stockholders of ATCG Technology Solutions, Inc., and the Stockholders’ representative (filed as Exhibit 2.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on March 13, 2017 and incorporated herein by reference). |
| Amended and Restated Certificate of Incorporation of Ameri Holdings, Inc. (filed as Exhibit 3.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on June 23, 2016 and incorporated herein by reference). |
| Amended and Restated Certificate of Designation of Rights and Preferences of 9.00% Series A Cumulative Preferred Stock (filed as Exhibit 3.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on January 4, 2017August 17, 2018 and incorporated herein by reference). |
| Corrected Certificate of Designation of Rights and Preferences of 9.00% Series A Cumulative Preferred Stock (filed as Exhibit 3.3 to Ameri Holdings, Inc.’s Registration Statement on Form S-1, Amendment No. 1, filed with the SEC on April 18, 2017 and incorporated herein by reference). |
| Amended and Restated Bylaws of Ameri Holdings, Inc. (filed as Exhibit 3.2 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on June 23, 2016 and incorporated herein by reference). |
| Form of 8% Convertible Unsecured Promissory Note due March 2020 (filed as Exhibit 10.2 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on March 8, 2017 and incorporated herein by reference). |
| Form of 6% Unsecured Promissory Note (filed as Exhibit 10.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on March 13, 2017 and incorporated herein by reference). |
| AmendmentForm of Private Placement Warrant (filed as Exhibit 4.1 to 6% Unsecured Promissory NoteAmeri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on July 30, 2018 and Waiverincorporated herein by reference). |
| Form of Placement Agent Warrant (filed as Exhibit 4.2 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on July 30, 2018 and incorporated herein by reference). |
| Warrant Agent Agreement dated February 28,August 16, 2018 by and between Ameri Holdings, Inc. and Moneta Ventures Fund I, L.P.Corporate Stock Transfer, Inc. (includes form of Warrant) (filed as Exhibit 4.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on August 17, 2018 and incorporated herein by reference). |
| Amendment Agreement (filed as Exhibit 10.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on March 2,June 26, 2018 and incorporated herein by reference). |
| Private Placement Securities Purchase Agreement dated as of July 25, 2018, by and among AMERI Holdings, Inc. and each purchaser named in the signature pages thereto (filed as Exhibit 10.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on July 30, 2018 and incorporated herein by reference). |
| Private Placement Registration Rights Agreement by and among AMERI Holdings, Inc. and each purchaser named in the signature pages thereto (filed as Exhibit 10.2 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on July 30, 2018 and incorporated herein by reference). |
| First Amendment to the Ameri Holdings, Inc. 2015 Equity Incentive Award Plan (filed as Exhibit 10.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on August 17, 2018 and incorporated herein by reference). |
| Employment Letter, dated October 17, 2018, between Ameri and Partners Inc and Barry Kostiner (filed as Exhibit 10.1 to Ameri Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on October 17, 2018 and incorporated herein by reference). |
| Section 302 Certification of Principal Executive Officer |
| Section 302 Certification of Principal Financial and Accounting Officer |
| Section 906 Certification of Principal Executive Officer |
| Section 906 Certification of Principal Financial and Accounting Officer |
101** | The following materials from Ameri Holdings, Inc.’s Quarterly Report on Form 10-Q for the three months ended March 31, 2018 are formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statement of Stockholders’ Equity (Deficit), (iv) the Consolidated Statements of Cash Flow, and (iv) Notes to the Consolidated Financial Statements. |
** | In accordance with Item 601of Regulation S-K, this Exhibit is hereby furnished to the SEC as an accompanying document and is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933. |
Pursuant to the requirements of the Section 13 or 15 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 15th14th day of MayNovember 2018.
| AMERI Holdings, Inc. |
| |
| By: | /s/ Brent Kelton |
| | Brent Kelton |
| | Chief Executive Officer (Principal Executive Officer) |
| |
| By: | /s/ Viraj PatelBarry Kostiner |
| | Viraj PatelBarry Kostiner |
| | Chief Financial Officer (Principal Accounting Officer) |
2931