| NOTE A - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES | Reverse
merger transaction On
October 3, 2014, Cybergy Holdings, Inc. ("Cybergy", "the Company"), formerly Mount Knowledge Holdings, Inc.
("MKHD"), entered into an Agreement and Plan of Merger (the "Merger Agreement") with MK Merger Acquisition
Sub, Inc., a wholly-owned subsidiary of MKHD ("Merger Sub"), Access Alternative Group S.A., and Cybergy Partners, Inc.
("Partners"), providing for the merger of Merger Sub with and into Partners (the "Merger"), with Partners
surviving the Merger as a wholly-owned subsidiary of MKHD. Pursuant to the Merger Agreement, the shareholders of Partners and
MKHD initially exchanged shares in the respective companies for 88% and 12% ownership, respectively, of the surviving company. The
Merger of Partners and MKHD, a nonoperating public shell corporation, resulted in the owners and management of Partners obtaining
actual and effective voting and operating control of the combined company. The Merger was treated as a public shell reverse acquisition
and therefore treated as a capital transaction in substance, rather than a business combination. The historical financial statements
of MKHD before the Merger were replaced with the historical financial statements of Partners before the Merger. As a result of
the Merger, Cybergy acquired the business of Partners, and has continued the existing business operations of Partners. Principles
of Consolidation, Basis of Presentation, and Fiscal Periods The
accompanying unaudited consolidated condensed financial statements of Cybergy Holdings, Inc. ("Cybergy", "Company",
"we", "us" or "our") have been prepared by us pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"). The information reflects all normal and recurring adjustments, which, in the opinion
of management, are necessary for a fair presentation of the financial position of the Company and its results of operations for
the interim periods set forth herein. The consolidated condensed balance sheet as of December 31, 2014 presented herein has been
derived from the audited balance sheet included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014. Certain
information and footnote disclosures, which are normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America, have been condensed or omitted pursuant to SEC rules and regulations,
although the Company believes that the disclosures made are adequate to make the information not misleading. The accompanying
unaudited consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014. The information reflects all
normal and recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the financial
position of the Company and its results of operations for the interim periods set forth herein. The
accompanying consolidated condensed financial statements include the accounts of Cybergy, its wholly-owned subsidiaries; Partners,
New West, Primetrix, Labs, and its 51% owned New West Energetics Joint Venture, LLC ("JV"). All intercompany accounts
and transactions have been eliminated in consolidation. In
2015, the Company changed from a calendar period end date to a "4/4/5 weekly" quarterly close cycle. The Company's fiscal
periods ended on July 3, 2015 and June 30, 2014. The
results for the three and six months ended July 3, 2015 are not necessarily indicative of the results to be expected for the full
year or any other period. Going
Concern In
2014 and 2015, the Company had negative cash flow from operations due to declining gross margin, increased personnel costs as
well as increased costs related to the acquisition and merger. The decline in gross margin was due primarily to the delay on the
transition from our JV contract to the follow-on MOTS contract with the Department of Energy. We expect to incur additional operating
losses for the year ending December 31, 2015. These
circumstances raise substantial doubt about our ability to continue as a going concern. The
Company does not currently believe that its existing cash resources are sufficient to meet its anticipated needs for the year
ending December 31, 2015. We need to obtain significant additional capital resources in order to develop products and fund operations
and make scheduled debt payments. The
accompanying unaudited consolidated condensed financial statements have been prepared assuming that the Company will continue
as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal
course of business. The Company has a history of recurring losses and had negative working capital at July 3, 2015. There
can be no assurance that the Company will be successful in reducing its negative operating cash flows, and that such cash flows
will be sufficient to sustain the Company's operations through 2015. Nor can there be any assurance that the Company can raise
additional capital. These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated
condensed financial statements were prepared assuming that the Company is a going concern. The consolidated condensed financial
statements do not include any adjustments that might result from the outcome of this uncertainty. Management's plans in regard
to these matters are focused on managing its cash flow, the proper timing of its capital expenditures, and raising additional
capital or financing in the future. In
April and May 2015, the Company raised net proceeds of $1,788,000 from the sale of Series C preferred stock and short term bridge
loans as more fully discussed in the following notes. $500,000 was used to repay a portion of the EPA note. Management
believes the Company will need additional capital in 2015 of approximately $3.0 to $3.5 million to further fund operations and
market expansion of the SmartFile software. The Company intends to cover its future operating expenses through additional financing
from existing and prospective investors, revenue from existing and new contracts, revenue from potential grants and collaborative
marketing agreements, as well as revenue from the commercialization of products and services. However, we may not be successful
in obtaining funding from new or existing collaborative agreements or the commercialization of our products and services. Further,
actual revenue may be less than forecasted. Additionally,
we have engaged a financial advisor to raise capital through the sale of stock, issuance of convertible debt or asset based loans,
which has a track record of successfully raising capital for hundreds of development stage to midcap scale companies. Use
of Estimates The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. Significant
estimates affecting the financial statements include accruals for contract reserves, recoverability of goodwill and intangible
assets and earnout obligations related to the acquisition of New West, warrant, conversion, and put valuations and income taxes.
The valuation of the warrant, conversion, and put derivative liabilities using a Lattice model is based upon interest rates, stock
prices, maturity estimates, volatility and other factors. The Company believes these estimates and assumptions are reliable. However,
these estimates and assumptions may change in the future based on actual experience as well as market conditions. It is at least
reasonably possible that the estimates used will change in the near term. Cash
and Cash Equivalents The
Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash and cash
equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which
it invests. Concentration
of Credit Risk/Fair Value of Financial Instruments Financial
instruments that potentially subject us to concentration of credit risk consist primarily of cash, cash equivalents and trade
receivables. We believe that concentrations of credit risk with respect to trade receivables are limited as they are primarily
from government agencies. Credit
Risk The
Company grants credit in the normal course of business to customers in the United States. The Company periodically performs credit
analysis and monitors the financial condition of its customers to reduce credit risk. Contracts
with the federal government, either as a prime or subcontractor, accounted for approximately 97% and 93% of revenues for the six
months ended July 3, 2015 and June 30, 2014, respectively and 99% and 93% of revenues for the three months ended July 3, 2015
and June 30, 2014, respectively. One customer accounted for 94% and 86% of total revenues for the six months ended July 3, 2015
and June 30, 2014 and 91% and 83% of revenues for the three months ended July 3, 2015 and June 30, 2014, respectively. At
July 3, 2015 and December 31, 2014, the same customer accounted for 89% and 74% of total contract receivables, respectively. Financial
Instruments The
Company uses fair value measurements in areas that include, but are not limited to: the allocation of purchase price consideration
to tangible and identifiable intangible assets and valuation of derivative liabilities. The carrying values of cash and cash equivalents,
contract receivables, accounts payable, and other current assets and liabilities approximate their fair values because of the
short-term nature of these instruments. The carrying value of our bank debt approximates fair value due to the variable nature
of the interest rates under our Credit Facility and current rates available to the Company for debt with similar terms and risk.
Since the put option is embedded in an outstanding share, management chose the "fair value option" in which the entire
instrument (the common stock and the put feature) is recorded at fair value. The
conversion features embedded in, and warrants attached to, the convertible debentures and the put liability are valued at estimated
fair value utilizing a Lattice model. The Company, using available market information and appropriate valuation methodologies,
has estimated the fair value of its financial instruments. However, considerable judgment is required in interpreting data to
develop the estimates of fair value. Contract
Receivables Contract
receivables are stated net of an allowance for doubtful accounts of $30,000 and $-0- at July 3, 2015 and December 31, 2014,
respectively. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the
associated credit risk by evaluating customers' creditworthiness and actively pursuing past due accounts. Management of the Company
reviews the collectability of customer receivables on an individual basis based on its historical collection experience with customers.
Many of the Company's customers are governmental agencies and are, therefore, subject to the terms and conditions of the Prompt
Payment Act, which, with certain exceptions, requires the U.S. government to pay the Company within 30 days from the date of submission
of a properly prepared invoice. Government
contract receivables arise from long-term U.S. government prime contracts and subcontracts. Unbilled contract receivables represent
services provided but not yet billed. The amount reflects the actual amount anticipated to be billed. The Company evaluates unbilled
amounts for collectability based on estimates of work in progress that may not be billed based on knowledge of individual balances. The
Company does not accrue finance or interest charges on its receivables. Contract receivables determined to be uncollectible are
expensed in the period such determination is made. Included
in Contract receivables are retainage amounts of $67,000 and $73,000 at July 3, 2015 and December 31, 2014, respectively. Property
and Equipment Property
and equipment are stated net of accumulated depreciation and amortization of $367,000 and $249,000 at July 3, 2015 and December
31, 2014, respectively. Goodwill We
review goodwill for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate the
carrying value of goodwill may not be recoverable. Intangibles Intangibles
are stated net of accumulated amortization of $1,169,000 and $790,000 at July 3, 2015 and December 31, 2014, respectively. Derivative
liabilities The
Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency. The
Company reviews the terms of convertible debt and equity instruments it issues to determine whether there are derivative instruments,
including an embedded conversion or put options that are required to be bifurcated and accounted for separately as a derivative
financial instrument. In circumstances where a host instrument contains more than one embedded derivative instrument, including
a conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound
derivative instrument. Also, in connection with the sale of convertible debt and equity instruments, the Company may issue freestanding
warrants or put options that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than
as equity. Derivative
instruments are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported
as nonoperating income or expense. When the convertible debt or equity instruments contain embedded derivative instruments that
are to be bifurcated and accounted for as liabilities, the total proceeds allocated to the convertible host instruments are first
allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to
the convertible instruments themselves, usually resulting in those instruments being recorded at a discount from their face value.
The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over
the life of the instrument through periodic charges to interest expense, using the effective interest method. The
Company has determined that certain of the features (specifically, the embedded conversion feature, the mandatory conversion feature,
the antidilution provisions, and default interest) embedded in its Convertible debentures were not considered "clearly and
closely related" to the economic characteristics of the Convertible debenture, nor did they meet the definition of being
indexed to the Company's own stock. The Company applies the applicable accounting provisions for the accounting of the valuation
of these features and associated warrants. The liability is adjusted quarterly to the estimated fair value based upon then current
market conditions. The Company records the change in the estimated fair value of the derivative liability in other income or expense. The
derivative liability was valued using a combination of a Brownian Motion technique and a Binomial Lattice ("Lattice")
model. A Lattice approach is a preferred valuation methodology relative to a closedform option pricing model (e.g., a Black-Scholes
option pricing model) because (i) it embodies all of the assumptions that market participants would likely consider in negotiating
the transfer of the Convertible debentures, (ii) it simulates the exercise of the Convertible debentures prior to the expiration
date, and iii) it incorporates potential variability for inputs that are not static such as the occurrence of a mandatory conversion,
an event of default or a dilutive issuance. The Lattice model utilizes interest rates, stock prices, contractually remaining term
of the underlying financial instruments and volatility factors. We utilize historical volatility over a period generally commensurate
with the remaining contractual term of the underlying financial instruments and use daily intervals for price observations. However,
the Company does not have sufficient trading activity on which to base an estimate of future stock price volatility. Therefore,
management determined that use of historical volatility of a comparable peer group over a term consistent with the remaining contractual
terms of the Convertible debentures was the best indicator of the stock's future volatility. The Company believes these estimates
and assumptions are reliable. However, these estimates and assumptions may change in the future based on actual experience as
well as market conditions. Revenue
Recognition Substantially
all of our work is performed for our customers on a contract basis based on time and materials. Revenues result from work performed
on these contracts by our employees and our subcontractors and from costs for materials and other work related costs allowed under
our contracts. Revenues
for time and materials contracts are recorded on the basis of contract allowable labor hours worked multiplied by the contract
defined billing rates, plus the direct costs and indirect cost burdens associated with materials and subcontract work used in
performance on the contract. Generally, gross profit on time and materials contracts result from the difference between the cost
of services performed and the contract defined billing rates for these services. Under
certain contracts with the U.S. government and other governmental entities, contract costs, including indirect costs, are subject
to audit by and adjustment through negotiation with governmental representatives. Revenue is recorded in amounts expected to be
realized on final settlement of any such audits. Share-Based
Compensation We
account for share-based awards in accordance with the applicable accounting rules that require the measurement and recognition
of compensation expense for all share-based payment awards based on estimated fair values. That cost is recognized over the requisite
service period in which the employee is required to provide service in exchange for the award, which is usually the vesting period. Net
Earnings (Loss) per Share of Common Stock Basic
earnings (loss) per common share are computed by dividing net earnings (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per share is calculated by dividing income (loss) available to common stockholders
by the weighted average number of common shares outstanding during the period adjusted to reflect potentially dilutive securities.
The computation of earnings (loss) per share is based on the weighted average number of shares outstanding during each of the
periods based upon the exchange ratio of shares issued in the merger. The
shareholders of Partners received Series C preferred stock in connection with the Merger, therefore the exchange ratio to common
stock was zero. Through the merger date in 2014, there were no outstanding common shares. The
following is a reconciliation of net earnings used in the calculation of basic and diluted earnings per share for the three and
six months ended July 3, 2015:
Three months ended Six
months ended
July
3, 2015
Net income attributable
to Cybergy $ 308,843,000 $ 413,266,000
Effect of dilutive
securities:
Preferred
stock - -
Stock
options 4,000 8,000
Convertible
debentures (135,520,000 ) (178,587,000 )
Warrants (11,023,000 ) (14,585,000 )
Put
option (164,217,000 ) (223,670,000 )
Diluted net (loss)
attributable to Cybergy $ (1,913,000 ) $ (3,568,000 ) The
following is a reconciliation of the number of shares used in the calculation of basic and diluted earnings per share for the
three and six months ended July 3, 2015:
Three months ended Six
months ended
July
3, 2015
Weighted-average
number of common shares outstanding 20,658,149 20,580,104
Effect of dilutive
securities:
Preferred
stock 524,069,398 523,930,466
Stock
options 17,747,780 17,755,291
Convertible
debentures 80,313,600 80,313,600
Warrants 6,431,811 6,462,297
Put
option - -
Dilutive potential
common shares 649,220,738 649,041,758 The
following securities were not included in the computation of diluted net earnings per share as their effect would have been antidilutive:
Three months ended Six
months ended
July
3, 2015
Stock options 4,648,883 4,648,883
Warrants 507,707 507,707
5,156,590 5,156,590 Income
Taxes The
current provision for income taxes represents estimated amounts payable or refundable on tax returns filed or to be filed for
the year. Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between
the tax basis of assets and liabilities and amounts reported in the consolidated balance sheets. Deferred tax assets are also
recognized for net operating loss and tax credit carryovers. The overall change in deferred tax assets and liabilities for the
period measures the deferred tax expense or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets
and liabilities are reflected as adjustments to tax expense in the period of enactment. When
appropriate, we record a valuation allowance against net deferred tax assets to offset future tax benefits that may not be realized.
In determining whether a valuation allowance is appropriate, we consider whether it is more likely than not that all or some portion
of our deferred tax assets will not be realized, based in part upon management's judgments regarding future events and past operating
results. The
Company follows the guidance of Accounting Standards Codification ("ASC") Topic 740, Accounting for Uncertainty in Income
Taxes. ASC Topic 740 prescribes a more-likely-than-not measurement methodology to reflect the financial statement impact of uncertain
tax positions taken or expected to be taken in a tax return. Recent
Accounting Pronouncements The Financial Accounting Standards Board (FASB) recently
released ASU 2015-03 ; Interest—Imputation of Interest,Simplifying the Presentation of Debt Issuance Costs | Organization Reverse
merger transaction On
October 3, 2014, Cybergy Holdings, Inc. (“Cybergy”, “the Company”), formerly Mount Knowledge Holdings,
Inc. (“MKHD”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with MK Merger Acquisition
Sub, Inc., a wholly-owned subsidiary of MKHD (“Merger Sub”), Access Alternative Group S.A., and Cybergy Partners,
Inc. (“Partners”), providing for the merger of Merger Sub with and into Partners (the “Merger”), with
Partners surviving the Merger as a wholly-owned subsidiary of MKHD. Pursuant to the Merger Agreement, the shareholders of Partners
and MKHD initially exchanged shares in the respective companies for 88% and 12% ownership, respectively, of the surviving company. The
Merger of Partners and MKHD, a non-operating public shell corporation, resulted in the owners and management of Partners obtaining
actual and effective voting and operating control of the combined company. The Merger was treated as a public shell reverse acquisition
and therefore treated as a capital transaction in substance, rather than a business combination. The historical financial statements
of MKHD before the Merger were replaced with the historical financial statements of Partners before the Merger. As a result of
the Merger, Cybergy acquired the business of Partners, and has continued the existing business operations of Partners. All
share amounts have been converted to post-merger and post reverse split equivalents. History Cybergy,
a Nevada corporation, is a holding company for our wholly-owned subsidiary, Cybergy Partners, Inc. Cybergy
Partners, Inc. (previously Civergy, Inc.) was formed in 2013 to facilitate the acquisitions of New West Technologies, LLC (“New
West”) and Cybergy Labs, LLC (formerly Bion Enterprises, LLC) (“Labs”). Partners is an operational-focused firm,
committed to building a premier, full spectrum, assistance and advisory services and products provider to the federal government,
state governments, and private clients through a disciplined execution of an organic growth and accretive acquisition strategy. Effective
January 1, 2014, Partners entered into an Equity Purchase Agreement (the “EPA”) with the Member of New West. Under
the EPA, Partners purchased all the assets, liabilities, and equity of New West for a purchase price of approximately $7.4 million.
Additionally, Partners and Labs entered into a Share Exchange Agreement effective January 1, 2014, whereby Labs transferred all
assets, liabilities and equity to Partners in exchange for 4,851,258 shares of Series C preferred stock. New
West was formed in the state of Colorado in January 1998 as Heritage Technologies, LLC and was reorganized as New West Technologies,
LLC in the state of Colorado in September 2004. New West provides technical, management, and analytical solutions in the areas
of advanced transportation technology; engineering systems; environmental analysis; policy, regulatory and outreach support; program
planning and evaluation; renewable energy systems; systems analysis and deployment; and Tribal development. During
2013, NWBSS, LLC (NWBSS) was formed as a limited liability company in the state of Colorado and was a wholly-owned subsidiary
of New West. NWBSS did not have any activity during 2013. NWBSS was spun out as a wholly-owned subsidiary of Partners in September
2014 and changed its name to Primetrix. Primetrix is a business services provider designed to give organizations the edge they
need when facing the demands of a dynamic and complex government contracting environment. Primetrix offers the opportunity for
small and medium-sized businesses to leverage efficiencies of scale in back office support, streamlining operations, ensuring
compliance with federal government regulations and guidelines, and providing the knowledge they need to make the best decisions
for the health of their brands. New
West-Energetics Joint Venture, LLC, formerly EnergyWorks Joint Venture, LLC (the “JV”), was organized in the state
of Maryland in 2006. The JV was created by its members to bid on a specific procurement with the U.S. Department of Energy for
technical, engineering, analytical, and management support services and was approved to do so by the U.S. Small Business Administration.
New West owns 51% of the JV. Formed
in 2011, Labs is a Software-as-a-Service (SaaS) firm, focused on four primary areas: intellectual property protection, business
intelligence, workflow management, and fighting fraud. LabsÂ’ flagship product, SmartFile, is a document tracking software
– monitoring human interaction with their digital documents. Labs specializes in innovative solutions to critical problems,
has expertise in grant proposal writing – for R&D grant funding, and is a technology accelerator with experience in
business development in “Tech to Market” programs for the U.S. Federal Government and the commercial sector. In 2014,
Labs expanded its scope to including other technologies focused on critical infrastructure solutions. Principles
of Consolidation and Basis of Presentation The
accompanying consolidated financial statements of Cybergy Holdings, Inc. (“Cybergy”, “Company”, “we”,
“us” or “our”) have been prepared by us pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). The information reflects all normal and recurring adjustments, which, in the opinion of management,
are necessary for a fair presentation of the financial position of the Company and its results of operations for the interim periods
set forth herein. The
accompanying consolidated financial statements for 2014 include the accounts of Cybergy, its wholly-owned subsidiaries; Partners,
New West, Primetrix, Labs, and its 51% owned New West-Energetics Joint Venture, LLC (“JV”). The
accompanying consolidated financial statements for 2013 include the accounts of Partners from inception in June 2013 and Labs
from the date the entities were under common control in June 2013 to December 2013. All
intercompany accounts and transactions have been eliminated in consolidation. The CompanyÂ’s fiscal year ends on December
31. Our fiscal periods are referred to herein
as 2014 and 2013. Going
Concern In
2014, the Company had negative cash flow from operations due to declining gross margin, increased personnel costs as well as M&A
costs related to the acquisition and merger. The decline in gross margin was due primarily to the delay on the transition from
our JV contract to the follow-on MOTS contract with the Department of Energy. Operating cash flow in 2015 remains negative due
to the continued delay in the transition to the follow-on contract. We expect to incur additional operating losses for the year
ending December 2015. The
Company does not currently believe that its existing cash resources are sufficient to meet its anticipated needs for the year
ending December 2015. We need to obtain significant additional capital resources in order to develop products and fund operations
and make scheduled debt payments. The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern,
which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.
The Company has a history of recurring losses and had negative working capital at December 2014. There
can be no assurance that the Company will be successful in reducing its negative operating cash flows, and that such cash flows
will be sufficient to sustain the CompanyÂ’s operations through 2015. Nor can there be any assurance that the Company can
raise additional capital. These factors raise substantial doubt about the CompanyÂ’s ability to continue as a going concern.
The consolidated financial statements were prepared assuming that the Company is a going concern. The consolidated financial statements
do not include any adjustments that might result from the outcome of this uncertainty. ManagementÂ’s plans in regard to these
matters are focused on managing its cash flow, the proper timing of its capital expenditures, and raising additional capital or
financing in the future. Use
of Estimates The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. Significant
estimates affecting the financial statements include accruals for contract reserves, recoverability of goodwill and intangible
assets and earn-out obligations related to the acquisition of New West, warrant, conversion, and put valuations and income taxes.
The valuation of the warrant, conversion, and put derivative liabilities using a Lattice model is based upon interest rates, stock
prices, maturity estimates, volatility and other factors. The Company believes these estimates and assumptions are reliable. However,
these estimates and assumptions may change in the future based on actual experience as well as market conditions. It is at least reasonably
possible that the estimates used will change in the near term. Cash
and Cash Equivalents The
Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash and cash
equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which
it invests. Concentration
of Credit Risk/Fair Value of Financial Instruments Financial
instruments that potentially subject us to concentration of credit risk consist primarily of cash, cash equivalents and trade
receivables. We believe that concentrations of credit risk with respect to trade receivables are limited as they are primarily
from government agencies. Credit
Risk The
Company grants credit in the normal course of business to customers in the United States. The Company periodically performs credit
analysis and monitors the financial condition of its customers to reduce credit risk. Contracts with the federal government, either
as a prime or subcontractor, accounted for approximately 94% of revenues and one customer accounted for 89% of total revenues
during 2014. At December 2014 the same customer accounted for 74% of total contract receivables. Financial
Instruments The
Company uses fair value measurements in areas that include, but are not limited to: the allocation of purchase price consideration
to tangible and identifiable intangible assets and valuation of derivative liabilities. The carrying values of cash and cash equivalents,
contract receivables, accounts payable, and other current assets and liabilities approximate their fair values because of the
short-term nature of these instruments. The carrying value of our bank debt approximates fair value due to the variable nature
of the interest rates under our Credit Facility and current rates available to the Company for debt with similar terms and risk.
Since the put option is embedded in an outstanding share, management chose the “fair value option” in which the entire
instrument (the common stock and the put feature) is recorded at fair value. The
conversion features embedded in, and warrants attached to, the convertible debentures and the put liability are valued at estimated
fair value utilizing a Lattice model. The Company, using available market information and appropriate valuation methodologies,
has estimated the fair value of its financial instruments. However, considerable judgment is required in interpreting data to
develop the estimates of fair value. Contract
Receivables The
Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated credit risk
by evaluating customers' creditworthiness and actively pursuing past due accounts. Management of the Company reviews the collectability
of customer receivables on an individual basis based on its historical collection experience with customers. Many of the Company's
customers are governmental agencies and are, therefore, subject to the terms and conditions of the Prompt Payment Act, which,
with certain exceptions, requires the U.S. government to pay the Company within 30 days from the date of submission of a properly
prepared invoice. U.S.
government contract receivables arise from long-term U.S. government prime contracts and subcontracts. Unbilled contract receivables
represent services provided but not yet billed. The amount reflects the actual amount anticipated to be billed. The Company evaluates
unbilled amounts for collectability based on estimates of work-in-progress that may not be billed based on knowledge of individual
balances. The
Company does not accrue finance or interest charges on its receivables. Contract
receivables determined to be uncollectible are expensed in the period such determination is made. No allowance was considered
necessary as of December 2014. Property
and Equipment Property
and equipment are stated at cost. Equipment under capital leases is valued at the lower of fair market value or net present value
of the minimum lease payments at inception of the lease. Depreciation is provided utilizing the straight-line method over the
estimated useful lives for owned assets, ranging from three to seven years, and the related lease terms for leasehold improvements
and equipment under capital leases. The cost of normal maintenance and repairs is charged to operating expenses as incurred. Material
expenditures that increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the
asset. The cost of properties sold, or otherwise disposed of, and the related accumulated depreciation or amortization, are removed
from the accounts, and any gains or losses are reflected in current operations. Long-Lived
Assets The
Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of the asset may not be recovered. The Company looks primarily to the undiscounted future cash flows in its assessment of whether
or not long-lived assets have been impaired. There were no impairments during 2014 and 2013. Goodwill We
review goodwill for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate the
carrying value of goodwill may not be recoverable. We
first evaluate qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent)
that the fair value of the reporting unit is less than its carrying amount, including goodwill. If after qualitatively assessing
the totality of events or circumstances we determine that it is not more likely than not that the fair value of the reporting
unit is less than its carrying amount, then further testing is unnecessary. If after assessing the totality of events or circumstances,
we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the reporting
unit shall estimate the fair value of the reporting unit and compare the fair value of the reporting unit with its carrying amount,
including goodwill, as discussed below. In
assessing whether it is more likely than not that an indefinite-lived intangible asset is impaired, we assess relevant events
and circumstances that could affect the significant inputs used to determine the fair value. The
quantitative impairment test for an indefinite-lived intangible asset consists of a comparison of the fair value of the asset
with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, a reporting unit shall recognize
an impairment loss in an amount equal to that excess. The
quantitative goodwill impairment test involves a two-step process. In the first step, we compare the fair value of each reporting
unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no
further testing is required. If the fair value of the reporting unit is less than the carrying value, we must perform the second
step of the impairment test to measure the amount of impairment loss. In the second step, the reporting unit's fair value is allocated
to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis
that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business
combination. If the implied fair value of the reporting unit's goodwill is less than the carrying value, the difference is recorded
as an impairment loss. Intangibles Intangible
assets consist of the value of customer relationships, trademark and trade names, non-compete agreements and patents. We amortize
intangible assets on a straight-line basis over their estimated useful lives unless their useful lives are determined to be indefinite.
The amounts we record related to acquired intangibles are determined by us considering the results of independent valuations.
Our intangibles are amortized over their estimated useful lives of 1 to 15 years with a weighted-average life of 6.3 years remaining
as of December 2014. Deferred
Rent The
Company recognizes rental expense on a straight-line basis over the life of the agreement. Deferred rent is recognized as the
difference between cash payments and rent expense, including any landlord incentives. Derivative
liabilities The
Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency. The
Company reviews the terms of convertible debt and equity instruments it issues to determine whether there are derivative instruments,
including an embedded conversion or put options that are required to be bifurcated and accounted for separately as a
derivative financial instrument. In circumstances where a host instrument contains more than one embedded derivative instrument,
including a conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a
single, compound derivative instrument. Also, in connection with the sale of convertible debt and equity instruments, the Company
may issue freestanding warrants or put options that may, depending on their terms, be accounted for as derivative instrument
liabilities, rather than as equity. Derivative
instruments are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported
as non-operating income or expense. When the convertible debt or equity instruments contain embedded derivative instruments that
are to be bifurcated and accounted for as liabilities, the total proceeds allocated to the convertible host instruments are first
allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to
the convertible instruments themselves, usually resulting in those instruments being recorded at a discount from their face value.
The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over
the life of the instrument through periodic charges to interest expense, using the effective interest method. The
Company has determined that certain of the features (specifically, the embedded conversion feature, the mandatory conversion feature,
the anti-dilution provisions, and default interest) embedded in its Convertible debentures were not considered “clearly
and closely related” to the economic characteristics of the Convertible debenture, nor did they meet the definition of being
indexed to the CompanyÂ’s own stock. The Company applies the applicable accounting provisions for the accounting of the valuation
of these features and associated warrants. The liability is adjusted quarterly to the estimated fair value based upon then current
market conditions. The Company records the change in the estimated fair value of the derivative liability in other expense. The
derivative liability was valued using a combination of a Brownian Motion technique and a Binomial Lattice (“Lattice”)
model. A Lattice approach is a preferred valuation methodology relative to a closed-form option pricing model (e.g., a Black-Scholes
option pricing model) because (i) it embodies all of the assumptions that market participants would likely consider in negotiating
the transfer of the Convertible debentures, (ii) it simulates the exercise of the Convertible debentures prior to the expiration
date, and iii) it incorporates potential variability for inputs that are not static such as the occurrence of a mandatory conversion,
an event of default or a dilutive issuance. The Lattice model utilizes interest rates, stock prices, contractually remaining term
of the underlying financial instruments and volatility factors. We utilize historical volatility over a period generally commensurate
with the remaining contractual term of the underlying financial instruments and use daily intervals for price observations. However,
the Company does not have sufficient trading activity on which to base an estimate of future stock price volatility. Therefore,
management determined that use of historical volatility of a comparable peer group over a term consistent with the remaining contractual
terms of the Convertible debentures was the best indicator of the stockÂ’s future volatility. The Company believes these
estimates and assumptions are reliable. However, these estimates and assumptions may change in the future based on actual experience
as well as market conditions. Revenue
Recognition Substantially
all of our work is performed for our customers on a contract basis based on time and materials. Revenues result from work performed
on these contracts by our employees and our subcontractors and from costs for materials and other work related costs allowed under
our contracts. Revenues
for time and materials contracts are recorded on the basis of contract allowable labor hours worked multiplied by the contract
defined billing rates, plus the direct costs and indirect cost burdens associated with materials and subcontract work used in
performance on the contract. Generally, gross profit on time and materials contracts result from the difference between the cost
of services performed and the contract defined billing rates for these services. Under
certain contracts with the U.S. government and other governmental entities, contract costs, including indirect costs, are subject
to audit by and adjustment through negotiation with governmental representatives. Revenue is recorded in amounts expected to be
realized on final settlement of any such audits. Share-Based
Compensation We
account for share-based awards in accordance with the applicable accounting rules that require the measurement and recognition
of compensation expense for all share-based payment awards based on estimated fair values. That cost is recognized over the requisite
service period in which the employee is required to provide service in exchange for the award, which is usually the vesting period. Net
Earnings (Loss) per Share of Common Stock Basic
earnings (loss) per common share are computed by dividing net earnings (loss) by the weighted average number of common
shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing income (loss) available
to common stockholders by the weighted average number of common shares outstanding during the period adjusted to reflect potentially
dilutive securities. The computation of earnings (loss) per share is based on the weighted average number of shares outstanding
during each of the periods based upon the exchange ratio of shares issued in the merger. The shareholders of Partners received
Series C preferred stock in connection with the Merger, therefore the exchange ratio to common stock was zero. In 2013 and through
the merger date in 2014, there were no outstanding common shares. Potentially
dilutive shares The
holders of Series C preferred stock do not share in the earnings of Cybergy. The following outstanding securities were excluded
from the calculation of earnings (loss) per share as the effect of the assumed exercise or conversion would be anti-dilutive:
2014 2013
Warrants 7,063,775 17,594,794
Convertible
debentures 80,313,600 -
Series C preferred
stock 523,784,355 -
Total 611,161,730 17,594,794 Income
Taxes The
current provision for income taxes represents estimated amounts payable or refundable on tax returns filed or to be filed for
the year. Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between
the tax basis of assets and liabilities and amounts reported in the consolidated balance sheets. Deferred tax assets are also
recognized for net operating loss and tax credit carryovers. The overall change in deferred tax assets and liabilities for the
period measures the deferred tax expense or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets
and liabilities are reflected as adjustments to tax expense in the period of enactment. When
appropriate, we record a valuation allowance against net deferred tax assets to offset future tax benefits that may not be realized.
In determining whether a valuation allowance is appropriate, we consider whether it is more likely than not that all or some portion
of our deferred tax assets will not be realized, based in part upon managementÂ’s judgments regarding future events and past
operating results. The
Company follows the guidance of Accounting Standards Codification ("ASC") Topic 740, Accounting for Uncertainty in
Income Taxes Interest
and penalties associated with tax positions are recorded in the period assessed as an adjustment to income tax expense. No interest
or penalties have been assessed as of December 2014. Segment
Information The
Company currently operates in one business segment providing engineering and analysis of clean energy, smart grid and environmental
technologies. Reclassifications Certain
reclassifications were made to the 2013 financial statements in order to conform to the presentation of the 2014 financial statements.
The reclassifications did not have any effect on the previously reported net loss. Recent
Accounting Pronouncements In
May 2014, the Financial Accounting Standards Board (“FASB”) amended the FASB Accounting Standards Codification and
released Accounting Standards Update 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. The core principle of the guidance
is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that
core principle, an entity should apply the following steps:
· Identify the contract(s) with a customer.
· Identify the performance obligations
in the contract.
· Determine the transaction price.
· Allocate the transaction price to the
performance obligations in the contract.
· Recognize revenue when (or as) the
entity satisfies a performance obligation. ASU
2014-09 is effective for annual reporting periods beginning after September 15, 2016. We will assess the impact of ASU 2014-09
on our consolidated financial position and results of operations in 2015. In August 2014, FASB released Accounting Standards
Update 2014-15, Presentation of Financial Statements—Going Concern, (Subtopic 205-40), Disclosure of Uncertainties about
an EntityÂ’s Ability to Continue as a Going Concern. In connection with preparing financial statements for each annual and
interim reporting period, an entityÂ’s management should evaluate whether there are conditions or events, considered in the
aggregate, that raise substantial doubt about the entityÂ’s ability to continue as a going concern within one year after
the date that the financial statements are issued (or within one year after the date that the financial statements are available
to be issued when applicable). If conditions or events raise substantial doubt about an entityÂ’s ability to continue as
a going concern, and substantial doubt is not alleviated after consideration of managementÂ’s plans, an entity should include
a statement in the footnotes indicating that there is substantial doubt about the entityÂ’s ability to continue as a going
concern within one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 is effective
for annual reporting periods beginning after December 15, 2016. We will assess the impact of ASU 2014-15 on our consolidated financial
position and results of operations in 2015. |
