ACCSYS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 2019 AND DECEMBER 31, 2018
AND CONSOLIDATED STATEMENTS OF
OPERATIONS AND SHAREHOLDERS' DEFICIT, AND OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2019 AND 2018
(Unaudited)
ACCSYS, INC. AND SUBSIDIARY
Table of Contents
September 30, 2019 and 2018 and December 31, 2018
| Consolidated Financial Statements (Unaudited): | Page |
| | |
| Balance Sheets as of September 30, 2019 and December 31, 2018 | 1- 2 |
| | |
| Statements of Operations and Shareholders' Deficit for the nine months ended September 30, 2019 and 2018 | 3 |
| | |
| Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 | 4 |
| | |
| Notes to Consolidated Financial Statements | 5- 13 |
ACCSYS, INC. AND SUBSIDIARY
Consolidated Balance Sheets (Unaudited)
Assets
| | September 30, 2019 | | | December 31, 2018 | |
| Current Assets: | | | | | | |
| Cash and cash equivalents | | $ | 339,692 | | | $ | 759,297 | |
| Accounts and unbilled receivables | | | 196,854 | | | | 109,562 | |
| Employee advances | | | 51,225 | | | | - | |
| Prepaid expenses and other current assets | | | 99,797 | | | | 109,969 | |
| Total current assets | | | 687,568 | | | | 978,828 | |
| Property and equipment, at cost: | | | | | | | | |
| Office equipment | | | 283,366 | | | | 286,792 | |
| Leasehold improvements | | | 40,500 | | | | 40,500 | |
| Furniture and fixtures | | | 25,246 | | | | 25,246 | |
| Computer software | | | 7,249 | | | | 7,249 | |
| | | | 356,361 | | | | 359,787 | |
| Less accumulated depreciation and amortization | | | (307,827 | ) | | | (293,630 | ) |
| Net property and equipment | | | 48,534 | | | | 66,157 | |
| Other long-term asset | | | 195,735 | | | | - | |
| Total Assets | | $ | 931,837 | | | $ | 1,044,985 | |
See notes to consolidated financial statements.
ACCSYS, INC. AND SUBSIDIARY
Consolidated Balance Sheets (Unaudited) - Continued
Liabilities and Shareholders' Deficit
| | September 30, 2019 | | | December 31, 2018 | |
| Current Liabilities: | | | | | | |
| Accounts payable and other liabilities | | $ | 530,055 | | | $ | 647,770 | |
| Payroll and payroll related liabilities | | | 207,005 | | | | 249,103 | |
| Customer deposits | | | 119,530 | | | | 94,188 | |
| Customer rebates payable | | | 61,570 | | | | 68,471 | |
| Deferred revenues | | | 507,753 | | | | 965,759 | |
| Line of credit | | | 100,000 | | | | 100,000 | |
| Capital lease obligations - current portion | | | 19,044 | | | | 20,754 | |
| Note payable - current portion | | | 89,324 | | | | - | |
| Shareholder notes payable - current portion | | | 30,000 | | | | 30,000 | |
| | | | | | | | | |
| Total current liabilities | | | 1,664,281 | | | | 2,176,045 | |
| | | | | | | | | |
| Capital lease obligations, net of current portion | | | 11,888 | | | | 25,724 | |
| Note payable, net of current portion | | | 159,389 | | | | - | |
| Shareholder notes payable, net of current portion | | | 4,472,600 | | | | 4,495,100 | |
| Deferred liabilities - shareholders | | | 1,734,636 | | | | 1,734,636 | |
| | | | | | | | | |
| Total liabilities | | | 8,042,794 | | | | 8,431,505 | |
| | | | | | | | | |
| Commitments (Note 6) | | | | | | | | |
| Shareholders' Deficit: | | | | | | | | |
| Common stock, $1 par value, 1,000 shares authorized, 810 shares issued and outstanding | | | 810 | | | | 810 | |
| Additional paid-in capital | | | 475,817 | | | | 475,817 | |
| Treasury stock, 190 shares, at cost | | | (300,000 | ) | | | (300,000 | ) |
| Deficit | | | (7,287,584 | ) | | | (7,563,147 | ) |
| | | | | | | | | |
| Total shareholders' deficit | | | (7,110,957 | ) | | | (7,386,520 | ) |
| | | | | | | | | |
| Total Liabilities and Shareholders' Deficit | | $ | 931,837 | | | $ | 1,044,985 | |
See notes to consolidated financial statements.
ACCSYS, INC. AND SUBSIDIARY
Consolidated Statements of Operations (Unaudited)
| | For the Nine Months Ended September 30, | |
| | | 2019 | | | 2018 | |
| Revenues, net | | $ | 5,741,042 | | | $ | 4,532,375 | |
| Costs of revenues | | | 2,888,555 | | | | 2,409,565 | |
| Gross profit | | | 2,852,487 | | | | 2,122,810 | |
| Operating expenses | | | 2,353,869 | | | | 2,221,739 | |
| Operating income (loss) | | | 498,618 | | | | (98,929 | ) |
| Other income (expense): | | | | | | | | |
| Interest income | | | 140 | | | | 213 | |
| Interest expense | | | (223,195 | ) | | | (145,709 | ) |
| Other expense | | | - | | | | (26,636 | ) |
| Total other expense, net | | | (223,055 | ) | | | (172,132 | ) |
| Net income (loss) | | | 275,563 | | | | (271,061 | ) |
| Deficit, beginning of period | | | (7,563,147 | ) | | | (6,871,054 | ) |
| Less distributions | | | - | | | | (78,000 | ) |
| Deficit, end of period | | $ | (7,287,584 | ) | | $ | (7,220,115 | ) |
See notes to consolidated financial statements.
ACCSYS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
| | For the Nine Months Ended September 30, | |
| | 2019 | | | 2018 | |
| Cash flows from operating activities: | | | | | | |
| Net income (loss) | | $ | 275,563 | | | $ | (271,061 | ) |
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | | | | |
| Depreciation and amortization | | | 17,575 | | | | 2,100 | |
| Loss on disposal of equipment | | | 48 | | | | - | |
| Provision for bad debts | | | 1,175 | | | | 21,789 | |
| Changes in assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (88,467 | ) | | | 222,102 | |
| Employee advances | | | (51,225 | ) | | | 250 | |
| Prepaid expenses and other current assets | | | 10,172 | | | | (28,744 | ) |
| Other assets | | | 106,665 | | | | - | |
| Accounts payable | | | (117,715 | ) | | | 82,072 | |
| Payroll and payroll related liabilities | | | (42,098 | ) | | | 68,937 | |
| Customer deposits | | | 25,342 | | | | 34,822 | |
| Customer rebate payable | | | (6,901 | ) | | | (5,250 | ) |
| Deferred revenue | | | (458,006 | ) | | | (427,438 | ) |
| Net cash used in operating activities | | | (327,872 | ) | | | (300,421 | ) |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Distributions | | | - | | | | (78,000 | ) |
| Payments on short term note payable | | | (53,687 | ) | | | - | |
| Payments on shareholder note payable | | | (22,500 | ) | | | (30,000 | ) |
| Payments on capital lease obligations | | | (15,546 | ) | | | (20,736 | ) |
| Cash used in financing activities | | | (91,733 | ) | | | (128,736 | ) |
| Net decrease in cash and cash equivalents | | | (419,605 | ) | | | (429,157 | ) |
| Cash and cash equivalents, beginning of period | | | 759,297 | | | | 700,446 | |
| Cash and cash equivalents, end of period | | $ | 339,692 | | | $ | 271,289 | |
| Supplemental Disclosure of Cash Flow Information: | | | | | | | | |
| Cash paid for interest | | $ | 100,147 | | | $ | 107,568 | |
| Supplemental Disclosure of Noncash Investing and Financing Transactions: | | | | | | | | |
Purchase of license agreement financed by note payable
| | $ | 302,400 | | | $ | - | |
See notes to consolidated financial statements.
ACCSYS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2019 and 2018 and December 31, 2018
Note 1 - Description of business and summary of significant accounting policies:
Nature of business
AccSys, Inc. (d/b/a Restaurant Magic Software), ("AccSys") was initially incorporated under the laws of the state of Florida in 1979. In November 2019, AccSys converted to a limited liability company under the laws of state of Delaware. AccSys's primary product, Data Central, is a suite of back office applications designed to help restaurant managers achieve operational and financial goals. The software integrates information from customers' existing POS, inventory, supply, payroll, and accounting platforms to provide a comprehensive view of operations. Data Central is offered as Software as a Service (SaaS) to its customers. The Company is headquartered in Tampa, Florida and its customers are located throughout the United States.
Basis of presentation
The Company has have adopted the Financial Accounting Standards Board (FASB) Codification (Codification). The Codification is the single official source of authoritative accounting principles generally accepted in the United States of America (U.S. GAAP) recognized by the FASB to be applied by nongovernmental entities, and all of the Codification's content carries the same level of authority.
Basis of consolidation
The accompanying unaudited consolidated financial statements include the accounts of AccSys and its wholly-owned subsidiary, AfterWords, Inc. ("AfterWords"). AccSys and AfterWords are hereinafter collectively referred to as the "Company." In November 2019, the Company's interest in AfterWords was transferred to a separate related entity. All significant intercompany balances and transactions have been eliminated in consolidation.
Liquidity
The Company’s consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. The Company has invested significant resources into the launch of AfterWords and as a result has significant shareholders' and working capital deficits at September 30, 2019 of approximately $7,288,000 and $2,711,000, respectively. However, a significant portion of the deficit resulted from deferred revenues of $507,753 which will not require the outlay of cash. Furthermore, in December 2019 the shareholders sold substantially all assets of the Company. All obligations due to the shareholders, including liabilities for deferred compensation and interest of $1,734,636, were paid in full upon closing of the sale. Management believes the Company will have adequate resources to meet its remaining obligations through, at a minimum, one year from the date of these consolidated financial statements.
ACCSYS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
September 30, 2019 and 2018 and December 31, 2018
Note 1 - Description of business and summary of significant accounting policies - continued:
Use of estimates in the preparation of financial statements
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. The reported amounts of revenues and expenses during the reporting period may be affected by these estimates. Estimates that are critical to the accompanying consolidated financial statement relate primarily to management's belief that all of the Company's long-lived asset are recoverable and that the Company will generate adequate cash to meet its obligations. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary. Actual results could differ from these estimates.
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or less from date of purchase to be cash equivalents.
Accounts receivable and credit policies
The Company's payment terms generally require payment within 30 days. Management performs ongoing credit evaluations of the Company's customers and generally does not require collateral as management believes the Company has collection measures in place to limit the potential for significant losses. The Company maintains allowances for doubtful accounts, when applicable, for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectibility of specific customer accounts: customer creditworthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. Balances that remain outstanding after the Company has made reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Substantially all of the Company's receivables were recovered subsequent to September 30, 2019 and December 31, 2018; accordingly, no allowance for doubtful accounts was deemed necessary as of such dates.
Revenue and cost recognition
The Company prepares its consolidated financial statements using the accrual basis of accounting, whereby revenues are recognized when earned and expenses are recognized when incurred. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price to the customer is fixed or determinable, and collectibility of the receivable is reasonably assured.
ACCSYS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
September 30, 2019 and 2018 and December 31, 2018
Note 1 - Description of business and summary of significant accounting policies - continued:
The Company enters in contractual relationships with customers to provide back office restaurant management. These services are provided under arrangements that allow for the use of a product or service over a period of time without taking possession of the Company's software.
Revenues from subscription services are recognized over the subscription period, which is generally on an annual basis, while revenue from professional services are recognized upon the completion of the services. Cash received from customers in excess of revenue recognized is recorded as deferred revenue. Revenue is recorded net of related discounts and promotions.
Costs of revenues are comprised primarily of hosting and infrastructure fees, and salaries and employee benefits for employees dedicated to providing customer service. Costs of revenues are recognized as incurred, which generally matches in the same period in which the corresponding revenues are recognized.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Repairs and maintenance are expensed as incurred. Depreciation and amortization are determined using the straight-line method over the shorter of the lease terms or estimated useful lives of the respective assets, which range from 3 to 39 years. Upon the sale, retirement or other disposition of assets, the related cost and accumulated depreciation and amortization are eliminated from the accounts, and any gain or loss is recognized in operations.
Property and equipment includes leased assets having a cost of $62,672 and $66,097 and net book value of $29,698 and $46,478 at September 30, 2019 and December 31, 2018, respectively. Depreciation and amortization for the nine-month periods ended September 30, 2019 and 2018 was $17,575 and $2,100, respectively.
Other long-term asset
Other long-term asset consists an up-front payment for the cloud services portion of a license agreement in the amount of $332,400. The agreement allows for consumption-based billing and as such the up-front payment is utilized based on actual usage. For nine month period ended September 30, 2019 the company has utilized $136,665.
ACCSYS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
September 30, 2019 and 2018 and December 31, 2018
Note 1 - Description of business and summary of significant accounting policies - continued:
Impairment of long-lived assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. At September 30, 2019, management believes all of the Company’s long-lived assets are recoverable.
Income taxes
Because AccSys and AfterWords were Subchapter S Corporations as of September 30, 2019 and December 31, 2018, the Company is not subject to income taxes; rather, the results of its operations flow through to the Company’s shareholders for inclusion in their personal income tax returns. Accordingly, these consolidated financial statements do not include any provision for income taxes.
The Company is required to evaluate each of its tax positions to determine if they are more likely than not to be sustained if the taxing authority examines the respective position. A tax position includes an entity's status as a pass-through entity and the decision not to file a tax return. Management has evaluated each of the Company’s tax positions and determined that no provision or liability for income taxes is necessary.
Advertising costs
Advertising costs, which are expensed as incurred, totaled $401,835 and $164,665 for the nine
months ended September 30, 2019 and 2018, respectively, and is included in operating expenses on the consolidated statement of operations.
Internally developed software
The Company charges all product development expenses to operations as they are incurred because management previously determined that the time period during which costs could be capitalized from the point of reaching technological feasibility until the time of general product release was very short, and consequently, the amounts that could be capitalized would not be material to the Company's consolidated financial position or results of operations.
ACCSYS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
September 30, 2019 and 2018 and December 31, 2018
Note 1 - Description of business and summary of significant accounting policies - continued:
Date of management's review and other subsequent events
Management has evaluated events and transactions subsequent to September 30, 2019 for potential recognition or disclosure through January 30, 2020, which is the date the consolidated financial statements were available to be issued. Significant subsequent events were as follows:
| | • | In November 2019, shareholder interests in AfterWords were spun off to a new legal entity not subject to consolidation. Loans due to the Company from the former subsidiary of approximately $3,240,000 (such amounts were eliminated in consolidation as of September 30, 2019 and December 31, 2018) were distributed to the shareholders as part of the transaction noted below. |
| • | In December 2019, substantially all of the Company's assets were sold to an independent third party. In connection with the transaction, shareholder notes payable, the line of credit and the amounts due to related parties included in the accompanying consolidated balance sheet, were paid. |
Note 2 - Note payable:
Note payable consists of the following:
| | | September 30, 2019 | | | December 31, 2018 | |
Note payable, collateralized by the right to use software and services financed by the agreement, due in monthly installments of $9,372, including interest at 7.25%, through March 2022. | | $ | 248,713 | | | $
| - | |
| Less: current portion | | | (89,324 | ) | | | - | |
| Long-term portion | | $ | 159,389 | | | $ | - | |
ACCSYS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
September 30, 2019 and 2018 and December 31, 2018
Note 2 - Notes payable - continued:
Future minimum payments of the note payable are as follows:
| Twelve months ending September 30, | | | | |
| 2020 | | $ | 89,324 | |
| 2021 | | | 104,328 | |
| 2022 | | | 55,061 | |
| | | $ | 248,713 | |
Note 3 - Line of credit:
Prior to its satisfaction and cancellation in December 2019, advances under the line of credit were secured by substantially all of the Company's assets, and accrued interest at a rate of prime plus 4.75% (maximum borrowings of $100,000 were available).
Note 4 - Shareholder notes payable:
| | | September 30, 2019 | | | December 31, 2018 | |
| | | | | | | |
Notes with interest only payments made on an annual basis. Prior to their satisfaction in December 2019, the notes accrued interest at a rate of 4.5%, were due in 2021 and secured by a second interest in substantially all of the Company's assets and intellectual property. | | $ | 4,130,000 | | | $ | 4,130,000 | |
| | | | | | | | |
| Notes with interest only payments made on an annual basis. Prior to their satisfaction in December 2019, the notes accrued interest at a rate of 5%, were due in 2021 and secured by a second interest in substantially all of the Company's assets and intellectual property. | | | 215,100 | | | | 215,100 | |
| | | | | | | | | |
Unsecured note payable to former shareholder that prior to its satisfaction in December 2019 was due in quarterly principal payments of $7,500 plus interest at a fixed rate of 3.25%. | | | 157,500 | | | | 180,000 | |
| | | | | | | | | |
| Shareholder notes payable | | $ | 4,502,600 | | | $ | 4,525,100 | |
ACCSYS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
September 30, 2019 and 2018 and December 31, 2018
Note 4 - Shareholder notes payable - continued:
Interest expensed and paid under the above mentioned notes approximated $202,000 and $100,100, respectively, for the nine months ended September 30, 2019. Interest expensed and paid under the above mentioned notes approximated $147,700 and $107,600, respectively, for the nine months ended September 30, 2018. These amounts include $60,200 and $35,100 of interest expensed and paid to the former shareholder. Accrued interest under the above mentioned notes was $405,600 and $303,736 as of September 30, 2019 and December 31, 2018, respectfully, and is included in the balance of accounts payable and other liabilities for reporting purposes.
Future minimum payments for shareholder notes payable are as follows:
| Twelve months ending September 30, | | | |
| 2020 | | $ | 30,000 | |
| 2021 | | | 30,000 | |
| 2022 | | | 4,375,100 | |
| 2023 | | | 30,000 | |
| 2024 | | | 30,000 | |
| Thereafter | | | 7,500 | |
| Total shareholder notes payable | | | 4,502,600 | |
| Less current portion | | | 30,000 | |
| Shareholder notes payable - non current | | $ | 4,472,600 | |
Note 5 - Capital leases:
The Company has entered into various lease agreements for computer hardware with Dell. These agreements are for a period of 36-60 months with interest rates between 5.00% and 22.92%. Upon termination ownership transfers to the Company with the payment of a bargain purchase option.
ACCSYS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
September 30, 2019 and 2018 and December 31, 2018
Note 5 - Capital leases - continued:
| Future minimum payments under these leases are as follows: Twelve months ending September 30, | | | |
| 2020 | | $ | 20,721 | |
| 2021 | | | 11,938 | |
| 2022 | | | 378 | |
| Total future minimum lease payments | | | 33,037 | |
| Less amount representing interest | | | 2,105 | |
| Total present value of minimum lease payments | | | 30,932 | |
| Less current portion | | | 19,044 | |
| Present value of minimum lease payments | | $ | 11,888 | |
Note 6 - Commitments:
On November 7, 2017 the Company entered into an operating lease that expires October 31, 2021 for office space in Tampa, Florida.
Minimum future lease payments are as follows:
Twelve months ending September 30,
| 2020 | | $ | 215,628 | |
| 2021 | | | 222,097 | |
| 2022 | | | 18,553 | |
| Total | | $ | 456,278 | |
Rent expense was $202,021 and $137,324 for the nine months ended September 30, 2019 and 2018, respectively.
ACCSYS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - Continued
September 30, 2019 and 2018 and December 31, 2018
Note 7 - Employee benefit plan:
The Company adopted an employee savings plan under the IRS Code Section 401(k). The plan covers substantially all employees of the Company. Each participant may contribute amounts up to 6% of eligible earnings. The Company made matching contributions of $42,482 and $27,808 for the nine months ended September 30, 2019 and 2018, respectively.
Note 8 - Concentrations of credit risk:
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents, and accounts receivable. Bank balances periodically exceed federally insured limits and therefore the Company is subject to credit risk to the extent that a financial institution may be unable to fulfill its obligation to return the Company's cash held at such financial institution. The Company has not experienced any losses in its accounts.
Two and four customers accounted for approximately 33% and 28% of the Company's accounts receivable as of September 30, 2019 and December 31, 2018, respectively. Four customers accounted for approximately 38% and 27% of the Company's revenues, respectively, for the nine months ended September 30, 2019 and 2018.
Note 9 - Deferred liabilities - shareholders:
At September 30, 2019 and December 31, 2018, the Company owed aggregate deferred compensation payable of approximately $1,211,500 for services rendered prior to March 7, 2015 and deferred interest of $523,100 on outstanding loans to two of its shareholders.
Page 13
