Summary of Significant Accounting Policies (Policies) | 12 Months Ended |
Dec. 31, 2014 |
Summary of Significant Accounting Policies [Abstract] | |
PRINCIPLES OF CONSOLIDATION AND ACCOUNTING FOR INVESTMENT IN AFFILIATE COMPANY | PRINCIPLES OF CONSOLIDATION AND ACCOUNTING FOR INVESTMENT IN AFFILIATE COMPANIES |
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The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, which include Tropical Communications, Inc. (“Tropical”) (since August 2011), Rives-Monteiro Leasing, LLC (“RM Leasing”) (since December 2011), ADEX Corporation, ADEX Puerto Rico, LLC and HighWire (collectively, “ADEX” or “ADEX entities”) (since September 2012), TNS, Inc. (“TNS”) (since September 2012), the AWS Entities (since April 2013), IPC (since January 2014), RentVM (since February 2014), and VaultLogix (since October 2014). The results of operations for the year ended December 31, 2013 include the accounts of Environmental Remediation and Financial Service, LLC (“ERFS”) (acquired in 2012, disposed of in November 2013) as discontinued operations. All significant inter-company accounts and transactions have been eliminated in consolidation. |
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The Company consolidates all entities in which it has a controlling voting interest and a variable interest in a variable interest entity (“VIE”) in which the Company is deemed to be the primary beneficiary. |
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The consolidated financial statements include the accounts of Rives-Montiero Engineering, LLC ("RM Engineering") (since December 2011), in which the Company owns an interest of 49%. The Company has the ability to exercise its call option to acquire the remaining 51% of RM Engineering for a nominal amount and thus makes all significant decisions related to RM Engineering even though it absorbs only 49% of the losses. Additionally, substantially all of the entity’s activities either involve or are conducted on behalf of the entity by the 51% holder of RM Engineering. |
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The consolidation of RM Engineering resulted in increases of $1,038 in assets and $450 in liabilities in the Company’s consolidated balance sheet and $3,122 in revenue and $33 in net loss in the consolidated statement of operations as of and for the year ended December 31, 2014. |
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The consolidation of RM Engineering resulted in increases of $1,000 in assets and $398 in liabilities in the Company’s consolidated balance sheet and $3,100 in revenue and $158 in net income in the consolidated statement of operations as of and for the year ended December 31, 2013. |
LIQUIDITY | LIQUIDITY |
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At December 31, 2014, the Company had working capital deficit of approximately $13,097, as compared to working capital of approximately $4,197 at December 31, 2013. The decrease of $17,294 in the Company’s working capital from December 31, 2013 to December 31, 2014 was primarily the result of the cash payment of approximately $13,451 in connection with the Company’s acquisition of IPC on January 1, 2014 as discussed below, and additional borrowings in the year ended December 31, 2014. |
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The increase in the Company’s working capital at December 31, 2013 was attributable, in part, to a requirement for a cash payment of approximately $13,451 in connection with the acquisition of IPC on January 1, 2014. The Company raised $11,625 through the issuance of the Convertible Debentures, and an additional $1,725 through the sale of debt securities, in December 2013. The proceeds of such financings were used for the cash portion of the purchase price of IPC. |
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On or prior to December 31, 2015, the Company has obligations relating to the payment of indebtedness as follows: |
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| ● | $4,000 related to term loans due June 1, 2015 and June 24, 2015; | | | | | | | | | | |
| ● | $2,331 payable to the holders of the Convertible Debentures, which is payable in monthly installments through June 1015; | | | | | | | | | | |
| ● | $2,000 related to term loans, which is payable in quarterly installments through December 2015; | | | | | | | | | | |
| ● | $1,000 relating to a term loan due November 1, 2015; and | | | | | | | | | | |
| ● | $350 relating to promissory notes held by related parties that mature prior to December 31, 2015. | | | | | | | | | | |
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The Company anticipates meeting its cash obligations on indebtedness that is payable on or prior to December 31, 2015 from earnings from operations, including, in particular, the operations of VaultLogix, which was acquired in October 2014, and possibly from the proceeds of additional indebtedness or equity raises. If the Company is not successful in obtaining additional financing when required, the Company expects that it will be able to renegotiate and extend certain of its notes payable as required to enable it to meet certain debt obligations as they become due, although there can be no assurance that the Company will be able to do so. |
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The Company’s future capital requirements for its operations will depend on many factors, including the profitability of its businesses, the number and cash requirements of other acquisition candidates that the Company pursues, and the costs of operations. The Company has been investing in sales personnel in anticipation of increasing revenue opportunities in the cloud and managed services segment of its business, which has contributed to the losses from operations. The Company’s management has taken several actions to ensure that it will have sufficient liquidity to meet its obligations through December 31, 2015, including the reduction of certain general and administrative expenses, consulting expenses and other professional services fees. Additionally, if the Company’s actual revenues are less than forecasted, the Company anticipates implementing headcount reductions to a level that more appropriately matches then-current revenue and expense levels. The Company is evaluating other measures to further improve its liquidity, including, the sale of equity or debt securities and entering into joint ventures with third parties. Lastly, the Company may elect to reduce certain related-party and third party debt by converting such debt into common shares. Refer to Note 19 Subsequent Events for a discussion on restructuring of related party debt and the extension of maturity dates. The Company is currently in discussion with a third party on a credit facility to enhance its liquidity position. The Company’s management believes that these actions will enable the Company to meet its liquidity requirements through December 31, 2015. There is no assurance that the Company will be successful in any capital-raising efforts that it may undertake to fund operations during 2015. |
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The Company plans to generate positive cash flow from its recently-completed acquisitions to address some of the liquidity concerns. However, to execute the Company’s business plan, service existing indebtedness and implement its business strategy, the Company anticipates that it will need to obtain additional financing from time to time and may choose to raise additional funds through public or private equity or debt financings, a bank line of credit, borrowings from affiliates or other arrangements. The Company cannot be sure that any additional funding, if needed, will be available on terms favorable to the Company or at all. Furthermore, any additional capital raised through the sale of equity or equity-linked securities may dilute the Company’s current stockholders’ ownership and could also result in a decrease in the market price of the Company’s common stock. The terms of those securities issued by the Company in future capital transactions may be more favorable to new investors and may include the issuance of warrants or other derivative securities, which may have a further dilutive effect. The Company also may be required to recognize non-cash expenses in connection with certain securities it issues, such as convertible notes and warrants, which may adversely impact the Company’s financial condition. Furthermore, any debt financing, if available, may subject the Company to restrictive covenants and significant interest costs. There can be no assurance that the Company will be able to raise additional capital, when needed, to continue operations in their current form. |
USE OF ESTIMATES | USE OF ESTIMATES |
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The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Changes in estimates and assumptions are reflected in reported results in the period in which they become known. Use of estimates includes the following: 1) valuation of derivative instruments and preferred stock, 2) allowance for doubtful accounts, 3) estimated useful lives of property, equipment and intangible assets, 4) valuation of contingent consideration, 5) revenue recognition, 6) estimates related to deferred tax assets, 7) valuation of intangible assets,8) goodwill impairment, 9) indefinite lived intangible assets, and 10) estimates in connection with the allocation of the purchase price allocations. |
SEGMENT INFORMATION | SEGMENT INFORMATION |
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As of December 31, 2013, the Company reported two operating segments, which consisted of specialty contracting services and telecommunications staffing services. The Company acquired four companies since January 1, 2013. In connection with such acquisitions, the Company evaluated each newly-acquired company’s sources of revenues and costs of revenues and determined that three of the four additional companies did not share similar economic characteristics with the two existing operating segments. As such, it was determined that the three companies should be reported as a separate operating segment, cloud and managed services and the fourth acquisition was aggregated within the professional services segment. |
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In 2014, the Company operated in four operating segments - as an applications and infrastructure provider, as a professional services provider and as a cloud services provider and managed services provider. The applications and infrastructure segment provides engineering and professional consulting services and voice, data and optical solutions. The engineering, design, installation and maintenance services of the applications and infrastructure segment support the build-out and operation of enterprise, fiber optic, Ethernet and wireless networks. The professional services segment provides outsourced services to the wireless and wireline industry and information technology industry. The cloud services segment provides cloud computing and storage services to customers. The managed services segment provides hardware and software products to customers and provides maintenance and support for those products. The Company has concluded that it has three reportable segments, the applications and infrastructure operating segment and the professional services operating segment are considered individual reporting segments, while the cloud services and managed services operating segments are aggregated into one reportable segment. |
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The Company’s reporting units have been aggregated into one of four operating segments due to their similar economic characteristics, products, or production and distribution methods. The first operating segment is applications and infrastructure, which is comprised of the components TNS, AWS, Tropical and RM Engineering. The Company’s second operating segment is professional services, which consists of the ADEX components. The Company’s third operating segment is cloud services, which consists of the VaultLogix components and the fourth operating segment is and managed services, which consists of the IPC and RentVM components. |
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Refer to Note 17. Segment Information for a detailed discussion on the change in reporting segments. |
CASH | CASH |
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Cash consists of checking accounts and money market accounts. The Company considers all highly-liquid investments purchased with an original maturity of three months or less to be cash. |
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS | ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS |
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Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews a customer’s credit history before extending credit. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Estimates of uncollectible amounts are reviewed each period, and changes are recorded in the period in which they become known. Management analyzes the collectability of accounts receivable each period. This review considers the aging of account balances, historical bad debt experience, changes in customer creditworthiness, current economic trends, customer payment activity and other relevant factors. Should any of these factors change, the estimate made by management may also change. Allowance for doubtful accounts was $1,545 and $738 at December 31, 2014 and 2013, respectively. |
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INVENTORY | INVENTORY |
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The inventory balance at December 31, 2014 relates to the Company’s IPC subsidiary. IPC purchases inventory for resale to customers and records it at lower of cost or market until sold. Inventory consists of networking equipment that was purchased and not delivered to customers as of December 31, 2014. The Company did not hold any inventory as of December 31, 2013 as all inventory relates to the IPC subsidiary, which was acquired in January 2014. |
BUSINESS COMBINATIONS | BUSINESS COMBINATIONS |
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The Company accounts for its business combinations under the provisions of Accounting Standards Codification ("ASC") Topic 805-10, Business Combinations ("ASC 805-10"), which requires that the purchase method of accounting be used for all business combinations. Assets acquired and liabilities assumed, including non-controlling interests, are recorded at the date of acquisition at their respective fair values. ASC 805-10 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business combinations and are expensed as incurred. If the business combination provides for contingent consideration, the Company records the contingent consideration at fair value at the acquisition date and any changes in fair value after the acquisition date are accounted for as measurement-period adjustments if they pertain to additional information about facts and circumstances that existed at the acquisition date and that the Company obtained during the measurement period. Changes in fair value of contingent consideration resulting from events after the acquisition date, such as earn-outs, are recognized as follows: 1) if the contingent consideration is classified as equity, the contingent consideration is not re-measured and its subsequent settlement is accounted for within equity, or 2) if the contingent consideration is classified as a liability, the changes in fair value are recognized in earnings. |
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The estimated fair value of net assets acquired, including the allocation of the fair value to identifiable assets and liabilities, was determined using Level 3 inputs in the fair value hierarchy (see Fair Value of Financial Instruments in Note 2). The estimated fair value of the net assets acquired was determined using the income approach to valuation based on the discounted cash flow method. Under this method, expected future cash flows of the business on a stand-alone basis are discounted back to a present value. The estimated fair value of identifiable intangible assets, consisting of customer relationships, the trade names and non-compete agreements acquired, also were determined using an income approach to valuation based on excess cash flow, relief of royalty and discounted cash flow methods. |
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The discounted cash flow valuation method requires the use of assumptions, the most significant of which include: future revenue growth, future earnings before interest, taxes, depreciation and amortization, estimated synergies to be achieved by a market participant as a result of the business combination, marginal tax rate, terminal value growth rate, weighted average cost of capital and discount rate. |
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The excess earnings method used to value customer relationships requires the use of assumptions, the most significant of which include: the remaining useful life, expected revenue, survivor curve, earnings before interest and tax margins, marginal tax rate, contributory asset charges, discount rate and tax amortization benefit. |
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The most significant assumptions under the relief of royalty method used to value trade names and developed technology include: estimated remaining useful life, expected revenue, royalty rate, tax rate, discount rate and tax amortization benefit. The discounted cash flow method used to value non-compete agreements includes assumptions such as: expected revenue, term of the non-compete agreements, probability and ability to compete, operating margin, tax rate and discount rate. Management has developed these assumptions on the basis of historical knowledge of the business and projected financial information of the Company. These assumptions may vary based on future events, perceptions of different market participants and other factors outside the control of management, and such variations may be significant to estimated values. |
GOODWILL AND INDEFINTITE LIVED INTANGIBLE ASSETS | GOODWILL AND INDEFINTITE LIVED INTANGIBLE ASSETS |
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Goodwill was generated through the acquisitions made by the Company between 2013 and 2014. As the total consideration paid exceeded the value of the net assets acquired, the Company recorded goodwill for each of the completed acquisitions. At the date of acquisition, the Company performed a valuation to determine the value of the intangible assets, along with the allocation of assets and liabilities acquired. The goodwill is attributable to synergies and economies of scale provided to the Company by the acquired entity (see Note 3. Acquisitions and Disposals of Subsidiaries). |
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The Company tests its goodwill and indefinite-lived intangible assets for impairment at least annually (as of December 31) and whenever events or circumstances change that indicate impairment may have occurred. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in the Company’s expected future cash flows; a sustained, significant decline in the Company’s stock price and market capitalization; a significant adverse change in legal factors or in the business climate of its segments; unanticipated competition; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of goodwill, the indefinite-lived intangible assets and the Company’s consolidated financial results. |
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Goodwill has been assigned to the reporting unit to which the value relates. The Company aggregates its reporting units and tests its goodwill for impairment at the operating segment level. Ten of the Company's fourteen reporting units have goodwill. The Company tests goodwill by estimating the fair value of the reporting unit using a Discounted Cash Flow (“DCF”) model. The key assumptions used in the DCF model to determine the highest and best use of estimated future cash flows include revenue growth rates and profit margins based on internal forecasts, terminal value and an estimate of a market participant's weighted-average cost of capital used to discount future cash flows to their present value. |
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The Company tested the indefinite-lived intangible assets using a Relief From Royalty Method (“RFRM”) under the Income Approach in conjunction with a Market Approach Method. The key assumptions used in the RFRM model include revenue growth rates, the terminal value and the assumed discount rate. The Market Approach Method uses one or more methods that compare the Company to similar businesses, business ownership interest and securities that have been sold. Certain elements of the Market Approach Method are incorporated in the RFRM. While the Company uses available information to prepare estimates and to perform impairment evaluations, actual results could differ significantly from these estimates or related projections, resulting in impairment related to recorded goodwill balances. Additionally, adverse conditions in the economy and future volatility in the equity and credit markets could impact the valuation of the Company's reporting units. The Company can provide no assurances that, if such conditions occur, they will not trigger impairments of goodwill and other intangible assets in future periods within all segments. |
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During 2014, indicators of potential impairment of goodwill and indefinite-lived intangible assets were identified by management in the professional services segment. The Company's management then determined that the ADEX operating segment assets were impaired and recognized an impairment loss of $1,369 related to goodwill and $2,392 related to intangible assets as the carrying value of the ADEX business unit was in excess of its fair value. If ADEX’s projected long-term sales growth rate, profit margins or terminal rate continue to change, or the assumed weighted-average cost of capital is considerably higher, future testing may indicate additional impairment in this reporting unit and, as a result, the remaining assets may also be impaired. See Note 5, Goodwill and Intangible Assets for further information. |
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With regard to other long-lived assets and intangible assets with indefinite-lives, the Company follows a similar impairment assessment. The Company will assess the quantitative factors to determine if an impairment test of the indefinite-lived intangible asset is necessary. If the quantitative assessment reveals that it is more likely than not that the asset is impaired, a calculation of the asset’s fair value is made. Fair value is calculated using many factors, which include the future discounted cash flows as well as the estimated fair value of the asset in an arm’s-length transaction. As of December 31, 2014 and 2013, respectively, the results of the Company’s analysis indicated that no impairment existed. |
REVENUE RECOGNITION | REVENUE RECOGNITION |
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The Company’s revenues are generated from their three reportable segments: applications and infrastructure, professional services, and cloud and managed services. The Company recognizes revenue on arrangements in accordance with ASC Topic 605-10, “Revenue Recognition”. The Company recognizes revenue only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability of the resulting receivable is reasonably assured. |
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The applications and infrastructure segment revenues are derived from contracted services to provide technical engineering services along with contracting services to commercial and governmental customers. The contracts of TNS, Tropical and RM Engineering provide that payment for the Company’s services may be based on either direct labor hours at fixed hourly rates or fixed-price contracts. The services provided under the contracts are generally provided within one month. Occasionally, the services may be provided over a period of up to six months. |
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AWS recognizes revenue using the percentage of completion method. Revenues and fees on these contracts are recognized utilizing the efforts-expended method, which uses measures such as task duration and completion. The efforts-expended approach is an input method used in situations where it is more representative of progress on a contract than the cost-to-cost or the labor-hours methods. Provisions for estimated losses on uncompleted contracts, if any, are made in the period in which such losses are determined. Changes in job performance conditions and final contract settlements may result in revisions to costs and income, which are recognized in the period in which revisions are determined. |
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AWS also generates revenue from service contracts with certain customers. These contracts are accounted for under the proportional performance method. Under this method, revenue is recognized in proportion to the value provided to the customer for each project as of each reporting date. |
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The revenues of the Company’s professional services segment, which is comprised of the ADEX subsidiaries, are derived from contracted services to provide technical engineering and management solutions to large voice and data communications providers, as specified by their clients. The contracts provide that payments made for the Company’s services may be based on either direct labor hours at fixed hourly rates or fixed-price contracts. The services provided under these contracts are generally provided within one month. Occasionally, the services may be provided over a period of up to four months. If it is anticipated that the services will span a period exceeding one month, depending on the contract terms, the Company will provide either progress billing at least once a month or upon completion of the clients’ specifications. The aggregate amount of unbilled work-in-progress recognized as revenues was insignificant at December 31, 2014 and 2013, respectively. |
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ADEX’s HighWire division generates revenue through its telecommunications engineering group which contracts with telecommunications infrastructure manufacturers to install the manufacturer’s products for end users. Highwire recognizes revenue using the proportional performance method. Under the proportional performance method, the Company recognizes revenue when a project within a contract is completed. Management judgments and estimates must be made and used in connection with revenue recognized using the proportional performance method. If management made different judgments and estimates, then the amount and timing of revenue for any period could differ materially from the reported revenue. |
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The Company sometimes requires customers to provide a deposit prior to beginning work on a project. When this occurs, the deposit is recorded as deferred revenue and is recognized in revenue when the work is complete. |
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The Company’s IPC subsidiary, which is included in the Company’s cloud and managed services segment, is a value-added reseller whose revenues are generated from the resale of voice, video and data networking hardware and software contracted services for design, implementation and maintenance services for voice, video, and data networking infrastructure. IPC’s customers are higher education organizations, governmental agencies and commercial customers. IPC also provides maintenance and support and professional services. |
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For multiple-element arrangements, IPC recognizes revenue in accordance with ASC 605-25, “Arrangements with Multiple Deliverables”. The Company allocates revenue for such arrangements based on the relative selling prices of the elements applying the following hierarchy: first vendor specific objective evidence (“VSOE”), then third-party evidence (“TPE”) of selling price if VSOE is not available, and finally our estimate of the selling price if neither VSOE nor TPE is available. VSOE exists when we sell the deliverables separately and represents the actual price charged by us for each deliverable. Estimated selling price reflects our best estimate of what the selling prices of each deliverable would be if it were sold regularly on a standalone basis taking into consideration the cost structure of our business, technical skill required, customer location and other market conditions. Each element that has standalone value is accounted for as a separate unit of accounting. Revenue allocated to each unit of accounting is recognized when the service is provided or the product is delivered. |
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The Company’s VaultLogix subsidiary, which is included in the Company’s cloud and managed services segment, provides on-line data backup services to their customers. VaultLogix recognizes revenue in accordance with ASC Topic 605-10. Certain customers pay for their services in advance of services being performed. Revenue for these customers is deferred until the services are performed. During 2013, the Company did not recognize any revenue from cloud-based services. |
LONG-LIVED ASSETS, INCLUDING FINITE LIVED INTANGIBLE ASSETS | LONG-LIVED ASSETS, INCLUDING DEFINITE-LIVED INTANGIBLE ASSETS |
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Long-lived assets, other than goodwill and other indefinite-lived intangibles, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets. |
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Definite-lived intangible assets primarily consist of non-compete agreements and customer relationships. For long-lived assets used in operations, impairment losses are only recorded if the asset's carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. The Company measures the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value. |
PROPERTY AND EQUIPMENT | PROPERTY AND EQUIPMENT |
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Property and equipment are stated at cost and depreciated on a straight-line basis over their estimated useful lives. Useful lives are: 3-7 years for vehicles; 5-7 years for equipment; 3-10 years for developed software; and 3 years for computers and office equipment. Maintenance and repairs are expensed as incurred and major improvements are capitalized. When assets are sold or retired, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in other income. |
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DEFERRED LOAN COSTS | DEFERRED LOAN COSTS |
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Deferred loan costs are capitalized and amortized to interest expense using the effective interest method over the terms of the related debt agreements. The amount of amortization of deferred loan costs, which was recorded as interest expense, in the years ended December 31, 2014 and 2013 was $1,371 and $671, respectively. As a result of the conversion of a portion of the Company’s convertible debentures and a term loan at various dates during 2014, the Company recorded $722 of accelerated amortization of the deferred loan costs related to that debt for the year ended December 31, 2014. |
CONCENTRATIONS | CONCENTRATIONS |
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Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and trade receivables. The Company maintains its cash balances with high-credit-quality financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. These deposits may be withdrawn upon demand and therefore bear minimal risk. The Company limits the amount of credit exposure through diversification and management regularly monitors the composition of its investment portfolio. |
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The Company provides credit to customers on an uncollateralized basis after evaluating client creditworthiness. The Company’s largest customer, Ericsson, Inc. and its affiliates, accounted for 15% and 41% of consolidated revenues for the years ended December 31, 2014 and 2013, respectively. In addition, amounts due from this customer represented 7% and 26% of trade accounts receivable as of December 31, 2014 and 2013, respectively. A significant reduction in business from this significant customer or its failure to pay outstanding trade accounts receivable could have a material adverse effect on the Company’s results of operations and financial condition. |
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The Company’s customers in its applications and infrastructure and professional services segments are located within the United States of America and Puerto Rico. Revenues generated within the United States of America accounted for approximately 96% and 92% of consolidated revenues for the years ended December 31, 2014 and 2013, respectively. Revenues generated from foreign sources accounted for approximately 4% and 8% of consolidated revenues for the years ended December 31, 2014 and 2013, respectively. |
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The Company has obligations contingent on the performance of its subsidiaries. These contingent obligations, payable to the former owners of the subsidiaries, are based on metrics that contain escalation clauses. The Company believes that the amounts recorded within the liabilities section of the consolidated balance sheets are indicative of fair value and are also considered the most likely payout of these obligations. If conditions were to change, these liabilities could potentially impact the Company’s results of operations, financial condition and future cash flows. |
COMMITMENTS AND CONTINGENCIES | COMMITMENTS AND CONTINGENCIES |
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In the normal course of business, the Company is subject to various contingencies. The Company records any contingencies in the consolidated financial statements when it is probable that a liability will be incurred and the amount of the loss is reasonably estimable, or otherwise disclosed, in accordance with ASC Topic 450, Contingencies ("ASC 450"). Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, the Company will, when applicable, adjust the accrual in the period in which the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as a whole or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made. |
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In March 2014, a complaint was filed in the United States District Court for the District of New Jersey against the Company, the Company’s Chairman of the Board and Chief Executive Officer, Mark Munro, The DreamTeamGroup and MissionIR, as purported securities advertisers and investor relations firms, and John Mylant, a purported investor and investment advisor. The complaint was purportedly filed on behalf of a class of certain persons who purchased the Company's common stock between November 5, 2013 and March 17, 2014. The complaint alleges violations by the defendants (other than Mark Munro) of Section 10(b) of the Exchange Act, and other related provisions in connection with certain alleged courses of conduct that were intended to deceive the plaintiff and the investing public and to cause the members of the purported class to purchase shares of the Company's common stock at artificially inflated prices based on untrue statements of a material fact or omissions to state material facts necessary to make the statements not misleading. The complaint also alleges that Mr. Munro and the Company violated Section 20 of the Exchange Act as controlling persons of the other defendants. The complaint seeks unspecified damages, attorney and expert fees, and other unspecified litigation costs. |
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In January 2015, a suit was filed in the United States District Court of the Southern District of New York against the Company, the Chairman of the Board and Chief Executive Officer, Mark Munro, the Chief Accounting Officer and former Chief Financial Officer, Dan Sullivan, alleging, among other claims, breach of contract due to the Company’s failure to pay certain post-closing purchase price payments to the sellers of IPC in connection with the Company’s purchase of IPC in January 2014, and that Messrs. Munro and Sullivan intentionally interfered with such contractual obligations. |
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The Company intends to dispute these claims and to defend these litigations vigorously. However, due to the inherent uncertainties of litigation, the ultimate outcome of these litigations is uncertain. An unfavorable outcome in either litigation could materially and adversely affect the Company's business, financial condition and results of operations. |
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Currently, there is no other material litigation pending against the Company other than as disclosed in the paragraphs above. From time to time, the Company may become a party to litigation and subject to claims incident to the ordinary course of the Company's business. Although the results of such litigation and claims in the ordinary course of business cannot be predicted with certainty, the Company believes that the final outcome of such matters will not have a material adverse effect on the Company's business, results of operations or financial condition. Regardless of outcome, litigation can have an adverse impact on the Company because of defense costs, diversion of management resources and other factors. |
DISTINGUISHMENT OF LIABILITIES FROM EQUITY | DISTINGUISHMENT OF LIABILITIES FROM EQUITY |
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The Company relies on the guidance provided by ASC Topic 480, Distinguishing Liabilities from Equity, to classify certain redeemable and/or convertible instruments, such as the Company’s preferred stock. The Company first determines whether a financial instrument should be classified as a liability. The Company will determine the liability classification if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding shares, embodies a conditional obligation that the Company must or may settle by issuing a variable number of its equity shares. |
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Once the Company determines that a financial instrument should not be classified as a liability, the Company determines whether the financial instrument should be presented between the liability section and the equity section of the balance sheet (“temporary equity”). The Company will determine temporary equity classification if the redemption of the preferred stock or other financial instrument is outside the control of the Company (i.e. at the option of the holder). Otherwise, the Company accounts for the financial instrument as permanent equity. |
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Initial Measurement |
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The Company records its financial instruments classified as liability, temporary equity or permanent equity at issuance at the fair value, or cash received. |
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Subsequent Measurement |
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Financial instruments classified as liabilities |
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The Company records the fair value of its financial instruments classified as liabilities at each subsequent measurement date. The changes in fair value of its financial instruments classified as liabilities are recorded as other expense/income. The Company uses the Black Scholes pricing method, which is not materially different from a binomial lattice valuation methodology utilizing Level 3 inputs, to determine the fair value of derivative liabilities resulting from warrants and options. The Monte Carlo simulation is used to determine the fair value of derivatives for instruments with embedded conversion features. |
INCOME TAXES | INCOME TAXES |
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The Company accounts for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established to reduce deferred tax assets when management estimates, based on available objective evidence, that it is more likely than not that the benefit will not be realized for the deferred tax assets. The Company, and its subsidiaries, conduct business, and file income, franchise or net worth tax returns, in thirty nine (39) states and the Commonwealth of Puerto Rico. The Company determines its filing obligations in a jurisdiction in accordance with existing statutory and case law. |
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Significant management judgment is required in determining the provision for income taxes, and in particular, any valuation allowance recorded against the Company’s deferred tax assets. Deferred tax assets are regularly reviewed for recoverability. The Company currently has significant deferred tax assets resulting from net operating loss carryforwards and deductible temporary differences, which should reduce taxable income in future periods. The realization of these assets is dependent on generating future taxable income. |
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In June 2006, the FASB issued ASC Topic 740, Income Taxes (“ASC Topic 740”) (formerly FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109) which prescribes a two-step process for the financial statement recognition and measurement of income tax positions taken or expected to be taken in an income tax return. The first step evaluates an income tax position in order to determine whether it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position. The second step measures the benefit to be recognized in the financial statements for those income tax positions that meet the more likely than not recognition threshold. ASC Topic 740 also provides guidance on de-recognition, classification, recognition and classification of interest and penalties, accounting in interim periods, disclosure and transition. Penalties and interest, if incurred, would be recorded as a component of current income tax expense. As of December 31, 2014, and 2013, the Company has no accrued interest or penalties related to uncertain tax positions. The Company believes that any uncertain tax positions would not have a material impact on the results of operations. |
STOCK-BASED COMPENSATION | STOCK-BASED COMPENSATION |
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The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation-Stock Compensation ("ASC Topic 718"). Under the fair value recognition provisions of this topic, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense on a straight-line basis over the requisite service period, based on the terms of the awards. The Company adopted a formal stock option plan in December 2012 and it had not issued any options under the plan as of December 31, 2013. The Company issued options prior to the adoption of this plan, but the amount was not material. Historically, the Company has awarded stock grants to certain of its employees and consultants that did not contain any performance or service conditions. Compensation expense included in the Company’s consolidated statement of operations includes the fair value of the awards at the time of issuance. When common stock was issued, it was valued at the trading price on the date of issuance and was expensed as it was issued. All stock grants issued in 2013 were fully vested in 2013. The Company granted an aggregate of 1,791,979 shares in 2014, of which 1,189,987 shares were subject to a 3-year vesting term, 185,000 shares were subject to 1-year vesting, and 416,992 shares had no vesting terms. |
2012 PERFORMANCE INCENTIVE PLAN and EMPLOYEE STOCK PURCHASE PLAN | 2012 PERFORMANCE INCENTIVE PLAN and EMPLOYEE STOCK PURCHASE PLAN |
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On November 16, 2012, the Company adopted its 2012 Equity Incentive Plan (the "Equity Incentive Plan") and it’s Employee Stock Purchase Plan (the "Stock Purchase Plan"). Both plans were established to attract, motivate, retain and reward selected employees and other eligible persons. For the Equity Incentive Plan, employees, officers, directors and consultants who provide services to the Company or one of the Company’s subsidiaries may be selected to receive awards. A total of 2,325,000 shares of the Company’s common stock is authorized for issuance with respect to awards granted under the Equity Incentive Plan. The number of authorized shares under the Equity Incentive Plan will automatically increase on the first trading day in January of each year (commencing with January 2014) by an amount equal to lesser of (i) 4% of the total number of outstanding shares of the Company’s common stock on the last trading day in December in the prior year, (ii) 2,000,000 shares, or (iii) such lesser number as determined by the Company’s board of directors. Any shares subject to awards that are not paid, delivered or exercised before they expire or are canceled or terminated, or fail to vest, as well as shares used to pay the purchase or exercise price of awards or related tax withholding obligations, will become available for other award grants under the Equity Incentive Plan. During the year ended December 31, 2014, an aggregate of 1,957,353 shares were granted under the Equity Incentive Plan, and 1,101,396 shares authorized under the Equity Incentive Plan remained available for award purposes. |
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The Stock Purchase Plan is designed to allow the Company’s eligible employees and the eligible employees of the Company’s participating subsidiaries to purchase shares of the Company’s common stock, at semi-annual intervals, with their accumulated payroll deductions. A total of 500,000 shares of the Company’s common stock was initially available for issuance under the Stock Purchase Plan. The share limit will automatically increase on the first trading day in January of each year (commencing with January 2014) by an amount equal to lesser of (i) 1% of the total number of outstanding shares of the Company’s common stock on the last trading day in December in the prior year, (ii) 500,000 shares, or (iii) such lesser number as determined by the Company’s board of directors. As of December 31, 2014 and 2013, no shares had been purchased under the Stock Purchase Plan. |
NET LOSS PER SHARE | NET LOSS PER SHARE |
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The Company follows ASC 260, Earnings Per Share, which requires presentation of basic and diluted earnings per share (“EPS”) on the face of the income statement for all entities with complex capital structures, and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. In the accompanying financial statements, basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS excluded all dilutive potential shares if their effect was anti-dilutive. |
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The following sets forth the computation of diluted EPS for the year ended December 31, 2014: |
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| | For the Year ended December 31, 2014 | |
| | Net loss (Numerator) | | | Shares (Denominator) | | | Per Share Amount | |
Basic EPS | | $ | (18,795 | ) | | | 12,619,885 | | | $ | (1.49 | ) |
Change in fair value of derivative instruments | | | (25,212 | ) | | | - | | | | - | |
Dilutive shares related to warrants | | | - | | | | 286,310 | | | | - | |
Dilutive shares related to 12% Convertible Debentures convertible feature | | | - | | | | 27,206 | | | | - | |
Dilutive shares related to Forward Investments, LLC convertible feature | | | - | | | | 71,330 | | | | - | |
Dilutive EPS | | $ | (44,007 | ) | | | 13,004,731 | | | $ | (3.38 | ) |
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Basic net loss per share is based on the weighted average number of common and common-equivalent shares outstanding. Potential common shares includable in the computation of fully-diluted per share results are not presented for the years ended December 31, 2014 and 2013, respectively, in the consolidated financial statements as their effect would be anti-dilutive. |
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Basic loss per common share is computed based on the weighted average number of shares outstanding during the period. Diluted loss per share is computed in a manner similar to the basic loss per share, except the weighted-average number of shares outstanding is increased to include all common shares, including those with the potential to be issued by virtue of warrants, options, convertible debt and other such convertible instruments. Diluted loss per share contemplates a complete conversion to common shares of all convertible instruments only if they are dilutive in nature with regards to earnings per share. |
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The anti-dilutive shares of common stock outstanding for years ended December 31, 2014 and 2013 were as follows: |
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| | December 31, | | | | | |
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Warrants | | | 283,870 | | | | 681,200 | | | | | |
Convertible Notes | | | 397,602 | | | | 2,039,858 | | | | | |
| | | 681,472 | | | | 2,721,058 | | | | | |
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FAIR VALUE OF FINANCIAL INSTRUMENTS | FAIR VALUE OF FINANCIAL INSTRUMENTS |
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ASC Topic 820 "Fair Value Measurements and Disclosures" ("ASC Topic 820") provides a framework for measuring fair value in accordance with generally accepted accounting principles. |
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ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). |
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The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC Topic 820 are described as follows: |
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● | Level 1— Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. | | | | | | | | | | | |
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● | Level 2— Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. | | | | | | | | | | | |
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● | Level 3— Inputs that are unobservable for the asset or liability. | | | | | | | | | | | |
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The following section describes the valuation methodologies that the Company used to measure, for disclosure purposes, its financial instruments at fair value. |
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Debt |
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The fair value of the Company’s debt, which approximated the carrying value of the Company's debt, as of December 31, 2014 and December 31, 2013 was estimated at $57,921 and $31,600, respectively. Factors that the Company considered when estimating the fair value of its debt included market conditions, liquidity levels in the private placement market, variability in pricing from multiple lenders and term of debt. The level of the debt would be considered as level 2. |
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Contingent Consideration |
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The fair value of the Company’s contingent consideration is based on the Company’s evaluation as to the probability and amount of any earn-out that will be achieved based on expected future performance by the acquired entity. The Company utilizes a third-party valuation firm to assist in the calculation of the contingent consideration at the acquisition date. The Company evaluates the forecast of the acquired entity and the probability of earn-out provisions being achieved when it evaluates the contingent consideration at initial acquisition date and at each subsequent reporting period. The fair value of contingent consideration is measured at each reporting period and adjusted as necessary. The Company evaluates the terms in contingent consideration arrangements provided to former owners of acquired companies who become employees of the Company to determine if such amounts are part of the purchase price of the acquired entity or compensation. |
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Additional Disclosures Regarding Fair Value Measurements |
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The carrying value of cash, accounts receivable and accounts payable approximate their fair value due to the short-term maturity of those items. |
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Derivative Warrant Liabilities |
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The fair value of the derivative liabilities is classified as Level 3 within the Company’s fair value hierarchy. Please refer to Footnote 9 Derivative Instruments for a further discussion of the measurement of fair value of the derivatives and their underlying assumptions. |
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The fair value of the Company’s financial instruments carried at fair value at December 31, 2014 and 2013 were as follows: |
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823 |
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| | Quoted Prices in Active Markets for Identical Assets | | | Significant Other Observable Inputs | | | Significant Unobservable Inputs | |
(Level 1) | (Level 2) | (Level 3) |
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Liabilities: | | | | | | | | | |
Warrant derivatives | | $ | - | | | $ | - | | | $ | 18 | |
Long-term warrant derivatives | | | - | | | | - | | | | 1,855 | |
Contingent consideration | | | - | | | | - | | | | 2,725 | |
Long-term contingent consideration | | | - | | | | - | | | | | |
Issuance of option shares | | | - | | | | - | | | | 536 | |
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Total liabilities at fair value | | $ | - | | | $ | - | | | $ | 5,957 | |
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| | 31-Dec-13 | |
Liabilities: | | | | | | | | | |
Warrant derivatives | | $ | - | | | $ | - | | | $ | 19,878 | |
Long-term contingent consideration | | | - | | | | - | | | | 1,615 | |
Contingent consideration | | | - | | | | - | | | | 4,514 | |
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Total liabilities at fair value | | $ | - | | | $ | - | | | $ | 26,007 | |
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The following table provides a summary of changes in fair value of the Company’s Level 3 financial instruments for the years ended December 31, 2014 and 2013. |
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Balance as of January 1, 2013 | | $ | 5,216 | | | | | | | | | |
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Change in fair value of warrant derivative | | | 14,156 | | | | | | | | | |
Warrant derivatives fair value and fair value of conversion feature on date of issuance | | | 6,814 | | | | | | | | | |
Change in fair value of contingent consideration | | | 3,131 | | | | | | | | | |
Settlement of derivative liabilities | | | (6,185 | ) | | | | | | | | |
Fair value of long-term consideration recorded at date of acquisition | | | 932 | | | | | | | | | |
Fair value of contingent consideration recorded at date of acquisition | | | 1,943 | | | | | | | | | |
Balance December 31, 2013 | | $ | 26,007 | | | | | | | | | |
Change in fair value of warrant derivative | | | (25,772 | ) | | | | | | | | |
Warrant derivatives fair value and fair value of conversion feature on date of issuance | | | 10,003 | | | | | | | | | |
Change in fair value of contingent consideration | | | (1,782 | ) | | | | | | | | |
Settlement of Series E warrants | | | (900 | ) | | | | | | | | |
Fair value of option shares on date of issuance | | | 536 | | | | | | | | | |
Settlement of contingent consideration | | | (3,542 | ) | | | | | | | | |
Fair value of long-term consideration recorded at date of acquisition | | | 1,696 | | | | | | | | | |
Fair value of contingent consideration recorded at date of acquisition | | | 1,046 | | | | | | | | | |
Adjustment of derivative liability upon conversion of debt | | | (1,829 | ) | | | | | | | | |
Reclassification of 31 Group debt discount | | | 184 | | | | | | | | | |
Revaluation of warrants for related-party debt | | | 310 | | | | | | | | | |
Balance December 31, 2014 | | $ | 5,957 | | | | | | | | | |
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TREASURY STOCK | TREASURY STOCK |
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The Company records treasury stock at the cost to acquire it and includes treasury stock as a component of stockholders’ equity (deficit). |
RECENT ACCOUNTING PRONOUNCEMENTS | RECENT ACCOUNTING PRONOUNCEMENTS |
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On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which is effective for public entities for annual reporting periods beginning after December 15, 2016. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on the consolidated financial statements and has not yet determined the method by which the Company will adopt the standard in 2017. |
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In April 2014, the FASB issued ASU No. 2014-08, Reporting of Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). ASU 2014-08 provides a narrower definition of discontinued operations than under existing U.S. GAAP. ASU 2014-08 requires that only a disposal of a component of an entity, or a group of components of an entity, that represents a strategic shift that has, or will have, a major effect on the reporting entity’s operations and financial results should be reported in the financial statements as discontinued operations. ASU 2014-08 also provides guidance on the financial statement presentations and disclosures of discontinued operations. ASU 2014-08 is effective prospectively for disposals (or classifications as held for disposal) of components of an entity that occur in annual or interim periods beginning after December 15, 2014. The Company does not expect the adoption of ASU 2014-08 to have a material impact on the consolidated financial statements. |
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In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern—Disclosures of Uncertainties about an entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 provides new guidance related to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards and to provide related footnote disclosures. This new guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The requirements of ASU 2014-15 are not expected to have a significant impact on the consolidated financial statements. |
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RECLASSIFICATIONS | RECLASSIFICATIONS |
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Certain 2013 activities and balances were reclassified to conform to classifications used in the current period. |