UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| For the quarterly period ended September 30, 2019 | Commission file number 001-38286 |
AMERI Holdings, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 95-4484725 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 5000 Research Court, Suite 750, Suwanee, Georgia | 30024 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (770) 935-4152
Not applicable
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☐ | Smaller reporting company ☑ |
| Emerging growth company ☑ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||
| Common Stock $0.01 par value per share | AMRH | The NASDAQ Stock Market LLC | ||
| Warrants to Purchase Common Stock | AMRHW | The NASDAQ Stock Market LLC |
As of November 6, 2019, 62,820,789 shares of the registrant’s common stock were issued and outstanding.
AMERI Holdings, Inc.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019
Page | ||
| PART I - FINANCIAL INFORMATION | ||
| 3 | ||
| 4 | ||
| 5 | ||
| 6 | ||
| 7 | ||
| 18 | ||
| 25 | ||
| 25 | ||
| PART II - OTHER INFORMATION | ||
| 26 | ||
| 27 | ||
| 27 | ||
| 27 | ||
| 27 | ||
| 27 | ||
| 27 | ||
| 28 | ||
PART I
AMERI HOLDINGS, INC.
September 30, 2019 | December 31, 2018 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 499,686 | $ | 1,371,331 | ||||
| Accounts receivable | 7,609,431 | 7,871,422 | ||||||
| Other current assets | 579,229 | 818,600 | ||||||
| Total current assets | 8,688,346 | 10,061,353 | ||||||
| Other assets: | ||||||||
| Property and equipment, net | 65,132 | 58,892 | ||||||
| Intangible assets, net | 4,132,964 | 5,778,036 | ||||||
| Goodwill | 13,729,770 | 13,729,770 | ||||||
| Deferred income tax assets, net | 40,097 | 9,399 | ||||||
| Total other assets | 17,967,963 | 19,576,097 | ||||||
| Total assets | $ | 26,656,309 | $ | 29,637,450 | ||||
| Liabilities | ||||||||
| Current liabilities: | ||||||||
| Line of credit | $ | 3,432,983 | $ | 3,950,681 | ||||
| Accounts payable | 4,713,113 | 4,377,794 | ||||||
| Other accrued expenses | 1,553,851 | 1,697,636 | ||||||
| Current portion - long-term notes | - | 6,450 | ||||||
| Convertible notes | 1,000,000 | 1,250,000 | ||||||
| Consideration payable – cash | 2,496,000 | 2,696,000 | ||||||
| Consideration payable – equity | - | 605,223 | ||||||
| Dividend payable – Preferred stock | 212,999 | 105,181 | ||||||
| Total current liabilities | 13,408,946 | 14,688,965 | ||||||
| Long-term liabilities: | ||||||||
| Warrant liability | - | 4,189,388 | ||||||
| Total long-term liabilities | - | 4,189,388 | ||||||
| Total liabilities | 13,408,946 | 18,878,353 | ||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $0.01 par value; 1,000,000 authorized, 424,928 and 420,720 issued and outstanding as of September 30, 2019 and December 31, 2018 respectively. | 4,249 | 4,207 | ||||||
| Common stock, $0.01 par value; 100,000,000 shares authorized, 62,820,789 and 42,329,121 issued and outstanding as of September 30, 2019 and December 31, 2018, respectively | 628,207 | 423,290 | ||||||
| Additional paid-in capital | 50,417,513 | 44,722,856 | ||||||
| Accumulated deficit | (37,872,197 | ) | (34,478,253 | ) | ||||
| Accumulated other comprehensive income (loss) | 69,591 | 86,997 | ||||||
| Total stockholders’ equity | 13,247,363 | 10,759,097 | ||||||
| Total liabilities and stockholders’ equity | $ | 26,656,309 | $ | 29,637,450 | ||||
See accompanying notes to the unaudited condensed consolidated financial statements.
AMERI HOLDINGS, INC.
Three Months Sep 30,2019 | Three Months Sep 30,2018 | Nine Months Sep 30,2019 | Nine Months Sep 30,2018 | |||||||||||||
| Revenue | 9,148,857 | 10,576,254 | 30,850,110 | 32,715,104 | ||||||||||||
| Cost of revenue | 7,249,406 | 8,230,456 | 24,428,520 | 25,637,422 | ||||||||||||
| Gross profit | 1,899,451 | 2,345,798 | 6,421,590 | 7,077,682 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Selling,General and administration | 2,902,401 | 2,655,902 | 9,075,751 | 8,059,432 | ||||||||||||
| Depreciation and amortization | 562,050 | 636,495 | 1,685,637 | 2,266,513 | ||||||||||||
| Acquisition related expenses | - | 227,952 | - | 237,952 | ||||||||||||
| Changes in estimates for consideration payable | - | (7,274,929 | ) | - | (7,140,310 | ) | ||||||||||
| Operating expenses | 3,464,451 | (3,754,580 | ) | 10,761,388 | 3,423,587 | |||||||||||
| Operating Income (loss) | (1,565,000 | ) | 6,100,378 | (4,339,798 | ) | 3,654,095 | ||||||||||
| Interest expenses | (252,648 | ) | (190,394 | ) | (551,862 | ) | (584,074 | ) | ||||||||
| Changes in fair value of warrant liability | 1,857,889 | (261,330 | ) | 1,796,174 | (261,330 | ) | ||||||||||
| Others, net | (9 | ) | 75,747 | 4,557 | 83,736 | |||||||||||
| Income (loss) before income taxes | 40,232 | 5,724,401 | (3,090,929 | ) | 2,892,427 | |||||||||||
| Income tax benefit | 1,067 | (24,934 | ) | 15,689 | (24,934 | ) | ||||||||||
| Income (loss) after income taxes | 41,299 | 5,699,467 | (3,075,240 | ) | 2,867,493 | |||||||||||
| Net income attributable to non-controlling interest | - | - | - | - | ||||||||||||
| Net Income (loss) attributable to the Company | 41,299 | 5,699,467 | (3,075,240 | ) | 2,867,493 | |||||||||||
| Dividend on preferred stock | (106,765 | ) | (1,816,452 | ) | (318,704 | ) | (2,478,005 | ) | ||||||||
| Net Income (loss) attributable to common stock holders | (65,466 | ) | 3,883,015 | (3,393,944 | ) | 389,488 | ||||||||||
| Other comprehensive income (loss), net of tax | ||||||||||||||||
| Foreign exchange translation | (17,979 | ) | 1,719 | (17,406 | ) | (800 | ) | |||||||||
| Total Comprehensive Income (loss) | (83,445 | ) | 3,884,734 | (3,411,350 | ) | 388,688 | ||||||||||
| Basic income (loss) per share | (0.001 | ) | 0.18 | (0.07 | ) | 0.02 | ||||||||||
| Diluted income (loss) per share | (0.001 | ) | 0.16 | (0.07 | ) | 0.02 | ||||||||||
| Basic weighted average number of common shares outstanding | 53,776,825 | 21,657,181 | 49,984,757 | 19,683,610 | ||||||||||||
| Diluted weighted average number of common shares outstanding | 53,776,825 | 24,184,264 | 49,984,757 | 20,630,142 | ||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| Common Stock | Preferred Stock | |||||||||||||||||||||||||||||||
| Shares | Par Value at $0.01 | Shares | Par Value at $0.01 | Additional paid-in capital | Foreign Currency Translation Reserve | Retained earnings | Total stockholders’ equity | |||||||||||||||||||||||||
| Balance at Dec 31, 2017 | 18,162,723 | $ | 181,625 | 405,395 | $ | 4,054 | $ | 34,223,181 | $ | 36,875 | $ | (14,997,552 | ) | $ | 19,448,183 | |||||||||||||||||
| Net Loss for the period | 389,488 | 389,488 | ||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (800 | ) | (800 | ) | ||||||||||||||||||||||||||||
| Warrants conversion to shares | 204,060 | 2,041 | 684,892 | 686,933 | ||||||||||||||||||||||||||||
| Shares Issued as consideration for acquisition of Subsidiary (ATCG) | 283,343 | 2,833 | 602,390 | 605,223 | ||||||||||||||||||||||||||||
| Shares Issued towards earnout | 389,027 | 3,890 | 638,960 | 642,850 | ||||||||||||||||||||||||||||
| Stock, Option, RSU and Warrant Expense | 890,276 | 890,276 | ||||||||||||||||||||||||||||||
| Compensation to Directors | 96,872 | 969 | (969 | ) | - | |||||||||||||||||||||||||||
| Conversion of Options | 560,000 | 5,600 | 800,800 | 806,400 | ||||||||||||||||||||||||||||
| Shares issued - Private Placement | 3,250,000 | 32,500 | 4,218,760 | 4,251,260 | ||||||||||||||||||||||||||||
| Issue of Preference shares for Q1 and Q2 dividend | 13,231 | 132 | 661,420 | 661,552 | ||||||||||||||||||||||||||||
| LSV - Preferred Dividend | 1,711,796 | 1,711,796 | ||||||||||||||||||||||||||||||
| - | ||||||||||||||||||||||||||||||||
| Balance at September 30, 2018 | 22,946,025 | $ | 229,458 | 418,626 | $ | 4,186 | $ | 44,431,506 | $ | 36,075 | $ | (14,608,064 | ) | $ | 30,093,161 | |||||||||||||||||
| Balance at Dec 31, 2018 | 42,329,121 | $ | 423,290 | 420,720 | $ | 4,207 | $ | 44,722,856 | $ | 86,997 | $ | (34,478,253 | ) | $ | 10,759,097 | |||||||||||||||||
| Net Loss for the period | (3,393,944 | ) | (3,393,944 | ) | ||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (17,406 | ) | (17,406 | ) | ||||||||||||||||||||||||||||
| Shares Issued towards earnouts | 3,289,255 | 32,893 | 572,330 | 605,223 | ||||||||||||||||||||||||||||
| Exercise of Warrants (PIPE series A&B) | 17,202,413 | 172,024 | 4,344,791 | 4,516,815 | ||||||||||||||||||||||||||||
| Stock Compensation expenses | 566,692 | 566,692 | ||||||||||||||||||||||||||||||
| Preferred stock issued | 4,218 | 42 | 210,844 | 210,886 | ||||||||||||||||||||||||||||
| - | ||||||||||||||||||||||||||||||||
| Balance at September 30, 2019 | 62,820,789 | $ | 628,207 | 424,938 | $ | 4,249 | $ | 50,417,513 | $ | 69,591 | $ | (37,872,197 | ) | $ | 13,247,363 | |||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
AMERI HOLDINGS, INC.
| September, 30 | ||||||||
| 2019 | 2018 | |||||||
| Cash flow from operating activities | ||||||||
| Net Income (loss) | (3,411,350 | ) | 388,688 | |||||
| Adjustment to reconcile comprehensive income/(loss) to net cash used in operating activities | ||||||||
| Depreciation and amortization | 1,685,637 | 2,266,513 | ||||||
| Provision for Preference dividend | 318,704 | 2,478,005 | ||||||
| Changes in fair value of warrants | (1,796,174 | ) | 261,330 | |||||
| Changes in estimate of contingent consideration | - | (7,140,310 | ) | |||||
| Stock, option, restricted stock unit and warrant expense | 566,692 | 890,276 | ||||||
| Foreign exchange translation adjustment | (17,406 | ) | (800 | ) | ||||
| Provision for Income taxes ( net off deferred income taxes) | (15,689 | ) | 24,934 | |||||
| Changes in assets and liabilities: | ||||||||
| Increase (decrease) in: | ||||||||
| Accounts receivable | 261,990 | 1,009,662 | ||||||
| Other current assets | 239,372 | 223,207 | ||||||
| Increase (decrease) in: | ||||||||
| Accounts payable and accrued expenses | 193,938 | (1,964,020 | ) | |||||
| Net cash provided by (used in) operating activities | (1,974,286 | ) | (1,562,515 | ) | ||||
| Cash flow from investing activities | ||||||||
| Purchase of fixed assets | (46,805 | ) | (11,560 | ) | ||||
| Acquisition consideration | (200,000 | ) | (3,645,666 | ) | ||||
| Net cash used in investing activities | (246,805 | ) | (3,657,226 | ) | ||||
| Cash flow from financing activities | ||||||||
| Proceeds from bank loan and convertible notes, net | (774,148 | ) | (2,324,606 | ) | ||||
| Contingent consideration for acquisitions | - | (1,582,667 | ) | |||||
| Proceeds from issuance of common shares, net | 2,123,594 | 6,308,620 | ||||||
| Net cash provided by financing activities | 1,349,446 | 2,401,347 | ||||||
| Net increase (decrease) in cash and cash equivalents | (871,645 | ) | (2,818,394 | ) | ||||
| Cash and cash equivalents as at beginning of the period | 1,371,331 | 4,882,084 | ||||||
| Cash at the end of the period | 499,686 | 2,063,690 | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
AMERI HOLDINGS, INC.
SEPTEMBER 30, 2019
| NOTE 1. | DESCRIPTION OF BUSINESS: |
AMERI Holdings, Inc. (“AMERI”, the “Company”, “we” or “our”) is a company that, through the operations of its eleven subsidiaries, provides SAP TM cloud and digital enterprise services to clients worldwide. Headquartered in Suwanee, Georgia, we typically go to market both vertically by industry and horizontally by product/technology specialties and provide our customers with a wide range of business and technology offerings. We work with customers, primarily within North America, to improve process, reduce costs and increase revenue through the judicious use of technology. The Company earns almost all of its revenue from North America. The Company takes the position that all of its businesses operate as a single segment.
| NOTE 2. | BASIS OF PRESENTATION: |
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP, and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended. Certain information and disclosure notes normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to ensure the information presented is not misleading.
The accompanying unaudited condensed consolidated financial statements reflect all adjustments (which were of a normal, recurring nature) that, in the opinion of management, are necessary to present fairly our financial position, results of operations and cash flows as of and for the interim periods presented. All intercompany transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements.
Our comprehensive income (loss) consists of net income (loss) plus or minus any periodic currency translation adjustments.
The results for the interim periods presented are not necessarily indicative of the results expected for any future period. The following information should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Recent Accounting Pronouncements
New Standards to Be Implemented
In January 2017, the FASB issued ASU No. 2017-04, simplifying the Test for Goodwill Impairment. Under this new standard, goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods. Early adoption is permitted for interim or annual goodwill impairment test performed on testing dates after January 1, 2017. The company does not expect any material impact on its financial statements.
Standards Implemented
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. This new standard replaces the existing guidance on leases and requires the lessee to recognize a right-of-use asset and a lease liability for all leases with lease terms equal to or greater than twelve months. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize total lease expense on a straight-line basis. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2018. Upon adoption, entities will be required to use a modified retrospective transition which provides for certain practical expedients. Entities are required to apply the new standard at the beginning of the earliest comparative period presented. Early adoption of this new standard is permitted. The Company has adopted this new standard during the current quarter and it does not have any material impact on its financial statements.
| NOTE 3. | BUSINESS COMBINATIONS: |
Acquisition of Ameri Georgia
On November 20, 2015, we completed the acquisition of Bellsoft, Inc., a consulting company based in Lawrenceville, Georgia, which specializes in SAP software, business intelligence, data warehousing and other enterprise resource planning services. Following the acquisition, the name of Bellsoft, Inc. was changed to Ameri100 Georgia Inc. (“Ameri Georgia”). Ameri Georgia has operations in the United States, Canada and India.
The total purchase price of $9.9 million was allocated to net working capital of $4.6 million, intangibles of $1.8 million, taking into consideration projected revenue from the acquired list of Ameri Georgia customers over a period of three years, and goodwill. The excess of total purchase price over the net working capital and intangibles allocations has been allocated to goodwill.
On January 17, 2018, we completed all payment obligations to the former shareholders of Ameri Georgia in connection with the Ameri Georgia share purchase agreement, and we have no further payment obligations pursuant thereto.
Acquisition of Bigtech Software Private Limited
On June 23, 2016, we entered into a definitive agreement to purchase Bigtech Software Private Limited (“Bigtech”), a pure-play SAP services company providing a wide range of SAP services including turnkey implementations, application management, training and basis ABAP support. Based in Bangalore, India, Bigtech offers SAP services to improve business operations at companies of all sizes and verticals.
The acquisition of Bigtech was effective as of July 1, 2016, and the total consideration for the acquisition of Bigtech was $850,000, consisting of:
| (a) | A cash payment in the amount of $340,000 which was due within 90 days of closing and was paid on September 22, 2016; |
| (b) | Warrants for the purchase of 51,000 shares of our common stock (valued at approximately $250,000 based on the $6.51 closing price of our common stock on the closing date of the acquisition), with such warrants exercisable for two years. The former shareholders of Bigtech exercised such warrants in full and were issued shares of common stock as of July 5, 2018; and |
| (c) | $255,000 payable in cash earn-outs to the sellers of Bigtech, if Bigtech achieved certain pre-determined revenue and EBITDA targets in 2017 and 2018. On October 4, 2018, we issued an aggregate of 72,570 shares of common stock to the former shareholders of Bigtech in satisfaction of an earn-out owed to them. As of October 4, 2018, we had resolved all remaining payments under the Bigtech purchase agreement and we have no further payment obligations pursuant thereto. |
Bigtech’s financial results are included in our condensed consolidated financial results starting July 1, 2016. The Bigtech acquisition did not constitute a significant acquisition for the Company for purposes of Regulation S-X. The valuation of Bigtech was made on the basis of its projected revenues.
Acquisition of Virtuoso
On July 22, 2016, we acquired all of the outstanding membership interests of Virtuoso, L.L.C. (“Virtuoso”), a Kansas limited liability company, pursuant to the terms of an Agreement of Merger and Plan of Reorganization, by and among us, Virtuoso Acquisition Inc., Ameri100 Virtuoso Inc., Virtuoso and the sole member of Virtuoso (the “Sole Member”). Virtuoso is an SAP consulting firm specialized in providing services on SAP S/4 HANA finance, enterprise mobility and cloud migration and is based in Leawood, Kansas. In connection with the merger, Virtuoso’s name was changed to Ameri100 Virtuoso Inc. The Virtuoso acquisition did not constitute a significant acquisition for the Company for purposes of Regulation S-X.
The total purchase price of $1.8 million was allocated to intangibles of $0.9 million, taking into consideration projected revenue from the acquired list of Virtuoso customers over a period of three years, and the balance was allocated to goodwill. The Virtuoso earn-out payments for 2016 amounted to $0.06 million in cash and 12,408 shares of common stock, which were delivered to the Sole Member during the twelve months ended December 31, 2017. As of January 23, 2018, we had resolved all remaining payments under the Virtuoso merger agreement with the Sole-Member and we have no further payment obligations pursuant thereto.
Acquisition of Ameri Arizona
On July 29, 2016, we acquired 100% of the membership interests of DC&M Partners, L.L.C. (“Ameri Arizona”), an Arizona limited liability company, pursuant to the terms of a Membership Interest Purchase Agreement by and among us, Ameri Arizona, all of the members of Ameri Arizona, Giri Devanur and Srinidhi “Dev” Devanur, our former President and Chief Executive Officer and current Executive Chairman, respectively. In July 2017, the name of DC&M Partners, L.L.C. was changed to Ameri100 Arizona LLC. Ameri Arizona is an SAP consulting company headquartered in Chandler, Arizona. Ameri Arizona provides its clients with a wide range of information technology development, consultancy and management services with an emphasis on the design, build and rollout of SAP implementations and related products.
The aggregate purchase price for the acquisition of Ameri Arizona was $15.8 million, consisting of:
| (a) | A cash payment in the amount of $3,000,000 at closing; |
| (b) | 1,600,000 shares of our common stock (valued at approximately $10.4 million based on the $6.51 closing price of our common stock on the closing date of the acquisition), which were to be issued on July 29, 2018 or upon a change of control of our company (whichever occurred earlier). At the election of the former members of Ameri Arizona, in lieu of receiving shares of our common stock, each former member was entitled to receive a cash payment of $2.40 per share; and |
| (c) | Earn-out payments of $1,500,000 payable in cash each year to be paid, if earned, through the achievement of annual revenue and gross margin targets in 2017 and 2018. |
The total purchase price of $15.8 million was allocated to intangibles of $5.4 million, taking into consideration projected revenue from the acquired list of Ameri Arizona customers over a period of three years, and the balance was allocated to goodwill. In August 2018, the Company resolved the payment of all earn-out payments to the former members of Ameri Arizona pursuant to the Ameri Arizona membership interest purchase agreement, and the Company has no further payment obligations with respect to any Ameri Arizona earn-out. As of July 29, 2018, two former members of Ameri Arizona properly elected to receive an aggregate of $2,496,000 in cash in lieu of stock and such payment was due on or about September 28, 2018. The Company has not yet paid such cash payments (which represent deferred purchase price for Ameri Arizona) and company has negotiated for deferred payment terms with the two former members of Ameri Arizona who elected such cash payments. On July 30, 2018, we issued 560,000 shares of common stock to the remaining former member of Ameri Arizona who had not elected to receive cash in lieu of stock. Such former member has asserted that he had properly elected to receive cash instead of stock prior to the deadline for such election. The Company has entered into a settlement agreement, dated February 4, 2019, in which the Company paid an amount of $200,000 to such member in four equal monthly installments starting from February 2019 and ending in May 2019, which settled such dispute in its entirety.
Acquisition of Ameri California
On March 10, 2017, we acquired 100% of the shares of ATCG Technology Solutions, Inc. (“Ameri California”), a Delaware corporation, pursuant to the terms of a Share Purchase Agreement among the Company, Ameri California, all of the stockholders of Ameri California (the “Stockholders”), and the Stockholders’ representative. In July 2017, the name of ATCG Technology Solutions, Inc. was changed to Ameri100 California Inc. Ameri California provides U.S. domestic, offshore and onsite SAP consulting services and has its main office in Folsom, California. Ameri California specializes in providing SAP Hybris, SAP Success Factors and business intelligence services.
The aggregate purchase price for the acquisition of Ameri California was $8.8 million, consisting of:
| (a) | 576,923 shares of our common stock, valued at approximately $3.8 million based on the closing price of our common stock on the closing date of the acquisition; |
| (b) | Unsecured promissory notes issued to certain of Ameri California’s selling stockholders for the aggregate amount of $3,750,000 (which notes bear interest at a rate of 6% per annum and mature on June 30, 2018); |
| (c) | Earn-out payments in shares of our common stock (up to an aggregate value of $1.2 million worth of shares) to be paid, if earned, in each of 2018 and 2019 based on certain revenue and earnings before interest taxes, depreciation and amortization (“EBITDA”) targets as specified in the purchase agreement. We have determined that the earn-out targets for each year have been fully achieved, and 283,344 shares of common stock were issued in 2018 in respect of the 2017 earn-out period and $605,000 worth of common stock was issued in January 2019 in respect of the 2018 earn-out period; and |
| (d) | An additional cash payment of $0.06 million for cash that was left in Ameri California at closing. |
The total purchase price of $8.8 million was allocated to intangibles of $3.75 million, taking into consideration projected revenue from the acquired list of Ameri California customers over a period of three years, and goodwill. The excess of total purchase price over the intangibles allocation has been allocated to goodwill.
In August 2018, we repaid all of the unsecured promissory notes issued to the Ameri California selling stockholders and we have no further payment obligations pursuant thereto.
Presented below is the summary of the foregoing acquisitions:
Allocation of purchase price in millions of U.S. dollars
| Asset Component | Ameri Georgia | Bigtech | Virtuoso | Ameri Arizona | Ameri California | |||||||||||||||
| Intangible Assets | 1.8 | 0.6 | 0.9 | 5.4 | 3.8 | |||||||||||||||
| Goodwill | 3.5 | 0.3 | 0.9 | 10.4 | 5.0 | |||||||||||||||
Working Capital | ||||||||||||||||||||
| Current Assets | ||||||||||||||||||||
| Cash | 1.4 | - | - | - | - | |||||||||||||||
| Accounts Receivable | 5.6 | - | - | - | - | |||||||||||||||
| Other Assets | 0.2 | - | - | - | - | |||||||||||||||
| 7.3 | - | - | - | - | ||||||||||||||||
| Current Liabilities | ||||||||||||||||||||
| Accounts Payable | 1.3 | - | - | - | - | |||||||||||||||
| Accrued Expenses & Other Current Liabilities | 1.3 | - | - | - | - | |||||||||||||||
| 2.7 | - | - | - | - | ||||||||||||||||
| Net Working Capital Acquired | 4.6 | - | - | - | - | |||||||||||||||
| Total Purchase Price | 9.9 | 0.9 | 1.8 | 15.8 | 8.8 | |||||||||||||||
As of the date of this report the Company owed an aggregate of $2,496,000 in consideration payable by cash.
| NOTE 4. | REVENUE RECOGNITION: |
Revenue Recognition. We recognize revenues as we transfer control of deliverables (products, solutions and services) to our customers in an amount reflecting the consideration to which we expect to be entitled. To recognize revenues, we apply the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenues when a performance obligation is satisfied. We account for a contract when it has approval and commitment from all parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We apply judgment in determining the customer’s ability and intention to pay based on a variety of factors including the customer’s historical payment experience.
For performance obligations where control is transferred over time, revenues are recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the deliverables to be provided.
Revenues related to fixed-price contracts for application development and systems integration services, consulting or other technology services are recognized as the service is performed using the cost to cost method, under which the total value of revenues is recognized on the basis of the percentage that each contract’s total labor cost to date bears to the total expected labor costs. Revenues related to fixed-price application maintenance, testing and business process services are recognized based on our right to invoice for services performed for contracts in which the invoicing is representative of the value being delivered. If our invoicing is not consistent with value delivered, revenues are recognized as the service is performed based on the cost to cost method described above. The cost to cost method requires estimation of future costs, which is updated as the project progresses to reflect the latest available information; such estimates and changes in estimates involve the use of judgment. The cumulative impact of any revision in estimates is reflected in the financial reporting period in which the change in estimate becomes known and any anticipated losses on contracts are recognized immediately.
Revenues related to our time-and-materials, transaction-based or volume-based contracts are recognized over the period the services are provided either using an output method such as labor hours, or a method that is otherwise consistent with the way in which value is delivered to the customer.
We assess the timing of the transfer of goods or services to the customer as compared to the timing of payments to determine whether a significant financing component exists. As a practical expedient, we do not assess the existence of a significant financing component when the difference between payment and transfer of deliverables is a year or less. If the difference in timing arises for reasons other than the provision of finance to either the customer or us, no financing component is deemed to exist. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our services, not to receive or provide financing from or to customers. We do not consider set up or transition fees paid upfront by our customers to represent a financing component, as such fees are required to encourage customer commitment to the project and protect us from early termination of the contract.
Trade Receivables, Contract Assets and Contract Liabilities. We classify our right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e., only the passage of time is required before payment is due). For example, we recognize a receivable for revenues related to our time and materials and transaction or volume-based contracts when earned regardless of whether amounts have been billed. We present such receivables in “Trade accounts receivable, net” in our consolidated statements of financial position at their net estimated realizable value. A contract asset is a right to consideration that is conditional upon factors other than the passage of time. Contract assets are presented in “Other current assets” in our consolidated statements of financial position and primarily relate to unbilled amounts on fixed-price contracts utilizing the cost to cost method of revenue recognition. Our contract liabilities, or deferred revenue, consist of advance payments and billings in excess of revenues recognized. We classify deferred revenue as current or noncurrent based on the timing of when we expect to recognize the revenues. The noncurrent portion of deferred revenue is included in “Other noncurrent liabilities” in our consolidated statements of financial position.
Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts to provide for the estimated amount of receivables that may not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and other applicable factors. We evaluate the collectability of our trade accounts receivable on an on-going basis and write off accounts when they are deemed to be uncollectable.
| NOTE 5. | INTANGIBLE ASSETS: |
The Company’s intangible assets primarily consists of the customer lists it acquired through various acquisitions. We amortize our intangible assets that have finite lives using either the straight-line method or based on estimated future cash flows to approximate the pattern in which the economic benefit of the asset will be utilized. Amortization expense was $1.6 million and 2.2 million for the nine months ended September 30, 2019 and September 30, 2018 respectively. This amortization expense relates to customer lists which expire through 2022.
During the year ended December 31, 2018, we determined, based upon the results of our annual goodwill impairment testing as further described in Note 6, that a triggering event had occurred with respect to certain customer lists contained in the reporting units where goodwill impairment was determined to have occurred, and recorded an impairment charge of $0.9 million. The determination of the fair value of intangible assets requires significant inputs, judgments and estimates. These fair value measurements, and related inputs, are considered to be Level 3 measures under the fair value hierarchy as further described in Note 12.
| NOTE 6. | GOODWILL: |
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in business combinations. The total value of the Company’s goodwill was $13.7 million as of September 30, 2019 and December 31, 2018.
As per Company policy, goodwill impairment tests are conducted on an annual basis and any impairment is reflected in the Company’s Statements of Operations.
During the year ended December 31, 2018, as a result of performing our annual impairment testing, we determined that impairment existed on certain of our reporting units and recorded impairment charges amounting to $8.2 million as a result of our impairment testing. The full goodwill impairment on Virtuoso, Bigtech and Ameri Consulting Service Pvt. Ltd, and the partial goodwill impairment on Ameri Arizona were primarily driven by declines in estimated future cash flows to be generated by the reporting units as these reporting units that have experienced declining cash flows that what were expected at the time of each acquisition. The determination of the fair value of a reporting unit requires significant inputs, judgments and estimates. These fair value measurements, and related inputs, are considered to be Level 3 measures under the fair value hierarchy as further described in Note 12.
| NOTE 7. | EARNINGS (LOSS) PER SHARE: |
Basic income (loss) per share is computed based upon the weighted average number of common shares outstanding for the period. When applicable, diluted income (loss) per share is calculated using two approaches. The first approach, the treasury stock method, reflects the potential dilution that could occur if outstanding stock options, warrants, restricted stock units and outstanding shares to be awarded to satisfy contingent consideration for the business combinations (collectively, the “Equity Awards”) were exercised and issued. The second approach, the if converted method, reflects the potential dilution of the Equity Awards, the 8% Convertible Unsecured Promissory Notes (the “2017 Notes”) described in Note 10 being exchanged for common stock. Under this method, interest expense, net of tax, if any, associated with the 2017 Notes, up through redemption, is added back to net income attributable to common stockholders and the shares outstanding are increased by the underlying 2017 Notes are considered to be issued.
For the nine months ended September 30, 2019 and 2018, no shares related to the issuance of common stock upon exercise of the Equity Awards or the exchange of the 2017 Notes for common stock were considered in the calculation of diluted loss per share, as the effect would be anti-dilutive due to net losses attributable to common stockholders for both periods.
A reconciliation of net loss attributable to common stockholders and weighted average shares used in computing basic and diluted net loss per share is as follows:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, 2018 | September 30, 2018 | September 30, 2019 | September 30, 2018 | |||||||||||||
| Numerator for basic and diluted income (loss) per share: | ||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | (65,466 | ) | $ | 3,883,015 | $ | (3,393,944 | ) | $ | 389,488 | ||||||
| Numerator for diluted income (loss) per share: | ||||||||||||||||
| Net income (loss) attributable to common stockholders - as reported | $ | (65,466 | ) | $ | 3,883,015 | $ | (3,393,944 | ) | $ | 389,488 | ||||||
| Interest expense on 2017 Notes, net of taxes | - | 25,000 | - | 25,000 | ||||||||||||
| Net income (loss) attributable to common stockholders - after assumed conversions of dilutive shares | $ | (65,466 | ) | $ | 3,908,015 | $ | (3,393,944 | ) | $ | 414,488 | ||||||
| Denominator for weighted average common shares outstanding: | ||||||||||||||||
| Basic shares | 53,776,825 | 21,657,181 | 49,984,757 | 19,683,610 | ||||||||||||
| Dilutive effect of Equity Awards | - | 2,080,654 | - | 946,532 | ||||||||||||
| Dilutive effect of 2017 Notes | - | 446,429 | — | — | ||||||||||||
| Diluted shares | 53,776,825 | 24,184,264 | 49,984,757 | 20,630,142 | ||||||||||||
| Income (loss) per share – basic: | ||||||||||||||||
| Net income (loss) | $ | (0.001 | ) | $ | 0.18 | $ | (0.07 | ) | $ | 0.02 | ||||||
| Income (loss) per share – diluted: | ||||||||||||||||
| Net income (loss) | $ | (0.001 | ) | $ | 0.16 | $ | (0.07 | ) | $ | 0.02 | ||||||
| NOTE 8. | OTHER ITEMS: |
During the nine months ended September 30, 2019, the Company has not granted any restricted stock units and stock options to purchase Company’s common stock to key employees or directors out of Company’s 2015 Equity Incentive Award Plan. The company has booked charges of $0.6 million as stock compensation expenses for the nine months ended September 30 2019 and $0.9 million for the nine months ended September 30, 2018.
| NOTE 9. | BANK DEBT: |
On January 23, 2019, certain subsidiaries of the Company, including Ameri100 Arizona LLC, Ameri100 Georgia, Inc., Ameri100 California, Inc. and Ameri and Partners, Inc., as borrowers (individually and collectively, “Borrower”) entered into a Loan and Security Agreement (the “Loan Agreement”) for a credit facility (the “Credit Facility”) with North Mill Capital LLC, as lender (the “Lender”). The Loan Agreement has an initial term of two years from the closing date, with renewal thereafter if Lender, at its option, agrees in writing to extend the term for additional one year periods (the “Term”). The Loan Agreement is collateralized by a first-priority security interest in all of the assets of Borrower. In addition, (i) pursuant to a Corporate Guaranty entered into by the Company in favor of the Lender (the “Corporate Guaranty”), the Company has guaranteed the Borrower’s obligations under the Credit Facility and (ii) pursuant to a Security Agreement entered into between the Company and Lender (the “Security Agreement”), the Company granted a first-priority security interest in all of its assets to Lender.
The Borrowers received an initial advance on January 23, 2019 in an amount of approximately $2.85 million (the “Initial Advance”). Borrowings under the Credit Facility accrue interest at the prime rate (as designated by Wells Fargo Bank, National Association) plus one and three quarters percentage points (1.75%), but in no event shall the interest rate be less than seven and one-quarter percent (7.25%). Notwithstanding anything to the contrary contained in the Loan Documents, the minimum monthly interest payable by Borrower on the Advances (as defined in the Loan Agreement) in any month shall be calculated based on an average Daily Balance (as defined in the Loan Agreement) of Two Million Dollars ($2,000,000) for such month. For the first year of the Term, Borrower shall pay to Lender a facility fee equal to $50,000, due in equal monthly installments, with additional facility fees due to Lender in the event borrowings exceed certain thresholds and with additional facility fees due and payable in later years or upon later milestones. In addition, Borrower shall pay to Lender a monthly fee (the “Servicing Fee”) in an amount equal to one-eighth percent (.125%) of the average Daily Balance (as defined in the Loan Agreement) during each month on or before the first day of each calendar month during the Term.
The Company used approximately $2.75 million of the Initial Advance to repay all of its outstanding obligations under the Credit Facility. Upon payment, the Company’s obligations under the Credit Facility were terminated.
Borrower also agreed to certain negative covenants in the Loan Agreement, including that they will not, without the prior written consent of Lender, enter into any extraordinary transactions, dispose of assets, merge, acquire, or consolidate with or into any other business organization or restructure. As of September 30, 2019, the principal balance and accrued interest under the Credit Facility amounted to $ 3.4 million.
| NOTE 10. | CONVERTIBLE NOTES: |
On March 7, 2017, we completed the sale and issuance of 8% Convertible Unsecured Promissory Notes (the “2017 Notes”) for aggregate proceeds to us of $1.25 million from four accredited investors, including one of the Company’s then-directors, Dhruwa N. Rai, and David Luci, who became a director of the Company in February 2018. The 2017 Notes were issued pursuant to Securities Purchase Agreements between the Company and each investor. The 2017 Notes bear interest at 8% per annum until maturity in March 2020, with interest being paid annually on the first, second and third anniversaries of the issuance of the 2017 Notes beginning in March 2018. From and after an event of default and for so long as the event of default is continuing, the 2017 Notes will bear default interest at the rate of 10% per annum. The 2017 Notes can be prepaid by us at any time without penalty. As of March 31, 2019, all interest payments due on the 2017 Notes have been paid in full.
During this first quarter of 2019 the company repaid $0.25 million towards 2017 notes.
The 2017 Notes are convertible into shares of our common stock at a conversion price equal to $2.80. The holders of the 2017 Notes have the right, at their option, at any time and from time to time to convert, in part or in whole, the outstanding principal amount and all accrued and unpaid interest under the 2017 Notes into shares of the Company’s common stock at the conversion price.
The 2017 Notes rank junior to our secured credit facility with Sterling National Bank. The 2017 Notes also include certain negative covenants including, without the investors’ approval, restrictions on dividends and other restricted payments and reclassification of its stock.
| NOTE 11. | COMMITMENTS AND CONTINGENCIES: |
Operating Leases
The Company’s principal facility is located in Suwanee, Georgia. The Company also leases office space in various locations with expiration dates between 2019 and 2021. The lease agreements often include leasehold improvement incentives, escalating lease payments, renewal provisions and other provisions which require the Company to pay taxes, insurance, maintenance costs, or defined rent increases. All of the Company’s leases are accounted for as operating leases. Rent expense is recorded over the lease terms on a straight-line basis. Rent expense was $253,813 and $199,579 for the nine months ended September 30, 2019 and 2018, respectively.
| Year ending December 31, | Amount | |||
| 2019 | 47,893 | |||
| 2020 | 159,345 | |||
| 2021 | 47,362 | |||
| Total | $ | 254,600 | ||
| NOTE 12. | FAIR VALUE MEASUREMENT: |
We utilize the following valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
| • | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; |
| • | Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; and |
| • | Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. |
A financial asset or liability’s classification within the hierarchy is determined based upon the lowest level input that is significant to the fair value measurement.
The following table sets forth the financial assets, measured at fair value, by level within the fair value hierarchy as of September 30, 2019:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Warrant Liability: | $ | - | $ | - | $ | $ | - | |||||||||
| Contingent consideration | - | - | - | - | ||||||||||||
| Total | - | - | $ | - | $ | - | ||||||||||
The following table sets forth the financial assets, measured at fair value, by level within the fair value hierarchy as of December 31, 2018:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Warrant liability: | $ | - | $ | - | $ | 4,189,388 | $ | 4,189,388 | ||||||||
| Contingent consideration | - | - | 605,223 | 605,223 | ||||||||||||
| Total | - | - | $ | 4,794,611 | $ | 4,794,611 | ||||||||||
The following table presents the change in level 3 instruments:
| Closing balance December 31, 2018 | 4,794,611 | |||
| Additions during the period | $ | - | ||
| Paid/settlements | (4,794,611 | ) | ||
| Total gains recognized in Statement of Operations | - | |||
| Closing balance September 30, 2019 | $ | - |
The fair value of the contingent consideration was estimated using a discounted cash flow technique with significant inputs that are not observable in the market. The significant inputs not supported by market activity included our probability assessments of expected future cash flows related to the acquisitions during the earn-out period, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the respective terms of the share purchase agreements.
No financial instruments were transferred into or out of Level 3 classification during the period ended September 30 2019 and year ended December 31, 2018.
| NOTE 13. | PRIVATE OFFERINGS: |
On July 25, 2018, we entered into a securities purchase agreement (the “Initial Securities Purchase Agreement”) with certain institutional and accredited investors (“Initial Purchasers”) for the sale of 5,000,000 shares of our common stock (“Initial Shares”) and warrants to purchase a total of 4,000,001 shares (“Initial Warrant Shares”) of our common stock (“Initial Purchaser Warrants”) for total consideration of approximately $6,000,000 (“Initial Investment”). On July 30, 2018, we issued an aggregate of 3,250,000 of the Initial Shares to the Initial Purchasers, with the remaining Initial Shares to be issued pursuant to pre-funded Warrants, subject to adjustment. The $6,000,000 purchase price paid by the Initial Purchasers on July 30, 2018 represents the entire purchase price for the Initial Shares and the Initial Purchaser Warrants (excluding the exercise price to be paid upon the exercise of Initial Purchaser Warrants), including upon the issuance of additional Shares (through the adjustment of a pre-funded warrant) and for additional Warrant Shares issuable upon the occurrence of certain events described below.
On August 21, 2018, we entered into a second securities purchase agreement (the “Second Securities Purchase Agreement”, and together with the Initial Securities Purchase Agreement, the “Purchase Agreements”) with an accredited investor (the “Additional Purchaser”, and with the Initial Purchaser, the “Purchasers”) for the sale of 500,417 shares of our common stock, via a pre-funded warrant due to share issuance limitations (the “Additional Shares”, and with the Initial Shares, the “Common Stock”), and warrants to purchase 400,333 shares (the “Additional Warrant Shares”, and with the Initial Warrant Shares, the “Warrant Shares”) of our common stock (the “Additional Purchaser Warrants”, and with the Initial Purchaser Warrants, the “Purchaser Warrants”) for gross proceeds of approximately $600,000 (the “Additional Investment”). The Additional Investment was made in connection with, and substantially on the same terms and using the same forms as, the private placement of the Initial Shares and Initial Purchaser Warrants (such private placement and the Additional Investment, the “Private Placement”). The $600,000 purchase price paid by the Additional Purchaser on August 21, 2018 represents the entire purchase price for the Additional Shares and the Additional Purchaser Warrants (excluding the exercise price to be paid upon the exercise of Additional Purchaser Warrants), including upon the issuance of additional Shares (through the adjustment of a pre-funded warrant, all pre-funded warrants with the Purchaser Warrants, the “Warrants”) and for additional Warrant Shares issuable upon the occurrence of certain events described below.
The initial price per share of Common Stock equaled $1.20 and the initial per share exercise price of the Purchaser Warrants equaled $1.60. The per share purchase price and the exercise price were subject to adjustment as described below. The Initial Purchaser Warrants are immediately exercisable, subject to ownership limitations described below, and expire five years after the date of issuance. The Initial Purchaser Warrants are exercisable on a cashless basis six months after the issuance date if there is no effective registration statement registering the resale of the shares underlying the Initial Purchaser Warrants. The Additional Purchaser was not issued any shares at the closing of the Additional Investment, due to Nasdaq stock issuance limitations at the time of closing, but the Additional Shares will be issued upon the exercise of a pre-funded warrant for no additional consideration to the Company. The Additional Purchaser Warrants and the Additional Purchaser’s pre-funded warrant are currently exercisable, subject to ownership limitations described below, and expire five years after the date of issuance. The Warrants contain provisions for the adjustment of the number of shares issuable upon the exercise of the warrant and of the exercise price in the event of stock dividends, splits, mergers, asset sales, tender or exchange offers, reclassifications, reorganizations or recapitalizations, combinations, or the like.
The per share purchase price (through the pre-funded Warrants) and Warrant exercise price was automatically adjusted lower (the “Price Adjustment”) to 80% (with respect to the purchase price of the Common Stock) and 110% (with respect to the exercise price of the Warrants) of the lowest of the average daily prices on the 6 trading days following each of: (i) the date our stockholders approved the Private Placement transaction (such approval was obtained on September 27, 2018) and (ii) the date a registration statement covering the resale of securities being issued in the Private Placement was declared effective by the Securities and Exchange Commission (the “SEC”) (such registration statement on Form S-1, file no. 333-227011, was declared effective on October 23, 2018 (the “Effective Registration”)). Due to the Price Adjustment, the lowest purchase price of $0.29 for the Common Stock issued at closing under the Purchase Agreements and pursuant to the pre-funded Warrants was achieved, and all 22,758,621 shares registered under the Effective Registration as issued or issuable under the Purchase Agreements and pursuant to the pre-funded Warrants were issued to the selling stockholders. In addition, the exercise price of the Purchaser Warrants was subject to the Price Adjustment, which has resulted in 22,544,139 shares of common stock being issuable under the Purchaser Warrants when exercised. The Purchaser Warrants have been fully adjusted and neither the exercise price or the number of shares issuable under such warrants are subject to further adjustment, except pursuant to typical anti-dilution provisions.
In accordance with the exercise provisions of the Purchaser Warrants, the 22,544,139 shares issuable under the Purchaser Warrants following the full Price Adjustment was determined by holding constant the aggregate exercise price of $7,040,534.40 for the Purchaser Warrants at the time of closing of the Private Placement (which was calculated based on 4,400,334 total Purchaser Warrants at the closing date multiplied by the exercise price of $1.60, which equals $7,040,534.40), and then dividing the $7,040,534.40 aggregate exercise price by the post-Price Adjustment exercise price of $0.3123 to get 22,544,139 shares.
Under the terms of all of the Warrants, a selling stockholder may not exercise Warrants to the extent such exercise would cause such selling stockholder, together with its affiliates and attribution parties, to beneficially own a number of shares of common stock which would exceed 4.99% or 9.99%, as applicable, of our then outstanding common stock following such exercise, excluding for purposes of such determination shares of common stock issuable upon exercise of the Warrants which have not been exercised. In addition, the Warrants have transaction-specific anti-dilution provisions.
The Company has allocated the aggregate gross proceeds received to the Purchaser Warrants, the Initial Shares issued and the pre-funded warrants. Due to the reset features present in the Purchaser Warrants along with the existence of down-round protection in the event of future financing transactions at lower prices, the Purchaser Warrants were determined to be derivative financial instruments and therefore, have been recorded as a liability (“Warrant Liability”) in the accompanying consolidated balance sheets. The Purchaser Warrants were initially recorded at fair value with fair value determined utilizing a Black-Scholes option pricing model with the following assumptions: expected term of 5 years; expected volatility of 111.8%; risk free interest rate of 2.37% and an expected dividend yield of zero. The calculated aggregate fair value of $1,429,000 was reflected as Warrant Liability. The remaining proceeds received under the Purchase Agreements were allocated to the Initial Shares and pre-funded warrants and recorded within stockholder’s equity. The fair value of the Purchaser Warrants was reassessed to reflect the Price Adjustment and number of shares issuable upon exercise. The resulting increase in the fair value of the Purchaser Warrants of $2,760,819 was reflected as “Changes in Fair Value of Warrant Liability” within the accompanying consolidated statements of comprehensive income (loss) during the year ended December 31 2018. For the sixth months ended June 30 2019, the Purchaser Warrants were reassessed to reflect the Price Adjustment and number of shares issuable upon exercise. The resulting increase in the fair value of the Purchaser Warrants of $61,715 was reflected as “Changes in Fair Value of Warrant Liability” within the accompanying consolidated statements of operations and comprehensive income (loss). Also, during the sixth months ended June 30, 2019, the Company issued 6,799,312 shares upon the exercise of certain Purchaser Warrants and received net cash proceeds of $2,123,425,
On September 19, 2019, the Company and each of the Purchasers entered into separate amendment and exchange agreements (the “Exchange Agreements”), pursuant to which the Company agreed to issue to the Purchasers an aggregate of 10,234,136 shares of Common Stock (the “Exchange Shares”) in exchange for the cancellation and termination of all of the outstanding Purchaser Warrants (the “Exchange”). The Company also agreed to grant to the Purchasers certain participation rights in future financings for a period of twelve (12) months. In connection with the Exchange, the Company recognized an additional charge of $733,470 reflecting an adjustment to the fair value of the Purchaser Warrants. The remaining Warrant Liability at the time of the Exchange of $4,984,573 was reclassified to Stockholder’s Equity. As of September 30, 2019, there are no Purchaser Warrants outstanding.
2018 Preferred Stock Amendment
On June 22, 2018, we entered into an Amendment Agreement with Lone Star Value Investors, LP (“LSV”), pursuant to which we and LSV agreed to the amendment and restatement of the certificate of designations (the “Amendment”) for our Series A Preferred Stock (the “Series A Preferred”) and the issuance of warrants (the “Amendment Warrants”) for the purchase of 5,000,000 shares of our common stock to holders of the Series A Preferred (the “Warrant Issuance”), provided that the Amendment and the Warrant Issuance were subject to approval by our stockholders at our 2018 annual meeting of stockholders (the “2018 Annual Meeting”).
As the Amendment and the Warrant Issuance were approved by our stockholders at the 2018 Annual Meeting, the Amendment, was filed with the Delaware Secretary of State following stockholder approval, providing for, among other things:
| (a) | the payment of the March 31, 2018 dividend payment in-kind in shares of Series A Preferred; |
| (b) | elimination of any prior default in respect of non-payment of accrued dividends through the filing effective date of the Amendment (the “Effective Date”); |
| (c) | payment in-kind in shares of Series A Preferred of dividends for all dividend periods from April 1, 2018 through March 31, 2020 at a rate of 2% per annum of the liquidation preference (the “Adjusted Rate”); and |
| (d) | commencing April 1, 2020, we will pay cash dividends per share at a rate per annum equal to the Adjusted Rate multiplied by the liquidation preference; provided, however, dividends for periods ending after April 1, 2020 may be paid at the election of our Board of Directors in-kind through the issuance of additional shares of Series A Preferred for up to four dividend periods in any consecutive 36-month period, determined on a rolling basis. |
In addition, the Amendment revised the change of control definition to mean a change in control of at least 70% of the voting power of all shares of stock of the Company and clarified that a change of control shall not be deemed to be a dissolution, liquidation or winding up of the Company. The Amendment also eliminated voting rights with respect to the authorization, creation or issuance of any securities ranking senior or equal to the Series A Preferred.
Following our 2018 Annual Meeting, promptly following the effectiveness of the Amendment, the Company issued an aggregate of 19,543 shares of our Series A Preferred to holders of our Series A Preferred, on a pro rata basis, as payment of accrued in-kind dividends owed on such preferred stock and completed the Warrant Issuance to holders of the Series A Preferred at such time.
The Amendment Warrants are only exercisable for cash, with an exercise price of $1.50 per share, for five years from the date of issuance. In the event that the closing price of our common stock is $2.00 or higher for ten trading days out of a fifteen consecutive trading day period, the Company shall have the option, in its sole discretion, to elect to accelerate the termination date of the Amendment Warrants to such date that is 30 days (or more, in the Company’s sole discretion) following the date of such election. Following such accelerated termination date, any unexercised Amendment Warrants shall automatically be canceled without any further obligations on the part of the Company or the holders of such Amendment Warrants. The Amendment Warrants were valued utilizing a Black-Scholes option pricing model with the following assumptions: expected term of 5 years; expected volatility of 111.8%; risk free interest rate of 2.37% and an expected dividend yield of zero.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements (and notes thereto) included in our Annual Report on Form 10-K for the year ended December 31, 2018. This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” included elsewhere herein.
We use the terms “we,” “our,” “us,” “AMERI” and “the Company” in this report to refer to AMERI Holdings, Inc. and its wholly-owned subsidiaries.
Company History
We were incorporated under the laws of the State of Delaware in February 1994 as Spatializer Audio Laboratories, Inc., which was a shell company immediately prior to our completion of a “reverse merger” transaction on May 26, 2015, in which we caused Ameri100 Acquisition, Inc., a Delaware corporation and our newly created, wholly owned subsidiary, to be merged with and into Ameri and Partners Inc (“Ameri and Partners”), a Delaware corporation (the “Merger”). On May 26, 2015, we completed the Merger, in which we caused Ameri100 Acquisition, Inc., a Delaware corporation and our newly created, wholly owned subsidiary, to be merged with and into Ameri and Partners (doing business as Ameri100), a Delaware corporation. As a result of the Merger, Ameri and Partners became our wholly owned operating subsidiary. The Merger was consummated under Delaware law, pursuant to an Agreement of Merger and Plan of Reorganization, dated as of May 26, 2015 (the “Merger Agreement”), and in connection with the Merger we changed our name to AMERI Holdings, Inc. We are headquartered in Suwanee, Georgia.
Overview
We specialize in delivering SAP cloud, digital and enterprise services to clients worldwide. Our SAP focus allows us to provide technological solutions to a broad and growing base of clients. Our model inverts the conventional global delivery model wherein offshore IT service providers are based abroad and maintain a minimal presence in the United States. With a strong SAP focus, our client partnerships anchor around SAP cloud and digital services. We pursue an acquisition strategy that seeks to disrupt the established business model of offshore IT service providers.
We generate revenue by providing consulting services under written service contracts with our customers. The service contracts we enter into generally fall into two categories: (1) time-and-materials contracts and (2) fixed-price contracts.
When a customer enters into a time-and-materials or fixed-price (or a periodic retainer-based) contract, the revenue is recognized in accordance with the deliverables of each contract. If the deliverables involve separate units of accounting, the consideration from the arrangement is measured and allocated to the separate units, based on vendor specific objective evidence of the value for each deliverable.
The revenue under time and materials contracts is recognized as services are rendered and performed at contractually agreed upon rates. Revenue pursuant to fixed-price contracts is recognized under the proportional performance method of accounting. We routinely evaluate whether revenue and profitability should be recognized in the current period. We estimate the proportional performance on fixed-price contracts on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project.
For the three months ended September 30, 2019 and September 30, 2018, sales to five major customers accounted for 52% and 40% of our total revenue, respectively. For the three months ended September 30, 2019, two of our customers contributed 14% each and one of our customer contributed 12% of our revenue. For the comparable period in 2018, one of our customers contributed 13% of our revenue
For the nine months ended September 30, 2019 and September 30, 2018, sales to five major customers accounted for 47% and 38% of our total revenue, respectively. Two of our customers contributed 14% and 12% of our revenue for the nine months ended September 30, 2019. For the comparable period in 2018, two of our customers contributed 13% and 10% of our revenue.
We continue to explore strategic alternatives to improve the market position and profitability of our product and service offerings in the marketplace, generate additional liquidity for the Company, and enhance our valuation. We expect to pursue our goals during the next twelve months through organic growth and through other strategic alternatives. Some of these alternatives have included, and could continue to include, selective acquisitions. The Company has obtained financing and additional capital from the sale of equity and incurrence of indebtedness in the past, and continues to consider capital raising and financing from the sale of various types of equity and incurrence of indebtedness to provide capital for our business plans and operations in the future.
Matters that May or Are Currently Affecting Our Business
The main challenges and trends that could affect or are affecting our financial results include:
| • | Our ability to raise additional capital, if and when needed; |
| • | Our ability to enter into additional technology-management and consulting agreements, to diversify our client base and to expand the geographic areas we serve; |
| • | Our ability to attract competent, skilled professionals and on-demand technology partners for our operations at acceptable prices to manage our overhead; |
| • | Our ability to acquire other technology services companies and integrate them with our existing business; and |
| • | Our ability to control our costs of operation as we expand our organization and capabilities. |
RESULTS OF OPERATIONS
Results of Operations for the Three Months Ended September 30, 2019 Compared to the Three Months Ended September 30, 2018 and for the Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018
Three Months Sep 30,2019 | Three Months Sep 30,2018 | Nine Months Sep 30,2019 | Nine Months Sep 30,2018 | |||||||||||||
| Revenue | 9,148,857 | 10,576,254 | 30,850,110 | 32,715,104 | ||||||||||||
| Cost of revenue | 7,249,406 | 8,230,456 | 24,428,520 | 25,637,422 | ||||||||||||
| Gross profit | 1,899,451 | 2,345,798 | 6,421,590 | 7,077,682 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Selling,General and administration | 2,902,401 | 2,655,902 | 9,075,751 | 8,059,432 | ||||||||||||
| Depreciation and amortization | 562,050 | 636,495 | 1,685,637 | 2,266,513 | ||||||||||||
| Impairment on goodwill | - | - | - | - | ||||||||||||
| Acquisition related expenses | - | 227,952 | - | 237,952 | ||||||||||||
| Changes in estimates for consideration payable | - | (7,274,929 | ) | - | (7,140,310 | ) | ||||||||||
| Operating expenses | 3,464,451 | (3,754,580 | ) | 10,761,388 | 3,423,587 | |||||||||||
| Operating Income (loss) | (1,565,000 | ) | 6,100,378 | (4,339,798 | ) | 3,654,095 | ||||||||||
| Interest expenses | (252,648 | ) | (190,394 | ) | (551,862 | ) | (584,074 | ) | ||||||||
| Impairment on goodwill and Intangibles | - | - | - | - | ||||||||||||
| Changes in fair value of warrant liability | 1,857,889 | (261,330 | ) | 1,796,174 | (261,330 | ) | ||||||||||
| Others, net | (9 | ) | 75,747 | 4,557 | 83,736 | |||||||||||
| Income (loss) before income taxes | 40,232 | 5,724,401 | (3,090,929 | ) | 2,892,427 | |||||||||||
| Income tax benefit | 1,067 | (24,934 | ) | 15,689 | (24,934 | ) | ||||||||||
| Income (loss) after income taxes | 41,299 | 5,699,467 | (3,075,240 | ) | 2,867,493 | |||||||||||
| Net income attributable to non-controlling interest | - | - | - | - | ||||||||||||
| Net Income (loss) attributable to the Company | 41,299 | 5,699,467 | (3,075,240 | ) | 2,867,493 | |||||||||||
| Dividend on preferred stock | (106,765 | ) | (1,816,452 | ) | (318,704 | ) | (2,478,005 | ) | ||||||||
| Net Income (loss) attributable to common stock holders | (65,466 | ) | 3,883,015 | (3,393,944 | ) | 389,488 | ||||||||||
| Other comprehensive income (loss), net of tax | ||||||||||||||||
| Foreign exchange translation | (17,979 | ) | 1,719 | (17,406 | ) | (800 | ) | |||||||||
| Total Comprehensive Income (loss) | (83,445 | ) | 3,884,734 | (3,411,350 | ) | 388,688 | ||||||||||
| Basic income (loss) per share | (0.001 | ) | 0.18 | (0.07 | ) | 0.02 | ||||||||||
| Diluted income (loss) per share | (0.001 | ) | 0.16 | (0.07 | ) | 0.02 | ||||||||||
| Basic weighted average number of common shares outstanding | 53,776,825 | 21,657,181 | 49,984,757 | 19,683,610 | ||||||||||||
| Diluted weighted average number of common shares outstanding | 53,776,825 | 24,184,264 | 49,984,757 | 20,630,142 | ||||||||||||
Revenues
Revenues for the three months ended September 30, 2019 decreased by $1.4 million, or 13%, as compared to the three months ended September 30, 2018 mainly due to completion of some of our major customer assignments, which had contributed to revenue during three months ended September 30, 2018.
For the three months ended September 30, 2019 and September 30, 2018, sales to five major customers accounted for 52% and 40% of our total revenue, respectively. For the three months ended September 30, 2019, two of our customers contributed 14% each and one of our customer contributed 12% of our revenue. For the comparable period in 2018, one of our customers contributed 13% of our revenue. We derived most of our revenues from our customers located in North America for the three months ended September 30, 2019 and September 30, 2018.
Revenues for the nine months ended September 30, 2019 decreased by $1.9 million, or 6%, as compared to the nine months ended September 30, 2018, mainly due to completion of some of our major customer assignment.
For the nine months ended September 30, 2019 and September 30, 2018, sales to five major customers accounted for 47% and 38% of our total revenue, respectively. Two of our customers contributed 14% and 12% of our revenue for the nine months ended September 30, 2019. For the comparable period in 2018, two of our customers contributed 13% and 10% of our revenue.
Gross Margin
Our gross margin was 21% for the three months ended September 30, 2019 and 22% for the comparable period in 2018.
Our gross margin was 21% for the nine months ended September 30, 2019, as compared to 22% for the nine months ended September 30, 2018.
Our target gross margins in future periods are anticipated to be in the range of 20% to 25% based on a mix of project revenues and professional service revenues. However, there is no assurance that we will achieve such anticipated gross margins.
Selling, General and Administration Expenses
Selling, general and administration (“SG&A”) expenses include all costs, including rent costs, which are not directly associated with revenue-generating activities, as well as the non-cash expense for stock-based compensation. These include employee costs, corporate costs and facilities costs. Employee costs include administrative salaries and related employee benefits, travel, recruiting and training costs. Corporate costs include reorganization costs, legal, accounting and outside consulting fees. Facilities costs primarily include rent and communications costs.
SG&A expenses for the three months ended September 30, 2019 were $2.9 million, as compared to $2.7 million for the three months ended September 30, 2018. The increase was mainly due to new sales initiatives taken by the company, including recruiting a new sales team.
SG&A expenses for the nine months ended September 30, 2019 were $9.1 million, as compared to $8.1 million for the nine months ended September 30, 2018. The increase was mainly due to new sales initiatives taken by the company, including recruiting a new sales team.
Depreciation and Amortization
Depreciation and amortization expense amounted to $0.6 million for the three months ended September 30, 2019 and three months ended September 30 2018 and $1.7 million for the nine months ended September 30, 2019 as compared to $2.3 million for the nine months ended September 30, 2018. We capitalized the customer lists acquired during various acquisitions, resulting in increased amortization costs. The customer lists from each acquisition are amortized over a period of 60 months.
Operating Income (Loss)
Our operating loss was $1.6 million for the three months ended September 30, 2019, as compared to $6.1 million operating income for the three months ended September 30, 2018. The change was mainly due to changes in estimates for consideration payable to the effect of $7.3 million (income) taken in three months ended September 30 2018, which was not present in the current comparable period. Without the item described in the preceding sentence, the operating loss for the three months ended September 30, 2018 would have been $1.2 million, and the increased loss for the 2019 period was due to new sales initiatives taken by the company, including recruiting a new sales team.
Our operating loss was $4.3 million for the nine months ended September 30, 2019, as compared to $3.7 million operating income for the nine months ended September 30, 2018. The increase was mainly due to changes in estimates for consideration payable to the effect of $7.1 million (income) taken in the nine months ended September 30 2018, which was not present in the current comparable period. Without the item described in the preceding sentence, the operating loss for the nine months ended September 30, 2018 would have been $3.5 million, and the increased loss is due to new sales initiatives taken by the company, including recruiting a new sales team.
Interest Expense
Our interest expense for the three months ended September 30, 2019 was $0.25 million as compared to $0.2 million for the three months ended September 30, 2018.
Our interest expense for the nine months ended September 30, 2019 and nine months ended September 30, 2018 was $0.6 million.
Liquidity and Capital Resources
Our cash position was approximately $0.5 million as of September 30, 2019, as compared to $1.4 million as of December 31, 2018.
Cash used for operating activities was $2 million during the nine months ended September 30, 2019 and was primarily a result of net changes in working capital requirements. Cash used in investing activities was $0.2 million during the nine months ended September 30, 2019. Cash provided by financing activities (predominantly by exercise of warrants) was $1.3 million during the nine months ended September 30, 2019.
Liquidity Concerns
We have incurred recurring losses as a result of costs and expenses related to our selling, general and administration activities and our acquisition strategy. As of September 30, 2019, we had negative working capital of $4.7 million and cash of $0.5 million on hand. Historically, our principal sources of cash have included bank borrowings and sales of securities. Our operating expenses are likely to continue to grow and, as a result, we will need to generate significant additional revenues to cover such expenses.
Our financial statements as of September 30, 2019 have been prepared under the assumption that we will continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to raise additional funding through the issuance of equity or debt securities, as well as to attain further operating efficiencies and, ultimately, to generate additional revenues. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. We can give no assurances that additional capital that we are able to obtain, if any, will be sufficient to meet our needs. The foregoing conditions raise substantial doubt about our ability to continue our operations.
Available Credit Facility, Borrowings and Repayment of Debt
On January 23, 2019, certain subsidiaries of the Company, including Ameri100 Arizona LLC, Ameri100 Georgia, Inc., Ameri100 California, Inc. and Ameri and Partners, Inc., as borrowers (individually and collectively, “Borrower”) entered into a Loan and Security Agreement (the “Loan Agreement”), for a credit facility (the “Credit Facility”) with North Mill Capital LLC, as lender (the “Lender”). The Loan Agreement has an initial term of two years from the closing date, with renewal thereafter if Lender, at its option, agrees in writing to extend the term for additional one year periods (the “Term”). The Loan Agreement is collateralized by a first-priority security interest in all of the assets of Borrower. In addition, (i) pursuant to a Corporate Guaranty entered into by the Company in favor of the Lender (the “Corporate Guaranty”), the Company has guaranteed the Borrower’s obligations under the Credit Facility and (ii) pursuant to a Security Agreement entered into between the Company and Lender (the “Security Agreement”), the Company granted a first-priority security interest in all of its assets to Lender.
The Borrowers received an initial advance on January 23, 2019 in an amount of approximately $2.85 million (the “Initial Advance”). Borrowings under the Credit Facility accrue interest at the prime rate (as designated by Wells Fargo Bank, National Association) plus one and three quarters percentage points (1.75%), but in no event shall the interest rate be less than seven and one-quarter percent (7.25%). Notwithstanding anything to the contrary contained in the Loan Documents, the minimum monthly interest payable by Borrower on the Advances (as defined in the Loan Agreement) in any month shall be calculated based on an average Daily Balance (as defined in the Loan Agreement) of Two Million Dollars ($2,000,000) for such month. For the first year of the Term, Borrower shall pay to Lender a facility fee equal to $50,000, due in equal monthly installments, with additional facility fees due to Lender in the event borrowings exceed certain thresholds and with additional facility fees due and payable in later years or upon later milestones. In addition, Borrower shall pay to Lender a monthly fee (the “Servicing Fee”) in an amount equal to one-eighth percent (.125%) of the average Daily Balance (as defined in the Loan Agreement) during each month on or before the first day of each calendar month during the Term.
The Company used approximately $2.75 million of the Initial Advance to repay all of its outstanding obligations under the Sterling National bank Credit Facility. Upon payment, the Company’s obligations under the Sterling National Bank Credit Facility were terminated. As of September 30, 2019, the principal balance and accrued interest under the Credit Facility amounted to $ 3.4 million.
Borrower also agreed to certain negative covenants in the Loan Agreement, including that they will not, without the prior written consent of Lender, enter into any extraordinary transactions, dispose of assets, merge, acquire, or consolidate with or into any other business organization or restructure.
If an Event of Default (as defined in the Loan Agreement) occurs, Lender may, among other things, (i) declare all obligations immediately due and payable in full; (ii) cease advancing money or extending credit to or for the benefit of Borrower; and/or (iii) terminate the Loan Agreement as to any future liability or obligation of Lender, without affecting Lender’s right to repayment of all obligations and Lender’s security interests.
On March 7, 2017, we completed the sale and issuance of 8% Convertible Unsecured Promissory Notes (the “2017 Notes”) for aggregate proceeds to us of $1.25 million from four accredited investors, including one of the Company’s then-directors, Dhruwa N. Rai, and David Luci, who became a director of the Company in February 2018. The 2017 Notes were issued pursuant to Securities Purchase Agreements between the Company and each investor. The 2017 Notes bear interest at 8% per annum until maturity in March 2020, with interest being paid annually on the first, second and third anniversaries of the issuance of the 2017 Notes beginning in March 2018. From and after an event of default and for so long as the event of default is continuing, the 2017 Notes will bear default interest at the rate of 10% per annum. The 2017 Notes can be prepaid by us at any time without penalty. As of June 30, 2019, all interest payments due on the 2017 Notes have been paid in full.
During this first quarter of 2019 the company repaid $0.25 million towards 2017 notes.
The 2017 Notes are convertible into shares of our common stock at a conversion price equal to $2.80. The holders of the 2017 Notes have the right, at their option, at any time and from time to time to convert, in part or in whole, the outstanding principal amount and all accrued and unpaid interest under the 2017 Notes into shares of the Company’s common stock at the conversion price.
The 2017 Notes rank junior to our secured credit facility with Sterling National Bank. The 2017 Notes also include certain negative covenants including, without the investors’ approval, restrictions on dividends and other restricted payments and reclassification of its stock.
Accounts Receivable
Accounts receivable for the period ended September 30, 2019 were $7.6 million as compared to $7.9 million as on December 31, 2018.
Accounts Payable
Accounts payable for the period ended September 30, 2019 were $4.7 million as compared to $4.4 million as on December 31, 2018.
Accrued Expense
Accrued expenses for the period ended September 30, 2019 were $1.5 million as compared to $1.7 million as on December 31, 2018.
Operating Activities
Our largest source of operating cash flows is cash collections from our customers. Our primary uses of cash for operating activities are for personnel-related expenditures, leased facilities and taxes.
Off- Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Impact of Inflation
We do not believe that inflation had a significant impact on our results of operations for the periods presented. On an ongoing basis, we attempt to minimize any effects of inflation on our operating results by controlling operating costs and, whenever possible, seeking to ensure that billing rates reflect increases in costs due to inflation.
For all significant foreign operations, the functional currency is the local currency. Assets and liabilities of these operations are translated at the exchange rate in effect at each period end. Statements of Operations accounts are translated at the exchange rate prevailing as of the date of the transaction. The gains or losses resulting from such translation are reported under accumulated other comprehensive income (loss) as a separate component of equity. Realized gains and losses from foreign currency transactions are included in other income, net for the periods presented.
Recent Accounting Pronouncements
See Note 2 to our unaudited condensed consolidated financial statements for additional information.
Critical Accounting Policies
Revenue Recognition. We recognize revenue in accordance with the Accounting Standard Codification 606 “Revenue Recognition.” Revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller’s price to buyer is fixed and determinable, and (4) collectability is reasonably assured. We recognize revenue from information technology services as the services are provided. Service revenues are recognized based on contracted hourly rates, as services are rendered or upon completion of specified contracted services and acceptance by the customer.
Stock-Based Compensation. Stock-based compensation expense for awards of equity instruments to employees and non-employee directors is determined based on the grant-date fair value of those awards. We recognize these compensation costs net of an estimated forfeiture rate over the requisite service period of the award. Forfeitures are estimated on the date of grant and revised if actual or expected forfeiture activity differs materially from original estimates.
Warrant Liability
The Company accounts for the warrants issued in connection with the July 25, 2018 Initial Securities Purchase Agreement in accordance with the guidance on Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which provides that the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statement of operations. The fair value of warrants issued by the Company in connection with private placements of securities has been estimated using the warrants quoted market price.
Impairment. Long-lived assets, which include property, plant and equipment, and certain other assets to be held and used by us, are reviewed when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable based on estimated future cash flows. If this assessment indicates that the carrying values will not be recoverable, as determined based on undiscounted cash flows over the remaining useful lives, an impairment loss is recognized based on the fair value of the asset.
Income Taxes. We provide for income taxes utilizing the asset and liability method of accounting. Under this method, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each balance sheet date, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. If it is determined that it is more likely than not that future tax benefits associated with a deferred income tax asset will not be realized, a valuation allowance is provided. The effect on deferred income tax assets and liabilities of a change in the tax rates is recognized in income in the period that includes the enactment date. Tax benefits earned on employee stock awards in excess of recorded stock-based compensation expense are credited to additional paid-in capital. Our provision for income taxes also includes the impact of provisions established for uncertain income tax positions, as well as the related interest.
Accounts Receivable. We extend credit to clients based upon management’s assessment of their credit-worthiness on an unsecured basis. We provide an allowance for uncollectible accounts based on historical experience and management evaluation of trend analysis. We include any balances that are determined to be uncollectible in allowance for doubtful accounts.
Business Combination. We account for business combinations using the acquisition method, which requires the identification of the acquirer, the determination of the acquisition date and the allocation of the purchase price paid by the acquirer to the identifiable tangible and intangible assets acquired, the liabilities assumed, including any contingent consideration and any non-controlling interest in the acquiree at their acquisition date fair values. Goodwill represents the excess of the purchase price over the fair value of net assets acquired, including the amount assigned to identifiable intangible assets. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related costs are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in our consolidated financial statements from the acquisition date.
Goodwill and Purchased Intangibles. We evaluate goodwill and purchased intangible assets for impairment at least annually, or as circumstances warrant. Goodwill is evaluated at the reporting unit level by comparing the fair value of the reporting unit with its carrying amount. For purchased intangible assets, if our annual qualitative assessment indicates possible impairment, we test the assets for impairment by comparing the fair value of such assets to their carrying value. In determining the fair value, we utilize various estimates and assumptions, including discount rates and projections of future cash flows. If an impairment is indicated, a write down to the implied fair value of goodwill or fair value of intangible asset is recorded.
Valuation of Contingent Earn-out Consideration. Acquisitions may include contingent consideration payments based on the achievement of certain future financial performance measures of the acquired company. Contingent consideration is required to be recognized at fair value as of the acquisition date. We estimate the fair value of these liabilities based on financial projections of the acquired companies and estimated probabilities of achievement. We believe our estimates and assumptions are reasonable, however, there is significant judgment involved. We evaluate, on a routine, periodic basis, the estimated fair value of the contingent consideration and changes in estimated fair value, subsequent to the initial fair value estimate at the time of the acquisition, will be reflected in income or expense in the consolidated statements of operations. Changes in the fair value of contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of revenue and/or earnings estimates and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria. Any changes in the estimated fair value of contingent consideration may have a material impact on our operating results.
Special Note Regarding Forward-Looking Information
Some of the statements in this Quarterly Report on Form 10-Q and elsewhere constitute forward-looking statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements involve known and unknown risks, uncertainties and other factors that may cause results, levels of activity, growth, performance, tax consequences or achievements to be materially different from any future results, levels of activity, growth, performance, tax consequences or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, those listed below.
The forward-looking statements included in this Form 10-Q and referred to elsewhere are related to future events or our strategies or future financial performance, including statements concerning our 2019 outlook, future revenue and growth, customer spending outlook, general economic trends, IT service demand, future revenue and revenue mix, utilization, new service offerings, significant customers, competitive and strategic initiatives, growth plans, potential stock repurchases, future results, tax consequences and liquidity needs. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “believe,” “anticipate,” “anticipated,” “expectation,” “continued,” “future,” “forward,” “potential,” “estimate,” “estimated,” “forecast,” “project,” “encourage,” “opportunity,” “goal,” “objective,” “could,” “expect,” “expected,” “intend,” “plan,” “planned,” or the negative of such terms or comparable terminology. These forward-looking statements inherently involve certain risks and uncertainties, although they are based on our current plans or assessments which are believed to be reasonable as of the date of this Form 10-Q.
Although we believe that the expectations in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, growth, earnings per share or achievements. However, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Except as otherwise required, we undertake no obligation to update any of the forward-looking statements after the date of this Form 10-Q to conform such statements to actual results.
Not applicable.
Management’s Report on Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report on Form 10-Q, we have carried out an evaluation of the effectiveness of the design and operation of our Company’s disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our Company’s management, including our Company’s Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our company’s Chief Executive Officer and Chief Financial Officer concluded that our company’s disclosure controls and procedures are not yet effective as of the end of the period covered by this report as noted below in management’s report on internal control over financial reporting. This is largely due to the fact that we are acquiring privately held companies as part of our growth strategy and our control procedures over all acquired subsidiaries will not be effective until such time as we are able to fully integrate the acquisition with our company and set processes and procedures for the acquired entities. We are working to improve and harmonize our financial reporting controls and procedures across all of our companies. There have been no changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
Disclosure controls and procedures and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. Our management has assessed the effectiveness of our internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with generally accepted accounting principles; providing reasonable assurance that receipts and expenditures are made in accordance with authorizations of management and our directors; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. As a result of this assessment, our management concluded that, as of September 30, 2019, our internal control over financial reporting was not yet effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. This is largely due to the fact that we previously acquired multiple privately held companies as part of our growth strategy and our control procedures over all acquired subsidiaries will not be effective until such time as we are able to fully integrate the acquisition with our company and set processes and procedures for the acquired entities. We are working to improve and harmonize our financial reporting controls and procedures across all of our companies.
This Quarterly Report on Form 10-Q does not include an attestation report of our independent auditors regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent auditors pursuant to temporary rules of the SEC that permit our company to provide only management’s report in this Quarterly Report on Form 10-Q.
Inherent Limitations on Effectiveness of Controls
Internal control over financial reporting has inherent limitations which include but is not limited to the use of independent professionals for advice and guidance, interpretation of existing and/or changing rules and principles, segregation of management duties, scale of organization and personnel factors. Internal control over financial reporting is a process, which involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis, however these inherent limitations are known features of the financial reporting process and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during the third quarter ended in 2019 that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.
PART II - OTHER INFORMATION
On May 1, 2018, MACT Holdings LLC, one of the former members of our subsidiary, Ameri Arizona, filed suit against us in the United States District Court for the Southern District of New York seeking damages in an amount equal to such former member’s portion of accrued but unpaid earn-out payments of approximately $236,950 in respect of the 2017 earn-out period, plus attorneys’ fees and expenses. All such amounts had been paid as of August 3, 2018. Such former member also asserted that he had elected to receive cash instead of stock consideration of 560,000 shares of common stock issued to him on July 30, 2018, and the Company has entered into a settlement agreement, as of February 4, 2019, in which the Company paid an amount of $200,000 to such member in four equal monthly installments starting from February 2019 and ending in May 2019, which settled such dispute in its entirety.
Other than the above, we are not currently a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business.
Not applicable.
None.
None.
Not applicable.
None.
| Exhibit | Description |
Form of Exchange Agreement (filed as Exhibit 10.1 to the Form 8-K filed by the Company on September 20, 2019 and incorporated by reference herein) | |
| Section 302 Certification of Principal Executive Officer | |
| Section 302 Certification of Principal Financial and Accounting Officer | |
| Section 906 Certification of Principal Executive Officer | |
| Section 906 Certification of Principal Financial and Accounting Officer | |
| 101** | The following materials from Ameri Holdings, Inc.’s Quarterly Report on Form 10-Q for the three months ended September 30, 2019 are formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statement of Stockholders’ Equity (Deficit), (iv) the Consolidated Statements of Cash Flow, and (iv) Notes to the Consolidated Financial Statements. |
| * | Furnished herewith. |
| ** | In accordance with Item 601of Regulation S-K, this Exhibit is hereby furnished to the SEC as an accompanying document and is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933. |
Pursuant to the requirements of the Section 13 or 15 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 8th day of November, 2019.
| AMERI Holdings, Inc. | ||
| By: | /s/ Brent Kelton | |
| Brent Kelton | ||
| Chief Executive Officer (Principal Executive Officer) | ||
| By: | /s/ Barry Kostiner | |
| Barry Kostiner | ||
| Chief Financial Officer (Principal Accounting Officer) | ||
28