NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature of Operations and Summary of Significant Accounting Policies
Nature
of Business and Operations Overview
Cachet
Financial Solutions, Inc. (the “Company”) is a leading provider of software-as-a-service, or SaaS, financial technology,
or fintech, solutions to the financial services industry. The Company provides traditional financial institutions and alternative
financial service, or AFS, providers with innovative mobile and other solutions to enable them to offer a suite of leading-edge
mobile financial services to their customers through the Internet, or cloud-based, access. As a SaaS provider, the Company develops,
hosts and maintains software solutions that it licenses to its clients. The Company serves three primary markets in the United
States: banks, credit unions and AFS providers, which includes providers of non-traditional banking services such as reloadable
prepaid cards and check cashing services. In the future, the Company intends to expand outside of the United States, including
Latin America and Europe, as opportunities present themselves.
The
Company has been expanding its suite of available fintech solutions. One of the Company’s recent solutions, Select Mobile
Money, is a prepaid mobile money platform that seamlessly links various mobile banking features with a prepaid debit card issued
by financial institutions or AFS providers. This solution enables card users to conveniently manage their card accounts through
an easy-to-use integrated mobile application, or app, with multiple features downloaded onto their smart phone or tablet and,
by adding a suite of available mobile financial services linked to their card accounts, enhances the card’s usefulness and
the cardholder’s mobile banking experience. For example, prepaid cardholders using the Company’s application may deposit
paper checks and direct payroll deposits into their prepaid card account, access cash from their prepaid card account at any automated
teller machine, or ATM, and check their prepaid card account balance and transaction history. The Company believes that its Select
Mobile Money solutions are setting the industry standard for reloadable prepaid mobile money solutions.
The
Company’s Select Mobile Money solutions comprise two distinct mobile banking technology solutions: first, a white label
mobile money platform for larger financial institutions and AFS providers that already have a reloadable prepaid card program
and wish to enhance it by integrating a feature rich app; and second, an end-to-end reloadable prepaid card program, called Select
Mobile Money-Express, or SMM-X, offered to all banks, credit unions and AFS providers of all sizes that would like to deploy a
complete reloadable prepaid card program, comprising a prepaid debit card, an integrated mobile app and program management.
The
Company’s business has historically focused on offering a full suite of consumer and business remote deposit check capture,
or RDC, products that enable financial institutions to provide their customers with the ability to conveniently deposit their
checks remotely anytime, anywhere. While the Company continues to offer these solutions, the Company recently expanded its focus
to include prepaid mobile money solutions. The Company’s latest innovations are a mobile remote payment capture solution,
which the Company calls Select Mobile NowPay, which enables enterprises to accept check payments submitted via their customers’
mobile devices, and the Company’s mobile account opening solution, which the Company calls Select Mobile Account Opening,
which streamlines the account opening process by utilizing photo imaging to capture customer data and auto-populate an account
opening application form for checking, savings, credit card and other types of accounts.
The
Company’s business operations are conducted through its wholly owned subsidiary, Cachet Financial Solutions Inc., a Minnesota
corporation (the “Subsidiary”). The Company was incorporated in Delaware in February 2010. In February 2014, the Company
acquired the business of the Subsidiary, and changed its corporate name to “Cachet Financial Solutions, Inc.”
Summary
of Significant Accounting Policies
Basis
of Presentation
The
accompanying consolidated financial statements of the Company are prepared on the accrual basis of accounting in accordance with
accounting principles generally accepted in the United States of America (“GAAP”). The Company’s consolidated
financial statements include the accounts of the Company and the Subsidiary. The Subsidiary is the only entity with operational
activity, and therefore no intercompany transactions exist with the Company which would require elimination.
Capital
Structure Change
On
June 2, 2016, the board of directors of the Company (the “Board of Directors”) adopted resolutions approving and recommending
to the Company’s shareholders to approve a proposal to amend the Company’s Amended and Restated Certificate of Incorporation
to effect a reverse split of outstanding shares of common stock of the Company, which was subsequently approved by the Company’s
shareholders, and the ratio was set by the Board of Directors at 1:15 (the “July Reverse Stock Split”). The July Reverse
Stock Split became effective on July 27, 2016. As a result of the July Reverse Stock Split, the Company’s historical financial
statements have been revised to reflect share counts and per share data as if the July Reverse Stock Split had been in effect
for all periods presented.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Going
Concern
In
August 2014, the FASB issued ASU 2014-15, “
Disclosure of Uncertainties about an Entity’s Ability to Continue as
a Going Concern.
” The amendments provide guidance about management’s responsibility to evaluate whether there
is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.
The standard is effective for the Company’s year ended December 31, 2016 and interim periods thereafter. The Company has
adopted this new accounting standard as of December 31, 2016, which requires the Company to evaluate whether there is substantial
doubt regarding the Company’s ability to continue as a going concern for one year from the date that these financial statements
were available to be issued.
The
accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern.
From inception to December 31, 2016, the Company has accumulated a deficit of $84.5 million, and, as of December 31, 2016, current
liabilities exceeded current assets by $8.3 million. The Company believes, based on its current cash flow forecast, it will have
enough cash to continue operations through March 31, 2017. If the Company is able to complete an underwritten public offering,
the Company believes that it will have sufficient cash to continue operations through February 24, 2018.
Revenue
Recognition
The
Company generates revenue from the following sources:
|
●
|
up-front
implementation fees;
|
|
|
|
|
●
|
professional
service fees; and
|
|
|
|
|
●
|
recurring
revenue, comprising of monthly hosting/maintenance fee, monthly user fees and transaction fees.
|
The
Company commences revenue recognition for fees earned on its solutions and services when all of the following criteria are met:
|
●
|
there
is persuasive evidence of an arrangement;
|
|
|
|
|
●
|
the
service has been or is being provided to the client;
|
|
|
|
|
●
|
collection
of the fees is reasonably assured; and
|
|
|
|
|
●
|
the
amount of fees to be paid by the client is fixed or determinable.
|
Up-Front
Implementation Fees
The
up-front implementation fees are recognized over the term of the contract or expected life of the contract where no contractual
term exists. Generally, client agreements are entered into for 12 to 36 months. A majority of the implementation service component
of the arrangement with clients is performed within 120 days of entering into a contract with the customer.
Professional
Services Fee
Fees
from professional services may include fees charged for consulting, implementation services, client customization services,
development of interfaces requested by the Company’s clients, assistance with software design and development and third-party
application integration of the Company’s solutions with its client’s applications, dedicated client support services,
advisory services to clients who choose to develop their own interfaces and applications, and additional marketing support services
requested by the Company’s clients. Professional services are typically performed within three to six months of entering
into an arrangement with the customer. Professional services are typically sold on a fixed-fee basis, but are also offered on
a time-and-material basis. Revenue for time-and-material arrangements is recognized as the services are performed. Revenue for
professional services is recognized under a percent of completion method matching the revenue with the costs of the computer programmer’s
time. The Company uses internal milestones to estimate the costs and related percent of completion. Professional services are
not considered essential to the functionality of the Company’s SaaS solutions. For the Company’s RDC solutions, the
Company also includes in this category revenues from the sale of scanning and related equipment.
In
determining whether professional services can be accounted for separately from other services, the Company considers the availability
of the professional services from other vendors, the nature of professional services and whether the Company sells its solutions
to new clients without professional services.
Recurring
Revenue
Recurring
revenue is billed on a monthly basis, and includes hosting/maintenance fees charged to the Company’s clients, user fees
charged per customer, and transaction fees based on client’s customer transactions. Recurring revenue arises only after
the client has implemented one of the Company’s solutions, whether RDC, Select Mobile Money, Select Mobile NowPay or Select
Mobile Account Opening. Recurring revenue varies depending on the specific solution deployed, the fee arrangement negotiated with
the client, the number of client customers that use the application (and, in the case of the Company’s prepaid mobile money
application, the type of service used), and the volume of monthly user transactions.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Recurring
revenue is recognized monthly based on the terms of the specific client agreement, commencing on the date the service is provisioned
to the client, provided the four revenue recognition criteria have been satisfied. Hosting/maintenance fees and user fees are
recognized on a monthly basis as earned under the terms of the client agreement provided the four revenue recognition criteria
have been satisfied. Transaction volume fees are recognized as transactions are processed provided the four revenue recognition
criteria have been satisfied.
Multiple
Element Arrangement
The
Company enters into multiple element arrangements in which a client may purchase a solution and professional services. For arrangements
with multiple deliverables, the Company evaluates whether the individual deliverables qualify as separate units of accounting.
In order to treat deliverables in a multiple element arrangement as separate units of accounting, the deliverables must have standalone
value upon delivery. If the deliverables have standalone value upon delivery, the Company accounts for each deliverable separately
and revenue is recognized for the respective deliverables as they are delivered. If one or more of the deliverables does not have
standalone value upon delivery, the deliverables that do not have standalone value are combined with the final deliverable within
the arrangement and treated as a single unit of accounting.
The
Company determines the selling price for each element based on the selling price hierarchy of: (i) vendor-specific objective evidence
of fair value, or VSOE, (ii) third-party evidence, or TPE, and (iii) estimated selling price, or ESP. The Company is unable to
establish VSOE for any of its services, as the Company has not historically priced its solutions or services with sufficient consistency.
The Company is unable to establish TPE, as the Company does not have sufficient information regarding pricing of third-party solutions
and professional services similar to its offerings. As a result, the Company has developed estimates of selling prices based on
margins established by the Company’s senior management as the targets in its selling and pricing strategies after considering
the nature of the services, the economic and competitive environment, and the nature and magnitude of the costs incurred. The
amount of arrangement fee allocated to a single unit of accounting is limited by any contingent revenue, if applicable.
Deferred
Revenue
Deferred
revenue consists of billings and payments received in advance of revenue recognition from any of the solutions and services the
Company offers as described above and is recognized as the revenue recognition criteria are met. The Company typically invoices
its clients on a monthly basis and, in certain limited cases, on an annual basis. Accordingly, the deferred revenue balance does
not represent the total contract value of the Company’s multi-year client agreements. Deferred revenue also includes certain
deferred professional services fees, which are recognized in accordance with the Company’s revenue recognition policy. The
portion of deferred revenue the Company expects to recognize during the succeeding 12-month period is recorded as current deferred
revenue, and the remaining portion is recorded as non-current.
Cost
of Revenue
Cost
of revenue primarily consists of costs related to developing, implementing, hosting and supporting the Company’s cloud-based
solutions and services, including the Company’s RDC solutions and prepaid mobile money solutions, providing client support,
data communications expense, salaries and benefits and non-cash stock compensation expense of operations and support personnel,
software development fees, software license fees, amortization expense associated with acquired developed technology assets, and
property and equipment depreciation of fixed assets used in the generation of revenue. Cost of revenue also includes the cost
of professional services the Company procures externally, including for the services the Company procures from its external programming
consultants in Toronto, Canada. These external programming consultants are dedicated primarily to the Company’s prepaid
mobile money solutions and other select development projects. The Company does not track or allocate cost of revenues to the different
solutions or services the Company sells to specific revenue sources, except for the cost of professional services the Company
incurs externally including for the services the Company procures from the external programming consultants in Toronto, Canada.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Cash and cash equivalents are maintained at more than one financial institution and, at times, balances may exceed federally insured
limits. The Company has never experienced any losses related to these balances and does not believe it is exposed to any significant
credit risk on cash and cash equivalents.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts
Receivable
Accounts
receivable represent amounts due from customers. Management determines the allowance for doubtful accounts by regularly evaluating
individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions.
Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded
when received. The allowance for doubtful accounts was approximately $11,000 and $10,000 as of December 31, 2016 and 2015, respectively.
Accounts receivable collectible within one year from the balance sheet date are recognized as current assets within the consolidated
balance sheets while accounts receivable that are collectible after one year from the balance sheet date are recognized as other
assets within the consolidated balance sheets. As of December 31, 2016, one customer represented approximately 42.8% of
the Company’s total receivables, for which the Company has not recorded a reserve due to the Company’s historical
experience with this customer. If amounts due from this customer become uncollectible in the future, the Company’s operations
would be materially impacted.
Property
and Equipment
Depreciation
and amortization is computed using the straight-line method over the following estimated useful lives:
Computer
and Data Center Equipment
|
|
3
years
|
Purchased
and Acquired software
|
|
3
years
|
Leasehold
Improvements
|
|
3-5
years, or lease term if less
|
Furniture
and fixtures
|
|
7
years
|
Major
additions and improvements are capitalized, while replacements, maintenance and repairs, which do not improve or extend the life
of the respective assets, are expensed as incurred. When assets are retired or otherwise disposed of, related costs and accumulated
depreciation and amortization are removed and any gain or loss is reported.
Goodwill
Goodwill
represents the excess purchase price over the appraised value of the portion of identifiable assets that were acquired from DeviceFidelity,
completed in March 2014. Goodwill is not amortized but is reviewed at least annually for impairment, or between annual dates if
circumstances change that would more likely than not cause impairment. The Company’s management performs its annual impairment
test at the close of each fiscal year, and considers several factors in evaluating goodwill for impairment, including the Company’s
current financial position and results of operations, general economic and industry conditions and legal and regulatory conditions.
See Note 9 “Goodwill and Finite Lived Intangible Assets.”
Impairment
of Long-lived Assets, Including License Agreements
The
Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount
of an asset to future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of
the assets. See Note 9 “Goodwill and Finite Lived Intangible Assets.”
Deferred
Financing Costs
Deferred
financing costs are capitalized and amortized into interest expense over the lives of the related debt agreements. In the event
debt is converted or paid prior to maturity, any unamortized issuance costs related to such debt are charged to expense at the
time of conversion or payment prior to maturity.
In
April 2015, the Financial Accounting Standards Board issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs,
which changed the presentation of debt issuance costs in financial statements to present such costs as a direct deduction from
the related debt liability rather than as an asset. This ASU became effective for public companies during interim and annual reporting
periods beginning after December 15, 2015. The Company adopted this ASU in 2016 on a retrospective basis.
Advertising
Costs
Advertising
costs are expensed as incurred and are included in sales and marketing expense on the accompanying consolidated statements of
operations. During the years ended December 31, 2016 and 2015, advertising costs totaled approximately $60,000 and $65,000, respectively.
Deferred
Commissions
The
Company capitalizes commission costs paid to internal sales associates that are incremental and directly related to the acquisition
of client contracts. Commission costs are capitalized and amortized over the term of the related client contract.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Net
Loss Per Common Share
Basic
and diluted net loss per common share for all periods presented is computed by dividing the net loss attributable to common shareholders
by the weighted-average number of common shares outstanding and common share equivalents outstanding, when dilutive. Potentially
dilutive common share equivalents include common shares which would potentially be issued pursuant to stock warrants, stock options,
convertible preferred stock and convertible note agreements. Common share equivalents are not included in determining the fully
diluted loss per share if their effect is antidilutive.
The
following table reflects the amounts used in determining loss per share:
|
|
Year
Ended
|
|
(In
thousands, except share and per share data)
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(15,167
|
)
|
|
$
|
(18,252
|
)
|
Less: Cumulative
unpaid preferred stock dividends
|
|
|
(480
|
)
|
|
|
(260
|
)
|
Net loss attributable
to common shareholders
|
|
$
|
(15,647
|
)
|
|
$
|
(18,512
|
)
|
Weighted average common shares outstanding
|
|
|
2,794,630
|
|
|
|
1,771,736
|
|
Net loss per common share – basic
and diluted
|
|
$
|
(5.60
|
)
|
|
$
|
(10.45
|
)
|
The
following potential common shares were excluded from the calculation of diluted loss per share from continuing operations and
diluted net loss per share attributable to common shareholders because their effect would have been anti-dilutive for the periods
presented:
|
|
As
of
|
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Convertible Preferred Stock
|
|
|
1,031,454
|
|
|
|
944,932
|
|
Stock Options
|
|
|
337,846
|
|
|
|
249,951
|
|
Warrants
|
|
|
4,343,528
|
|
|
|
1,723,674
|
|
|
|
|
5,712,828
|
|
|
|
2,918,557
|
|
Fair
Value of Financial Instruments
The
Company uses fair value measurements to record fair value adjustments for certain financial instruments and to determine fair
value disclosures. Instruments issued with price protection features are recorded at fair value on a recurring basis. The Company
considers the carrying value of cash and cash equivalents, accounts receivable and accounts payable to approximate fair value
due to the short maturity of these instruments. With respect to the determination of fair values of financial instruments, there
are the following three levels of inputs:
Level
1 Inputs – Quoted prices for identical instruments in active markets.
Level
2 Inputs – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in
markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level
3 Inputs – Instruments with primarily unobservable value drivers.
The
instruments that are carried at fair value are valued using level 3 inputs utilizing the Black-Scholes option pricing model or
a Monte Carlo simulation, depending on the instrument. The conversion features that are carried at fair value are valued by a
third-party valuation specialist. There were no transfers into or out of level 3 of the fair value hierarchy during the year ended
December 31, 2016.
Use
of Estimates
The
preparation of these consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that may affect certain reported amounts and disclosures in the consolidated financial statements. Actual results could differ
from those estimates. Significant estimates include the Company’s ability to continue as a going concern, the allowance
for doubtful accounts, assumptions used to value stock options and warrants, conversion feature liabilities, conversion incentive
and share purchase price adjustments.
Research
and Development Costs
The
Company considers those costs incurred in developing new processes and solutions to be research and development costs and they
are expensed as incurred.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Income
Taxes
The
Company utilizes the asset and liability method of accounting for income taxes. The Company recognizes deferred tax liabilities
or assets for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities.
The Company regularly assesses the likelihood that its deferred tax assets will be recovered from future taxable income. The Company
considers projected future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance
necessary to offset the Company’s deferred tax assets that will not be recoverable. The Company has recorded and continues
to carry a full valuation allowance against its gross deferred tax assets that will not reverse against deferred tax liabilities
within the scheduled reversal period. If the Company determines in the future that it is more likely than not that the Company
will realize all or a portion of its deferred tax assets, the Company will adjust its valuation allowance in the period in which
the Company makes that determination. The Company expects to provide a full valuation allowance on its future tax benefits until
the Company can sustain a level of profitability that demonstrates its ability to realize these assets.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period’s presentation. These reclassifications did
not have an impact on reported net loss for any of the periods presented.
Recent
Accounting Pronouncements
On
May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, “
Revenue from Contracts with Customers.
” The core principle of the ASU is for companies to recognize
revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration, or payment, to which
the company expects to be entitled in exchange for those goods or services. The ASU may also result in enhanced disclosures about
revenue. For public entities, the ASU was to be effective for annual reporting periods beginning after December 15, 2016. On July
9, 2015, the FASB voted to allow a one year deferral of the effective date to annual reporting periods beginning after December
15, 2017. The deferral permits early adoption, but does not allow adoption any earlier than the original effective date of the
standard. The Company has not yet selected a transition method and is currently evaluating the impact this standard will have
on the Company’s consolidated financial statements.
In
January 2016, the FASB issued ASU 2016-01, “
Recognition and Measurement of Financial Assets and Financial Liabilities,
”
which requires that most equity instruments be measured at fair value, with subsequent changes in fair value recognized in net
income. The pronouncement also impacts the financial liabilities under the fair value option and the presentation and disclosure
requirements for financial instruments. The ASU does not apply to equity method investments or investments in consolidated subsidiaries.
The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December
15, 2017, with early adoption permitted and amendments to be applied as a cumulative-effect adjustment to the balance sheet in
the year of adoption. The Company is currently evaluating the impact of the ASU on its consolidated financial statements and disclosures.
In
February 2016, the FASB issued ASU 2016-02 “
Leases,
” which sets out the principles for the recognition, measurement,
presentation and disclosure of leases for both lessees and lessors. The new guidance requires lessees to apply a dual approach,
classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed
purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest
method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use
asset and a lease liability for all leases with a term greater than 12 months, regardless of their classification. Leases with
a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The new standard supersedes
the previous leasing standard. The standard is effective for fiscal years, and for interim periods within those fiscal years,
beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the ASU on its
consolidated financial statements and disclosures.
In
March 2016, the FASB issued ASU 2016-09, “
Improvements to Employee Share-Based Payment Accounting.
” This ASU
affects entities that issue share-based payment awards to their employees. The ASU is designed to simplify several aspects of
accounting for share-based payment award transactions, which include the income tax consequences, classification of awards as
either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. The revised guidance
is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted in any interim or annual period.
The Company does not believe that this ASU will have a material impact on its consolidated financial statements and disclosures.
In
June 2016, the FASB issued ASU 2016-13, “
Financial Instruments – Credit Losses,
” which introduces new
guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on
current expected credit losses (“CECL”) on certain types of financial instruments and expands disclosure requirements
regarding an entities assumptions, models and methods for estimating CECL. Generally, the CECL and subsequent changes to the estimate
will be reported in current earnings through an allowance on the consolidated balance sheets. The revised guidance is effective
for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted
for reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact of the ASU on its consolidated
financial statements and disclosures.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
August 2016, the FASB issued ASU 2016-15, “
Statement of Cash Flows,
” which is intended to reduce diversity
in practice in how certain cash receipts and cash payments are presented and classified in the consolidated statements of cash
flows by providing guidance on eight specific cash flow issues. The revised guidance is effective for fiscal years beginning after
December 15, 2017, including for interim periods within those fiscal years, and is to be applied retrospectively. Early adoption
is permitted. The Company is currently evaluating the impact of the ASU on its consolidated financial statements and disclosures.
In
January 2017, the FASB issued ASU 2017-04, “
Intangibles-Goodwill and Other (Topic 350),
” which simplifies the
test for goodwill impairment by eliminating step 2 of the goodwill impairment test. Instead, an entity should perform its annual
or interim impairment test by comparing the fair value of a reporting unit to its carrying amount, and should recognize an impairment
charge in the amount by which the carrying amount of the reporting unit exceeds its fair value. The revised guidance is effective
for fiscal years beginning after December 15, 2019, including for interim periods within those fiscal years, and is to be applied
prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January
1, 2017. The Company is currently evaluating the impact of the ASU on its consolidated financial statements and disclosures.
2.
Prepaid Expenses and Deferred Costs
Prepaid
expenses and deferred costs primarily consist of prepayment of licenses and maintenance fees, or deposits with, the providers
of RDC software capabilities to the Company.
3.
Property and Equipment
Property
and equipment consists of the following:
|
|
As of
|
|
(In
thousands)
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
255
|
|
|
$
|
227
|
|
Data center equipment
|
|
|
1,230
|
|
|
|
1,011
|
|
Purchased software
|
|
|
814
|
|
|
|
692
|
|
Furniture and fixtures
|
|
|
90
|
|
|
|
90
|
|
Leasehold improvements
|
|
|
78
|
|
|
|
75
|
|
Total property and equipment
|
|
|
2,467
|
|
|
|
2,095
|
|
Less: accumulated
depreciation
|
|
|
(1,771
|
)
|
|
|
(1,431
|
)
|
Net property
and equipment
|
|
$
|
696
|
|
|
$
|
664
|
|
Depreciation
expense consisted of the following:
|
|
Year
Ended
|
|
(In
thousands)
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
$
|
340
|
|
|
$
|
322
|
|
4.
Accrued Expenses
Accrued
expenses consist of the following:
|
|
As of
|
|
(In
thousands)
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Accrued compensation
|
|
$
|
226
|
|
|
$
|
120
|
|
Accrued rent
|
|
|
12
|
|
|
|
-
|
|
Accrued sales
tax
|
|
|
3
|
|
|
|
6
|
|
Total accrued
expenses
|
|
$
|
241
|
|
|
$
|
126
|
|
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
5.
Financing Arrangements
The
Company has obtained debt financing through bank loans, loans from directors and other affiliated parties and unaffiliated third
party investors. Certain of the Company’s debt agreements contain various covenants. As of December 31, 2016, the Company believes
that it is in compliance with all covenants. Certain of the debt was issued with warrants that permit the investor to acquire
shares of the Company’s common stock at prices as specified in the individual agreements. See Note 10 “Shareholders’
Deficit.”
The
Company’s debt and accrued interest outstanding as of the periods presented consisted of the following:
|
|
Principal
Balance
|
|
|
Accrued
Interest
|
|
(Dollar
amounts in thousands)
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable
to Directors and Affiliates
|
|
$
|
3,078
|
|
|
$
|
1,748
|
|
|
$
|
411
|
|
|
$
|
232
|
|
Convertible Term Loan,
due December 2016, interest at 10%
|
|
|
—
|
|
|
|
2,300
|
|
|
|
—
|
|
|
|
370
|
|
Convertible Notes,
due 2016 and 2017, interest between 0%
and 8%
(1)
|
|
|
9,211
|
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
Series Subordinated
Note, due January 2016, interest at 12%
|
|
|
415
|
|
|
|
415
|
|
|
|
228
|
|
|
|
2
|
|
Notes Payable, due
October 2016, interest between 8.25% and 12%
|
|
|
67
|
|
|
|
75
|
|
|
|
32
|
|
|
|
28
|
|
Note Payable, due August
2021, interest at 0%
|
|
|
192
|
|
|
|
192
|
|
|
|
—
|
|
|
|
—
|
|
Installment
Note Payable – Bank
|
|
|
234
|
|
|
|
261
|
|
|
|
—
|
|
|
|
—
|
|
Total
debt
|
|
|
13,197
|
|
|
|
4,991
|
|
|
|
675
|
|
|
|
632
|
|
Discount on notes payable
|
|
|
(8,519
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Unamortized
deferred financing costs
|
|
|
(133
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
Total debt, net
|
|
|
4,545
|
|
|
|
4,960
|
|
|
|
|
|
|
|
|
|
Less:
short-term debt and current portion of long-term debt
|
|
|
4,229
|
|
|
|
4,768
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion
|
|
$
|
316
|
|
|
$
|
192
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes notes payable to Messrs. Hanson and Davis totaling
approximately $906,000.
|
Future
maturities of notes payable, gross, as of December 31, 2016 are as follows (in thousands):
2017
|
|
$
|
12,881
|
|
2018
|
|
|
115
|
|
2019
|
|
|
9
|
|
2020
|
|
|
—
|
|
2021
|
|
|
192
|
|
Thereafter
|
|
|
—
|
|
|
|
$
|
13,197
|
|
Less: unamortized discount and deferred financing fees
|
|
|
(8,652
|
)
|
Total
debt
|
|
$
|
4,545
|
|
Notes
Payable to Directors and Affiliates
The
Company has historically relied on Messrs. Hanson and Davis to provide financing to fund the Company’s operations. See Note
12 “Related Party Transactions.”
Convertible
Term Loan, due December 2016, interest at 10%
In
December 2013, the Company entered into a loan and security agreement with Trooien Capital, LLC (“Trooien Capital,”
and the Company refers to this note as the “Trooien Capital Note”) for a principal amount of up to $4 million. Borrowings
under the Trooien Capital Note bore interest at 10% and matured in December 2016. Under the agreement, Trooien Capital had the
right, but not the obligation, to advance additional amounts up to the $4 million. Trooien Capital had the right to request shares
of common stock, rather than cash, as payment for interest. The Company repaid the Trooien Capital Note, including interest accrued
but unpaid thereon in December 2016 for an aggregate amount of $3.1 million in cash. See Note 7 “Commitments and Contingencies.”
Convertible
Notes, due 2016 and 2017, interest at 0%
For
accounting purposes, the Company accounts for the debt, warrants and conversion features of the following convertible notes using
an allocation process. As a result, the reported amount of the debt has been reduced and will be accreted to face value through
each of the maturity dates.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Convertible
notes that will convert upon uplisting
Between
June and September 2016, the Company issued to several investors convertible notes, which are unsecured and do not bear any interest,
and warrants to purchase common stock. Each of the investors may elect to convert the principal amount of the notes into shares
of the Company’s common stock at any time before the maturity date of the notes at a conversion price equal to the lower
of $5.55 and 80% of the per share sale price of the Company’s common stock in its next underwritten public offering. The
Company has the right to require each of the investors to convert the notes into shares of its common stock at that conversion
price if the Company’s common stock is listed on the Nasdaq Capital Market, the Nasdaq Global Market or the Nasdaq Global
Select Market. In addition, under the Company’s agreement with each of the investors, it is required to file with the SEC
a registration statement covering the resale of the shares of its common stock issuable under the notes and the warrants within
21 days after the Company’s next underwritten public offering, or 90 days following the date on which the Company’s
current financing plan is terminated. If the Company fails to file a registration statement in a timely manner, the Company will
be required to issue to each of the investors additional warrants to purchase shares of its common stock.
Between
October 2016 and January 2017, the Company issued to several investors convertible notes, which are unsecured and do not
bear any interest, and warrants to purchase common stock. Each of the investors may elect to convert the principal amount of the
notes into shares of the Company’s common stock at any time before the maturity date of the notes at a conversion price
equal to the lower of $7.00 and 80% of the per share sale price of the Company’s common stock in its next underwritten public
offering. The Company has the right to require each of the investors to convert the notes into shares of its common stock at that
conversion price if the Company’s common stock is listed on the Nasdaq Capital Market, the Nasdaq Global Market or the Nasdaq
Global Select Market. In addition, under the Company’s agreement with each of the investors, it is required to file with
the SEC a registration statement covering the resale of the shares of its common stock issuable under the notes and the warrants
within 21 days after the Company’s next underwritten public offering, or 90 days following the date on which the Company’s
current financing plan is terminated. If the Company fails to file a registration statement in a timely manner, the Company will
be required to issue to each of the investors additional warrants to purchase shares of its common stock. The Company has expressed
its intent to grant a security interest in the assets and properties of the Company to the investors which, when granted, shall
(i) secure the full and timely payment and performance by the Company of the obligations of the Company under the convertible
notes on a pari passu basis among the investors, and (ii) be subordinate and junior in right of payment and security to the prior
payment in full of all senior obligations and the liens securing all senior obligations (as outlined in the securities purchase
agreement). As of the date that these financial statements were available to be issued, the Company has not yet granted this security
interest. After an event of default (as outlined in the securities purchase agreement), these notes will be convertible at a conversion
price equal to 60% of the lowest daily volume weighted average price in the 20 trading days immediately prior to conversion (“VWAP”)
if such VWAP is lower than the lower of $7.00 per share or 80% of the per share price in the Company’s next underwritten
public offering.
The
following table provides additional information about each financing as of December 31, 2016.
Note
Date
|
|
Maturity
Date
|
|
Proceeds
(1)
|
|
|
Principal
(1)
|
|
|
Fair
Value
(2)
|
|
|
|
|
|
(in
thousands)
|
|
June 2016
|
|
June 2017
|
|
$
|
1,000
|
|
|
$
|
1,053
|
|
|
$
|
1,955
|
|
August 2016
|
|
August 2017
|
|
|
1,000
|
|
|
|
1,053
|
|
|
|
1,969
|
|
September 2016
|
|
September 2017
|
|
|
95
|
|
|
|
100
|
|
|
|
188
|
|
October - December 2016
|
|
October - December 2017
|
|
|
6,695
|
|
|
|
7,005
|
|
|
|
12,408
|
|
(1)
|
As
provided for in the relevant agreements
|
|
|
(2)
|
As
of December 31, 2016, includes the principal amount of the notes plus the fair value of the conversion feature derivative
and warrants associated with the instrument.
|
Convertible
notes to June 9, 2016 Investors
On
June 9, 2016, the Company agreed to issue to each of Old Main Capital, LLC
,
River North Equity, LLC, Kodiak Capital
Group, LLC, and DiamondRock, LLC (collectively, the “June 9, 2016 Investors”) a convertible note in the principal
amount of up to $450,000 and a warrant to purchase shares of the Company’s common stock, subject to adjustments, in exchange
for an aggregate purchase price of $375,000, payable by each of the June 9, 2016 Investors in two tranches. On June 9, 2016, each
of the June 9, 2016 Investors funded the first tranche of this investment, for aggregate gross proceeds to the Company of $1.0
million.
The
notes did not bear any interest but were issued with a 20% original issue discount and an additional 20% repayment premium. Each
tranche funded under a note was due and payable in full six months after the date of funding. The first tranche was due and repaid
on December 9, 2016 in the amount of $1.4 million. The June 9, 2016 Investors did not fund the second tranche.
In December
2016, the Company entered into a securities purchase agreement with FirstFire, pursuant to which the Company issued to
FirstFire the FirstFire Note. FirstFire funded $550,000 of principal due under the FirstFire Note and after giving effect to
original issue discount the Company received gross proceeds of $500,000. The FirstFire Note bears interest at a rate of 5%
per annum and is due June 12, 2017. Prior to an event of default, amounts funded under the FirstFire Note are convertible
into shares of the Company’s common stock at a price equal to the lowest of $5.55 per share or a price per share equal
to 80% of the price in the Company’s next underwritten public offering. Upon prepayment, the Company must pay FirstFire
an amount equal to: (A) within 30 days of the date of issuance, 105%, (B) between 31 and 60 days of issuance, 110%, (C)
between 61 and 120 days of the date of issuance, 115%, (D) between 121 and 150 days of the date of issuance, 125% and (E)
thereafter, 135% multiplied by the principal amount plus any accrued but unpaid interest on the principal amount, plus
default interest, if any.
The Company also issued
to FirstFire warrants to purchase up to 89,110 shares of the Company’s common stock at an exercise price equal to the lower
of $5.55 per share and 80% of the price in the Company’s next underwritten public offering, exercisable for a five-year
period. The Company also granted FirstFire piggy-back registration rights.
On December 23,
2016, the Company issued the FLMM Note to FLMM in the amount of $1,440,000, payable in cash. The FLMM Note is secured by
substantially all of the assets of the Subsidiary, bears interest at a rate of 8% per annum and is payable in full on March
15, 2017. The Company may not prepay the note without the consent of FLMM. FLMM has the right, at its sole option and
discretion, to convert the principal and interest under the FLMM Note into shares of the Company’s common stock at a
price equal to $7.00 per share. FLMM will also have the right, at its sole option and discretion, to convert the principal
and interest under the FLMM Note into shares of the Company’s common stock following an offering that results in the
Company’s common stock being listed on any exchange operated by the Nasdaq Stock Market LLC (“Uplist Transaction”) at
a rate equal to the lower of $7.00 per share and 80% of the per share price in the Uplist Transaction. As consideration
for entering into the FLMM Note, the Company also issued to FLMM a warrant to purchase 64,865 shares of the
Company’s common stock, exercisable for a five-year period from the date of issuance, at the lower of $5.55 per share
and 80% of the per share price in the Company’s next underwritten public offering.
On December
22, 2016, the Company issued the Gruber Note to Gruber in the amount of $75,000, payable in cash. The Gruber Note is
unsecured, bears interest at a rate of 8% per annum and is payable in full on March 22, 2017, which may, under certain
circumstances, be extended to May 31, 2017. The Company may not prepay the note without the consent of Gruber. Gruber has the
right, at its sole option and discretion, to convert the principal and interest under the Gruber note into shares of the
Company’s common stock at $7.00 per share. Gruber will also have the right, at its sole option and discretion, to
convert the principal and interest under the Gruber Note into shares of the Company’s common stock following an
offering that results in an Uplist Transaction at a rate equal to the lower of $7.00 per share and 80% of the per share price
in the Uplist Transaction. As consideration for entering into the Gruber Note, the Company also issued to Gruber a warrant to
purchase 3,379 shares of common stock, exercisable for a five-year period from the date of issuance, at the lower of $5.55
per share and 80% of the per share price in the Company’s next underwritten public offering.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Series
Subordinated Note, due January 2016, interest at 12%
The
series subordinated note was due in January 2016. As of December 31, 2016, the Company has not repaid the note. On March 31, 2016,
the holder of the note commenced legal action against the Company. See Note 7 “Commitments and Contingencies.”
Notes
Payable, due October 2016, interest between 8.25% and 12%
In
January 2014, the Company assumed notes payable in connection with the reverse merger transaction pursuant to which the Company
acquired the Subsidiary. During the year ended December 31, 2016, the Company repaid three of the notes for approximately $11,000,
including principal and accrued interest. During 2016, the Company also extended the maturity date of the remaining notes to August
2016 and then to October 2016. The Company agreed to a settlement with the holder of these notes and, on January 24, 2017, the
Company settled the principal and accrued but unpaid interest due under the remaining notes for a cash payment of $80,000 and
the issuance of 10,000 shares of the Company’s common stock to the holder.
Note
Payable, due August 2021, interest at 0%
In
August 2014, the Company entered into a 0% interest, $192,000 note payable to the State of Minnesota as part of an angel loan
program fund. There are no financial loan covenants associated with the loan, which has a maturity date of August 2021. The loan
contains a provision whereby if the Company transfers more than a majority of its ownership, the loan becomes immediately due,
along with a 30% premium amount of the principal balance. In addition, if the Company is more than 30 days past due on any payments
owed under the loan, the interest rate increases to 20% per annum.
Installment
Note Payable – Bank
In
January 2016, the Company entered into an installment note payable with a bank, replacing a previous note, for a principal amount
of approximately $330,000. The company received the net amount between the two notes, or approximately $69,000, which was primarily
used for working capital purposes. The note bears interest at the prime rate plus 1%, but not less than 5%. The note is due in
January 2019. The prime rate of interest was 3.75% as of December 31, 2016 and 3.50% as of December 31, 2015.
6.
Employee Benefit Plan
The
Company has a defined contribution 401(k) saving plan covering all employees satisfying certain eligibility requirements. The
plan permits, but does not require, contributions by the Company. The Company did not make any contributions pursuant to the plan
during the years ended December 31, 2016 and 2015.
7. Commitments
and Contingencies
Operating
Leases
The
Company leases approximately 22,000 square feet of office space in Chanhassen, Minnesota. The lease commenced on May 1, 2012 and
extends through January 2022. In addition to the office space, the Company leases certain office furniture and equipment under
operating leases through November 2018. The Company has two vehicles on 36-month leases which commenced in January 2015 and June
2015, respectively. The Company also entered into a lease agreement, in April 2014, for a total of 1,812 square feet of office
space in Dallas, Texas related to the employees retained as part of its acquisition of Select Mobile Money. The lease commenced
on May 1, 2014 and extends through June 30, 2017. The Company has sub-leased the Dallas, Texas office space, commencing on November
19, 2015 and expiring on June 30, 2017. The Company also has various computer leases with three year terms. The Company is recording
rental expense monthly.
Rent
expense pursuant to operating leases for the periods presented is as follows:
|
|
Year
Ended
|
|
(In
thousands)
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Rent expense
|
|
$
|
464
|
|
|
$
|
476
|
|
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company’s headquarters office space lease calls for rent increases over the term of the lease. The Company records rent
expense on a straight-line basis using the average rent for the term of the lease. The excess of the expense over cash rent paid
is shown as accrued rent.
Future
minimum lease payments pursuant to operating leases as of December 31, 2016 are as follows (in thousands):
2017
|
|
$
|
292
|
|
2018
|
|
|
242
|
|
2019
|
|
|
241
|
|
2020
|
|
|
248
|
|
2021
|
|
|
255
|
|
Thereafter
|
|
|
22
|
|
|
|
$
|
1,300
|
|
The
Company is due approximately $17,000 in future minimum lease receivables through the expiration of its sublease on the Dallas,
TX office space in 2017.
Capital
Leases
The
total cost of capital leased assets, net of accumulated depreciation, included in property and equipment as of December 31, 2016
and December 31, 2015 totaled approximately $575,000 and $501,000, respectively.
Future
minimum lease payments pursuant to capital leases as of December 31, 2016 are as follows (in thousands):
2017
|
|
$
|
441
|
|
2018
|
|
|
154
|
|
2019
|
|
|
89
|
|
2020
|
|
|
5
|
|
2021
|
|
|
—
|
|
Total payments remaining
|
|
|
689
|
|
Less: portion
representing interest
|
|
|
(26
|
)
|
Principal portion
|
|
|
663
|
|
Less: unamortized
deferred financing costs
|
|
|
(46
|
)
|
Capital lease balance
|
|
|
617
|
|
Less: current
maturities of capital lease obligations
|
|
|
(379
|
)
|
Capital lease,
net of current maturities
|
|
$
|
238
|
|
Litigation
Cachet
Banq
An
entity named Cachet Banq contacted the Company in December 2010 relative to their U.S. Trademark Registration No. 2,857,465 (registered
on June 29, 2004) for the standard character mark “CACHET” covering “financial services, namely automated clearing
house processing services for the payroll service industry.” Cachet Banq has alleged that the Company’s use of “CACHET”
infringes on their federal trademark registration. On or about March 4, 2013, Cachet Banq filed a trademark infringement lawsuit
against the Company in the United States District Court for the Central District of California. The parties filed cross motions
for summary judgment. The initial brief was filed on May 30, 2014, replies were filed on June 26, 2014 and the court took these
motions under advisement on July 8, 2014. The Company has denied that its use of the character mark “CACHET” infringes
on Cachet Banq’s purported rights in their mark. On September 21, 2015, the court issued an order (1) granting Cachet Banq’s
motion for summary judgment, (2) denying the Company’s motion for summary judgment, and (3) ordering the parties to submit
memoranda regarding remedies. The last of those memoranda were submitted on October 12, 2015. On November 30, 2015, the Court
entered an additional order providing for an additional period of discovery and additional briefing regarding remedies. Pursuant
to the Court’s order, the parties engaged in a renewed period of discovery focused on remedies and submitted additional
briefing. The discovery was completed and all additional briefing was submitted to the Court by April 19, 2016. According to their
briefing on the remedies, Cachet Banq is not presently seeking any monetary damages as a result of the alleged infringement, but
rather an injunction.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
October 27, 2016, the Court entered a judgment and permanent injunction against the Company which, effective from April 15, 2017,
enjoins the Company and its officers, directors, agents, servants, employees and attorneys and all persons in active concert or
participation with any of the foregoing from (i) using any mark, name, symbol, logo or other indicia that incorporates or is confusingly
similar to the term “CACHET” in any way that relates to financial services, and (ii) offering for sale, soliciting
sales, promoting, distributing, importing, advertising, or selling any products or services, in any medium, under any mark, name,
symbol, logo or other indicia that incorporates or is confusingly similar to the term “CACHET” which in any way relate
to financial services. The Company is also ordered to destroy or discard all signs, products, advertisements, packaging, literature,
business cards, and any other promotional material, which feature the term “CACHET” or a term confusingly similar
thereto, both physical and electronic, which are in any way related to financial services, in each case except for the permitted
use described below. Under the injunction, the Company must complete its transition to a yet-to-be determined new company name
by no later than April 15, 2017. The Company is permitted to reference its current name in an explanatory fashion on signs, products,
advertisements, packaging, literature, business cards, and any other promotional material to introduce the new name of the Company
in a font size no greater than one-third the font-size of the yet-to-be determined new company name. This permitted use provision
terminates on June 30, 2017, by which date the Company must cease from using the explanatory statement in any manner and destroy
or discard all materials featuring the explanatory statement. By no later than July 12, 2017, the Company must file a declaration,
under penalty of perjury, setting forth in detail the manner and form in which the Company has complied with the injunction.
The
Company intends to comply with the injunction and will pursue a re-branding of the Company. The Company expects that the re-branding
of the Company will require it to devote significant resources to advertising and marketing new brands and will cause the Company
to incur substantial costs. The Company estimates the expenses related to the re-branding will be between $200,000 and $300,000
over a six-month period during 2017. The Court denied Cachet Banq’s request for attorney’s fees and costs.
Series
Subordinated Note
On
March 31, 2016, the holder of the series subordinated note referred to in Note 5 “Financing Arrangements” commenced
an action against the Company in Hennepin County Court in the State of Minnesota, alleging that the Company breached the terms
of the note and seeking to collect alleged amounts due and owing under the note. The holder of the note alleges that the Company
is in default and owes the note holder approximately $695,000 plus interest and assessments accruing after April 1, 2016. The
dispute centers on the note holder’s interpretation of the agreement. Based on the note holder’s interpretation of
the agreement, the note holder seeks an extraordinary amount in alleged liquidated damages (approximately $300,000 on an outstanding
debt of approximately $415,000). The Company disputes the allegations of the note holder and intends to vigorously defend the
claim. Among other things, the Company contends the note holder’s interpretation of the agreement is unenforceable under
Minnesota law. The note holder moved for summary judgment and a hearing on that motion was held on August 9, 2016 before the Fourth
Judicial District in Hennepin County in Minnesota where the Court heard both arguments and took the motion under advisement. On
October 19, 2016, the Court entered an order granting in part and denying in part the motion for summary judgment. The alleged
default could subject the Company to claims of default or cross default by our other lenders. At this time no other lender has
asserted such a claim. If the plaintiff in this matter is successful in their lawsuit, the Company would be subject to a penalty
of $500 per day for each day that the Company was in default of the note. As of December 31, 2016, the Company had accrued $176,000
related to this $500 per day penalty and is reflected in accrued interest on the consolidated balance sheets.
Trooien
Capital
On
or about May 24, 2016, the Company received notice from Trooien Capital alleging that the Company did not make interest payments
in accordance with the terms of the Trooien Capital Note, and as a result of such alleged breach, all outstanding amounts under
such notes were accelerated. Pursuant to the Trooien Capital Note, the Subsidiary granted to Trooien Capital a security interest
in all of the Subsidiary’s property and assets, including all property that the Subsidiary will acquire in the future, as
collateral security for the payment and performance of the Subsidiary’s obligations under the Trooien Capital Note. On or
about May 27, 2016, the Subsidiary filed a verified complaint with the Fourth District Court of Hennepin County in Minnesota naming
Trooien Capital as a defendant and seeking a declaratory judgment against Trooien Capital with respect to this claim. On June
10, 2016, Trooien Capital answered the Subsidiary’s complaint and asserted counterclaims. On June 20, 2016, Trooien Capital
moved to appoint a receiver for the Subsidiary. On June 30, 2016, the Company filed a notice of motion and motion to dismiss a
portion of the counterclaims. On July 19, 2016, the Company filed with the Fourth District Court of Hennepin County in Minnesota
a memorandum of law and supporting documents requesting that the Court deny Trooien Capital’s motion to appoint a receiver
for the Subsidiary. On October 18, 2016, a hearing on the motions was held and the Court took both motions under advisement. On
October 21, 2016, the Court entered an order denying Trooien Capital’s motion to appoint a receiver and denying the Company’s
motion to dismiss a portion of Trooien Capital’s counterclaims.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
December 20, 2016, the Company entered into a settlement agreement and full release with Trooien Capital, pursuant to which the
Company agreed to pay to Trooien Capital a total of $3.1 million and to issue a warrant to purchase 500,000 shares of the Company’s
common stock at the lower of $5.55 per share and 80% of the Company’s per share price in the next underwritten public offering,
in settlement of the Trooien Capital Note, plus interest accrued but unpaid thereon. In exchange for the settlement payment and
warrants, Trooien Capital, within one business day after receipt of the settlement payment and warrants, agreed to take all necessary
steps to remove, terminate or otherwise release any and all interest in any tangible or intangible assets of the Subsidiary. The
Company fully repaid the $3.1 million due to Trooien Capital as of December 23, 2016.
Financial
Service Agreements
In
August 2015, the Company entered into an agreement with a firm to provide investor relations and financial advisory services.
The initial six-month term of the agreement required the issuance of 26,667 shares of the Company’s common stock and payments
totaling $30,000. After the initial six-month term, the Company had the option to extend for an additional six months which required
issuing the firm additional shares of common stock and payment totaling $30,000. In February 2016, the Company renewed the services
agreement and issued the firm an additional 31,000 shares of common stock for another six months of investor relations and financial
advisory services. The Company renewed the services agreement further in August 2016 and issued to the firm an additional 12,000
shares of common stock.
In
January 2016, the Company entered into an agreement with an independent contractor to provide investor relations, capital raising
services and other consulting duties. The agreement requires annual compensation for services of $100,000 as well as discretionary
bonuses paid in cash or stock based on the consultant’s ability to complete particular projects for the Company. The term
of this agreement is for 12 months commencing on January 1, 2016. The agreement is cancelable by either party with a 30-day notice.
8. Income
Taxes
The
Company has not recorded a current or deferred tax provision for the years ended December 31, 2016 and 2015 due to the Company’s
net tax losses incurred and the uncertainty of realization of any related tax benefit in the future. Due to the full valuation
allowance on the Company’s net deferred tax assets, there was no deferred tax benefit or provision recorded.
A
reconciliation of the Company’s statutory tax expense (benefit) to our actual tax expense (benefit) is as follows:
|
|
Year
Ended
|
|
(Dollars
in thousands)
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Federal statutory rate at
34 percent
|
|
$
|
(5,157
|
)
|
|
$
|
(6,206
|
)
|
State taxes, net of federal tax expense
(benefit)
|
|
|
(422
|
)
|
|
|
(499
|
)
|
|
|
|
|
|
|
|
|
|
Nondeductible interest
|
|
|
1,374
|
|
|
|
2,002
|
|
Stock-based compensation
|
|
|
414
|
|
|
|
59
|
|
Nondeductible meals & entertainment
|
|
|
9
|
|
|
|
21
|
|
Other
|
|
|
328
|
|
|
|
84
|
|
Change in valuation
allowance
|
|
$
|
3,454
|
|
|
$
|
4,539
|
|
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
components of the Company’s net deferred tax assets and liabilities are as follows:
|
|
Year
Ended
|
|
(In
thousands)
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Non-Current:
|
|
|
|
|
|
|
|
|
Net
operating loss carry forward
|
|
$
|
11,080
|
|
|
$
|
7,662
|
|
Finite-lived intangibles
|
|
|
552
|
|
|
|
394
|
|
Non-qualified stock-based
compensation
|
|
|
347
|
|
|
|
347
|
|
Property, plant
and equipment
|
|
|
20
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Accounts receivable
allowance
|
|
|
4
|
|
|
|
4
|
|
Accrued
expenses
|
|
|
878
|
|
|
|
998
|
|
Gross deferred tax
assets
|
|
|
12,881
|
|
|
|
9,427
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Non-Current:
|
|
|
|
|
|
|
|
|
Amortization of
indefinite-lived intangible
|
|
|
(13
|
)
|
|
|
(8
|
)
|
Property,
plant and equipment
|
|
|
—
|
|
|
|
—
|
|
Gross
deferred tax liabilities
|
|
|
(13
|
)
|
|
|
(8
|
)
|
Net deferred tax assets before valuation
allowance
|
|
|
12,868
|
|
|
|
9,419
|
|
Less: valuation
allowance
|
|
|
(12,868
|
)
|
|
|
(9,419
|
)
|
Total net deferred
tax asset (liability)
|
|
$
|
—
|
|
|
$
|
—
|
|
In
assessing the need for a valuation allowance, management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become deductible. Management has assessed the
potential realization of its deferred tax assets and determined that sufficient uncertainty exists regarding the realization of
its deferred tax assets and therefore continues to record a valuation allowance on all of its deferred tax assets.
As
of December 31, 2016 and 2015, the Company had approximate Federal NOL carryforwards of $30.1 million and $20.9 million, respectively,
and various state NOL carryforwards of $15.7 million and $10.2 million, respectively. The loss carryforwards for federal tax purposes
will begin expiring in 2032. The expiration of the statute of limitations related to the state NOL carryforwards varies by state.
The Company is subject to income taxes in the U.S. federal and various state jurisdictions. The Company is generally subject to
U.S. federal and state tax examinations for all years after 2012.
Section
382 of the U.S. Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards
that might be used to offset taxable income when a corporation has undergone significant changes in stock ownership. The Company
has not completed a Section 382 analysis of the NOL carryforwards. Consequently, the Company’s NOL carryforwards may be
subject to annual limitations under Section 382.
The
Company recognizes tax liabilities for uncertain income tax positions based on management’s estimate of whether it is more
likely than not that additional taxes will be required. The Company had no uncertain tax positions as of December 31, 2016 or
2015. It is the Company’s practice to recognize interest and penalties accrued on any unrecognized tax benefits as a component
of income tax expense. The Company does not expect any material changes in unrecognized tax positions over the next twelve months.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
9. Goodwill
and Finite Lived Intangible Assets
The
Company assesses the carrying amount of its goodwill for potential impairment annually or more frequently if events or a change
in circumstances indicate that impairment may have occurred. The Company performs an impairment test for finite-lived assets,
such as intangible assets, and other long-lived assets, such as fixed assets, whenever events or changes in circumstances indicate
that the carrying value of such assets may not be recoverable.
The
Company has only one operating and reporting unit that earns revenues, incurs expenses and makes available discrete financial
information for review by the Company’s chief operating decision maker. Accordingly, the Company completes its goodwill
impairment testing on this single reporting unit.
In
conducting the annual impairment test of the Company’s goodwill, qualitative factors are first examined to determine whether
the existence of events or circumstances indicates that it is more likely than not that the fair value of a reporting unit is
less than its carrying amount. If it is determined that it is more likely than not that the fair value of the reporting unit is
less than its carrying amount, a two-step impairment test is applied. In the first step, the Company calculates the fair value
of the reporting unit and compares that amount with the reporting unit’s carrying amount, including goodwill. If the carrying
amount exceeds the fair value, the Company performs the second step of measuring the amount of the goodwill impairment loss, if
any, by comparing the implied fair value of the reporting unit’s goodwill to the carrying amount of goodwill. This requires
performing a hypothetical application of the acquisition method to determine the implied fair value of goodwill after measuring
the reporting unit’s identifiable assets and liabilities.
The
Company had recorded Goodwill of $204,000 as of December 31, 2016 and December 31, 2015. The Company conducted its annual goodwill
impairment test as of December 31, 2016 and determined there to be no impairment related to the Company’s goodwill.
For
the years ended December 31, 2016 and 2015, the Company recognized impairment charges of approximately $87,000 and $216,000,
respectively related to certain customer contracts acquired in the acquisition of the Select Mobile Money business in March 2014.
In determining the impairment loss, the Company reviewed all circumstances, including the undiscounted cash flows it expects to
derive from those contracts going forward.
Identified
intangible assets are summarized as follows:
|
|
Amortizable
|
|
|
December
31, 2016
|
|
|
|
Period
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
(Dollar
amounts in thousands)
|
|
(years)
|
|
|
Assets
|
|
|
Amortization
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Contracts
|
|
|
3
|
|
|
$
|
549
|
|
|
$
|
(526
|
)
|
|
$
|
23
|
|
Proprietary Software
|
|
|
3
|
|
|
|
917
|
|
|
|
(864
|
)
|
|
|
53
|
|
Total identified
intangible assets
|
|
|
|
|
|
$
|
1,466
|
|
|
$
|
(1,390
|
)
|
|
$
|
76
|
|
|
|
Amortizable
|
|
|
December
31, 2015
|
|
|
|
Period
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
(Dollar
amounts in thousands)
|
|
(years)
|
|
|
Assets
|
|
|
Amortization
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
Contracts
|
|
|
3
- 5
|
|
|
$
|
784
|
|
|
$
|
(510
|
)
|
|
$
|
274
|
|
Proprietary
Software
|
|
|
3
|
|
|
|
917
|
|
|
|
(559
|
)
|
|
|
358
|
|
Total
identified intangible assets
|
|
|
|
|
|
$
|
1,701
|
|
|
$
|
(1,069
|
)
|
|
$
|
632
|
|
Amortization
and impairment expense for identified intangible assets is summarized below:
|
|
Year
Ended
|
|
|
Statement of
|
|
|
|
|
|
|
|
|
|
Operations
|
|
(In
thousands)
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
Classification
|
|
|
|
|
|
|
|
|
|
|
|
Customer Contracts
|
|
$
|
250
|
|
|
|
499
|
|
|
|
Cost
of Revenue
|
|
Proprietary Software
|
|
|
306
|
|
|
|
306
|
|
|
|
Cost
of Revenue
|
|
Total
|
|
$
|
556
|
|
|
|
805
|
|
|
|
|
|
Based
on the identified intangible assets recorded at December 31, 2016, future amortization expense is expected to be as follows (in
thousands):
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
10.
Shareholders’ Deficit
Convertible
Preferred Stock
In
June 2015, the Company issued 44,030 shares of Series C Convertible Preferred Stock at $100.00 per share and issued five-year
warrants to purchase 670,475 shares of its common stock at $4.94 per share, as adjusted, in a private placement.
The
Series C Preferred Stock entitles its holders to a 10% per annum dividend, payable quarterly in cash or in additional shares of
Series C Preferred Stock (or a combination of both) as determined by the Company, and may be converted to the Company’s
common stock at the option of a holder at a conversion price of $4.94 per share. The Series C Preferred Stock contains anti-dilution
conversion price protection allowing the stock’s conversion price to adjust, prior to conversion, should the Company sell
common stock at a price below the then current conversion price. The Series C Preferred Stock will automatically convert into
common stock upon the occurrence of any of the following: (a) an underwritten public offering of shares of the Company’s
common stock providing at least $10 million in gross proceeds, (b) the Company’s common stock closing price being greater
than 100% above the conversion price then in effect for at least 40 of 60 consecutive trading days, (c) four years after the closing
of the offering of the Series C Preferred Stock, or (d) the written consent of holders representing 50% of the issued and outstanding
Series C Preferred Stock. The holders of the Series C Preferred Stock are entitled to vote their shares on an as-converted basis
and are entitled to a liquidation preference equal to the stated value (i.e., purchase price) of their shares plus any accrued
but unpaid dividends thereon.
In
March 2016, an investor converted 500 shares of Series C Convertible Stock at the conversion price of $4.94 per share, as well
as received credit for all unpaid cumulative dividends earned through the date of conversion. The investor received a total of
10,934 shares of common stock. As of December 31, 2016 and 2015, the Company had outstanding 43,530 and 44,030, respectively of
its Series C Preferred Stock.
Common
Stock
The
Company’s common stock issuances for the years ended December 31, 2016 and 2015 are as follows:
|
|
Common
Stock
|
|
Balance, December 31, 2014
|
|
|
1,129,052
|
|
Share price conversion adjustment
|
|
|
548,842
|
|
Conversion of preferred stock to common
stock and payment of preferred dividend with common stock
|
|
|
337,381
|
|
Issuance of common stock for professional
services
|
|
|
38,334
|
|
Share-based compensation
|
|
|
4,803
|
|
Issuance of common stock under Associate
Stock Purchase Plan
|
|
|
11,067
|
|
Warrant exercises
|
|
|
189,908
|
|
Shares issued to Lincoln Park Capital
Fund under Equity Line Agreement
|
|
|
78,673
|
|
Issuance of restricted common stock
to Associates, net of forfeitures
|
|
|
5,600
|
|
Director equity
exchange agreement
|
|
|
(25,521
|
)
|
Balance, December 31, 2015
|
|
|
2,318,139
|
|
Conversion of preferred stock to common
stock and payment of preferred dividend with common stock
|
|
|
10,934
|
|
Issuance of common stock for professional
services
and fees
|
|
|
103,884
|
|
March 2016 equity offering
|
|
|
284,600
|
|
Share-based compensation
|
|
|
32,847
|
|
Issuance of common stock under Associate
Stock Purchase Plan
|
|
|
20,179
|
|
Warrant exercises
|
|
|
384,505
|
|
Balance, December 31, 2016
|
|
|
3,155,088
|
|
Net
cash and non-cash increases to total shareholders’ deficit pursuant to common stock issuances for the year ended
December 31, 2016 and 2015 totaled $3.8 million and $5.5 million, respectively.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants
The
Company’s warrant activity for the years ended December 31, 2016 and 2015 consisted of the following:
|
|
Number of
|
|
|
|
|
|
Weighted
|
|
|
|
Shares
Issuable
|
|
|
Weighted
Avg.
|
|
|
Remaining
|
|
|
|
Under
Warrants
|
|
|
Exercise Price
|
|
|
Life (Years)
|
|
Balance, December 31, 2014
|
|
|
593,580
|
|
|
$
|
30.88
|
|
|
|
4.57
|
|
Issued
|
|
|
1,320,009
|
|
|
|
5.93
|
|
|
|
|
|
Exercised
|
|
|
(189,915
|
)
|
|
|
6.59
|
|
|
|
|
|
Balance, December 31, 2015
|
|
|
1,723,674
|
|
|
|
10.98
|
|
|
|
3.98
|
|
Issued
|
|
|
3,132,547
|
|
|
|
5.49
|
|
|
|
|
|
Exercised
|
|
|
(512,693
|
)
|
|
|
4.60
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
4,343,528
|
|
|
|
7.73
|
|
|
|
4.23
|
|
Certain
of the Company’s warrants have a cashless exercise provision, whereby the Company issues shares of common stock based on
the difference between the weighted-average trading price of the Company’s common stock for the five consecutive trading
days ending on the date immediately preceding the date of the warrant exercise and the stated exercise price of the warrants.
As a result of these cashless exercise provisions, the number of common shares issued pursuant to warrant exercises may be different
than the total number of warrants exercised during a given period.
As
of December 31, 2016 and 2015, the Company’s warrant and conversion feature liabilities consisted of the following:
|
|
|
|
|
|
|
|
Balance
as of
|
|
Counterparty
|
|
Shares
Issuable
|
|
|
Current
Exercise
Price
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Former senior lender
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
537
|
|
Mr. Davis
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45
|
|
Series A, B and C preferred shareholders
|
|
|
597,790
|
|
|
|
4.94
|
|
|
|
1,164
|
|
|
|
2,175
|
|
Lincoln Park Capital Fund
|
|
|
115,400
|
|
|
|
4.94
|
|
|
|
234
|
|
|
|
43
|
|
Lender of October 2016 notes payable
|
|
|
5,000
|
|
|
|
4.94
|
|
|
|
10
|
|
|
|
-
|
|
June 9, 2016 Investors
|
|
|
200,000
|
|
|
|
4.94
|
|
|
|
406
|
|
|
|
-
|
|
Convertible noteholders
(1)
|
|
|
1,319,989
|
|
|
|
5.55
|
|
|
|
7,369
|
|
|
|
-
|
|
Messrs. Hanson and Davis
|
|
|
33,334
|
|
|
|
4.94
|
|
|
|
64
|
|
|
|
-
|
|
Sutter Securities Incorporated
|
|
|
2,812
|
|
|
|
5.55
|
|
|
|
5
|
|
|
|
-
|
|
Trooien Capital, LLC
|
|
|
500,000
|
|
|
|
5.55
|
|
|
|
968
|
|
|
|
-
|
|
Craft Capital
Management LLC
|
|
|
901
|
|
|
|
5.55
|
|
|
|
2
|
|
|
|
-
|
|
Warrant and conversion feature liability
|
|
|
|
|
|
|
|
|
|
|
10,222
|
|
|
|
2,800
|
|
Less: current
portion of warrant and conversion feature liability
|
|
|
|
|
|
|
|
|
|
|
(2,870
|
)
|
|
|
-
|
|
WARRANT LIABILITY
|
|
|
|
|
|
|
|
|
|
$
|
7,352
|
|
|
$
|
2,800
|
|
(1) Shares
issuable includes only warrants issued in connection with convertible notes.
Warrants
that contain anti-dilution price protection are carried as liabilities on the consolidated balance sheets until they are either
exercised or no longer subject to anti-dilution protection, after which the value of the warrants is reclassified to additional
paid-in capital. The fair value of warrants is determined at the issuance date, and each quarter for warrants recognized as liabilities
and carried at fair value, using the Black-Scholes option pricing model using the following significant assumptions, or a Monte
Carlo simulation, depending on the instrument.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Stock
price:
|
|
Published
trading market values of the Company’s common stock as of the grant date of the warrants or at the valuation date.
|
|
|
|
Exercise
price:
|
|
The
stated exercise price of the warrant.
|
|
|
|
Expected
term:
|
|
Generally, the Company utilizes the contractual term of the warrant.
|
|
|
|
Expected
dividend:
|
|
The
rate of dividends that the Company expects to pay over the term of the warrant.
|
|
|
|
Volatility:
|
|
For
periods prior to the Company’s public offering, volatility is estimated based on the volatility of comparable peer companies
that are publicly traded, and for later periods the Company includes its actual common stock trading history.
|
|
|
|
Risk-free
interest rate:
|
|
The
daily United States Treasury yield curve rate.
|
The
conversion features on the Company’s convertible notes are accounted for as derivative financial instruments. The Company
records all derivatives on the balance sheet at fair value. Changes in the value of the conversion features are reflected in mark-to-market
warrant and debt (income) expense on the consolidated statements of operations. The Company obtains a valuation report prepared
by a third-party valuation specialist to assist in determining the fair value of the conversion features associated with certain
of its convertible notes. If converted by the holders, as of December 31, 2016, the Company would be required to issue 498,921
shares to settle convertible notes convertible at $5.55 per share and 944,588 shares to settle convertible notes convertible at
$7.00 per share.
The
fair value of the warrants issued was determined using a Monte Carlo simulation or the Black-Scholes option pricing model.
For the warrants valued using the Black-Scholes option pricing model, the following assumptions were used for the
periods presented:
|
|
Year
Ended
|
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Stock price
|
|
$
|
4.05
to $11.25
|
|
|
$
|
6.00
to $16.80
|
|
Exercise price
|
|
$
|
4.94
to $6.90
|
|
|
$
|
4.94
to $20.25
|
|
Expected term
|
|
|
2.5
to 5.0 years
|
|
|
|
1.0
to 5.0 years
|
|
Expected dividend
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility
|
|
|
51%
to 91
|
%
|
|
|
27%
to 96
|
%
|
Risk-free interest rate
|
|
|
0.71%
to 2.07
|
%
|
|
|
0.25%
to 1.37
|
%
|
11.
Stock-Based Compensation and Benefit Plans
Stock
Options and Performance Awards
On
February 9, 2010, the Board of Directors adopted the 2010 Equity Incentive Plan (the “2010 EIP”), which was approved
by the shareholders of the Company. Participants in the plan include the Company’s employees, officers, directors, consultants,
or independent contractors. On February 12, 2014, the Board of Directors approved the assumption of the 2010 EIP as part of the
Merger; however, it was agreed that no new grants would be made under the 2010 EIP. On February 12, 2014, the Board of Directors
also adopted the 2014 Stock Incentive Plan (the “2014 SIP”). On June 2, 2016, the Board of Directors adopted the 2016
Stock Incentive Plan (the “2016 SIP”), which was approved by the shareholders of the Company.
Pursuant
to the 2016 SIP, the Company’s Chief Executive Officer may, on a discretionary basis and without committee review or approval,
grant non-qualified (non-statutory) stock options for up to 6,667 common shares to new employees of the Company who are not officers
of the Company during each fiscal year. Incentives under the plan may be granted in one or a combination of the following forms:
(a) incentive stock options and non-statutory stock options; (b) stock appreciation rights (“SARs”); (c) stock awards;
(d) restricted stock; (e) restricted stock units; and (f) performance shares. Eligible participants include officers and employees
of the company, members of the Board of Directors, and consultants or other independent contractors. No person is eligible to
receive grants of stock options and SARs under the 2014 SIP that exceed, in the aggregate, 26,667 shares of common stock in any
one year. The term of each stock option shall be determined by the board or committee, but shall not exceed ten years. Vested
stock options may be exercised in whole or part by the holder giving notice to the Company. Options under the plan may provide
for the holder of the option to make payment of the exercise price by surrender of shares equal in value to the exercise price.
Options granted to employees generally vest over two to three years. Stock awards granted to non-employee directors generally
vest 50% on the grant date and 50% on the first anniversary of the date of the grant. Options expire five years from the date
of grant.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following is a summary of shares issuable pursuant to options granted as of December 31, 2016:
|
|
Maximum
|
|
|
Outstanding
|
|
|
Exercisable
|
|
2010 EIP
|
|
|
45,000
|
|
|
|
7,523
|
|
|
|
7,523
|
|
2014 SIP
|
|
|
101,442
|
|
|
|
58,662
|
|
|
|
37,334
|
|
2016 SIP
|
|
|
600,000
|
|
|
|
55,206
|
|
|
|
18,408
|
|
Issued outside
of plans
|
|
|
—
|
|
|
|
216,455
|
|
|
|
158,460
|
|
Shares issuable
pursuant to options granted
|
|
|
|
|
|
|
337,846
|
|
|
|
221,725
|
|
The
following is a summary of stock option activity for the years ended December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
Shares Issuable
|
|
|
Weighted
Avg.
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Under
Options
|
|
|
Exercise Price
|
|
|
Life (Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Balance, December 31, 2014
|
|
|
180,346
|
|
|
$
|
30.15
|
|
|
|
4.05
|
|
|
$
|
62
|
|
Granted
|
|
|
115,150
|
|
|
|
13.80
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited or
Expired
|
|
|
(45,545
|
)
|
|
|
26.40
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
|
249,951
|
|
|
|
19.80
|
|
|
|
3.95
|
|
|
|
—
|
|
Granted
|
|
|
163,813
|
|
|
|
6.36
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited or
Expired
|
|
|
(75,918
|
)
|
|
|
13.82
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
337,846
|
|
|
|
14.66
|
|
|
|
3.52
|
|
|
|
29
|
|
Exercisable at December 31, 2016
|
|
|
221,725
|
|
|
|
18.03
|
|
|
|
3.21
|
|
|
$
|
10
|
|
Information
with respect to stock options outstanding and exercisable as of December 31, 2016 is as follows:
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Range
of
Exercise Price
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual Life
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
$4.10 - $6.61
|
|
|
90,583
|
|
|
|
4.14
|
|
|
$
|
5.76
|
|
|
$
|
29
|
|
|
|
31,158
|
|
|
$
|
5.77
|
|
|
$
|
10
|
|
$6.62 - $10.49
|
|
|
47,873
|
|
|
|
4.45
|
|
|
|
7.86
|
|
|
|
—
|
|
|
|
18,479
|
|
|
|
8.12
|
|
|
|
—
|
|
$10.50 - $20.25
|
|
|
73,657
|
|
|
|
3.54
|
|
|
|
12.82
|
|
|
|
—
|
|
|
|
50,244
|
|
|
|
12.83
|
|
|
|
—
|
|
$22.50 to $60.00
|
|
|
125,733
|
|
|
|
2.71
|
|
|
|
24.74
|
|
|
|
—
|
|
|
|
121,844
|
|
|
|
24.81
|
|
|
|
—
|
|
|
|
|
337,846
|
|
|
|
3.52
|
|
|
$
|
14.66
|
|
|
$
|
29
|
|
|
|
221,725
|
|
|
$
|
18.03
|
|
|
$
|
10
|
|
The
Company has also adopted a performance bonus plan (the “Performance Bonus Plan”), which is intended to provide incentive
for associates to establish quarterly goals and objectives as defined by management and achieve those goals and objectives above
the established criteria. Shares issued pursuant to the Performance Bonus Plan to date have been issued under the 2014 SIP and
2016 SIP. The Company issued 32,847 and 4,803 shares to associates pursuant to the Performance Bonus Plan during the years
ended December 31, 2016 and 2015, respectively.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company utilizes the Black-Scholes option pricing model when determining the compensation cost associated with stock options issued
using the following significant assumptions:
Stock
price:
|
|
Published
trading market values of the Company’s common stock as of the grant date of the stock options.
|
|
|
|
Exercise
price:
|
|
The
stated exercise price of the stock option.
|
|
|
|
Expected
term:
|
|
The
Company’s assumption of the term of the stock options based on historical exercise data.
|
|
|
|
Expected
dividend:
|
|
The
rate of dividends that the Company expects to pay over the term of the stock options.
|
|
|
|
Volatility:
|
|
For
periods prior to the Company’s public offering, volatility is estimated based on the volatility of comparable peer companies
that are publicly traded, and for later periods the Company includes its actual common stock trading history.
|
|
|
|
Risk-free
interest rate:
|
|
The
daily United States Treasury yield curve rate.
|
The
fair value of the stock options issued was determined using the Black-Scholes option pricing model and the following assumptions
for the periods presented:
|
|
Year
Ended
|
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Stock price
|
|
$
|
4.10
to $7.85
|
|
|
$
|
8.25
to $20.25
|
|
Exercise price
|
|
$
|
4.10
to $7.85
|
|
|
$
|
8.25
to $20.25
|
|
Expected term
|
|
|
3
Years
|
|
|
|
2
to 3 Years
|
|
Expected dividend
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility
|
|
|
61%
to 91
|
%
|
|
|
26%
to 48
|
%
|
Risk-free interest rate
|
|
|
0.71%
to 1.54
|
%
|
|
|
0.22%
to 1.08
|
%
|
The
Company estimates forfeitures when recognizing compensation expense and this estimate of forfeitures is adjusted over the requisite
service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes
in estimated forfeitures are recognized through a cumulative catch-up adjustment, which is recognized in the period of change,
and impacts the amount of unamortized compensation expense to be recognized in future periods.
Compensation
expense recognized for the issuance of warrants, stock options, restricted stock grants and stock bonuses for the periods presented
was as follows:
|
|
Year
Ended
|
|
(In
thousands)
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
Stock-based compensation costs included
in:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
135
|
|
|
$
|
55
|
|
Sales and marketing expenses
|
|
|
163
|
|
|
|
91
|
|
Research and development expenses
|
|
|
108
|
|
|
|
105
|
|
General and administrative
expenses
|
|
|
217
|
|
|
|
192
|
|
Total stock-based
compensation expense
|
|
$
|
623
|
|
|
$
|
443
|
|
As
of December 31, 2016, the total compensation cost related to unvested options awards not yet recognized was approximately $231,000,
which will be recognized over a weighted-average period of 1.24 years.
2014
Associate Stock Purchase Plan
In
September 2014 and August 2015, the Company’s Board of Directors and stockholders, respectively, approved the 2014 Associate
Stock Purchase Plan, under which 33,334 shares were reserved for purchase by the Company’s associates (employees). In December
2016, the Board of Directors of the Company approved the reservation of an additional 150,000 shares. The purchase price of the
shares under the plan is the lesser of 85% of the fair market value on the first or last day of the offering period. Offering
periods are every six months ending on June 30 and December 31. Associates may designate up to ten percent of their compensation
for the purchase of shares under the plan. As of December 31, 2016, there are 149,346 shares available for purchase remaining
in the plan.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
12. Related
Party Transactions
In
order to finance its operations, the Company has historically relied upon Messrs. Hanson and Davis for financing through the issuance
of debt, equity and warrants. Balances with related parties consisting of members of the Board of Directors for borrowings and
warrants were as follows. No debt is held by executive officers of the Company.
|
|
As of
|
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Notes Payable to Directors and Affiliates
(in thousands)
(1)
|
|
$
|
3,078
|
|
|
$
|
1,748
|
|
Convertible Notes, due 2016 and 2017, interest between 0% and 8%, held by related parties
(in
thousands)
|
|
$
|
906
|
|
|
$
|
—
|
|
Accrued interest to
related parties
(in thousands)
|
|
$
|
411
|
|
|
$
|
232
|
|
Warrants held by related parties
|
|
|
1,332,303
|
|
|
|
691,043
|
|
(1)
|
Included within this line item are two convertible
notes, issued December 22, 2016, for proceeds of $135,000, a principal amount of $135,000 and a fair value, as of December
31, 2016, of approximately $194,000.
|
|
|
Year
Ended
|
|
(In
thousands)
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
|
|
Related party interest expense
|
|
$
|
196
|
|
|
$
|
154
|
|
On
May 7, 2014, the Company entered into a $1.5 million line-of-credit agreement with Mr. Hanson, as subsequently amended (the “Line
of Credit”). The stated interest rate on the Line of Credit is 10% on the principal amount outstanding and the maturity
date is January 31, 2017, with all outstanding principal and accrued interest due in full on that date. There are no financial
covenants associated with the Line of Credit. On July 7, 2016, the Company entered into an amendment #3 to the borrowing agreement
with Mr. Hanson in connection with the Line of Credit. Pursuant to that amendment, which is effective as of June 30, 2016, the
parties agreed that the Company will make an interest-only payment on January 31, 2017. The interest-only payment is for interest
accrued on the principal balance from February 1, 2016 to date of payment. On October 6, 2016, Mr. Hanson agreed to convert the
$1.0 million owed under the Line of Credit to equity upon consummation of an underwritten public offering. The Company and
Mr. Hanson subsequently agreed to reduce the conversion amount and number of warrants issuable pursuant to this conversion. See
Note 14 “Subsequent Events.”
On
July 30, 2014, the Company entered into a financing commitment letter with Messrs. Hanson and Davis to lend the Company up to
$2.5 million through December 31, 2014, bearing interest at 10% (which increases to 18% under certain circumstances in the event
of default). The maturity date of the financing commitment letter is January 31, 2017, on which date the total principal balance
and accrued interest thereon will be due in full. On July 7, 2016, the Company entered into an addendum #4 to this commitment
letter with Mr. Hanson. Pursuant to that addendum, which is effective as of June 30, 2016, the parties extended the payment date
of the interest-only payments that were or will be due and payable to January 31, 2017. The interest-only payments are for interest
accrued on the principal balance from February 1, 2016 to date of payment.
On
December 22, 2015, the Company issued a $150,000 demand promissory note to Mr. Hanson. The note bears an interest rate of 10%
and was due on June 30, 2016. On July 13, 2016, the Company entered into an addendum #1 to this demand promissory note. Pursuant
to that addendum, which is effective as of June 30, 2016, the parties extended the maturity date under the demand promissory note
from June 30, 2016 to January 31, 2017.
In
February 2016, the Company entered into a thirty-day note payable with Mr. Davis for $150,000 and Mr. Hanson for $75,000. Under
the note agreements, in lieu of interest, the Company agreed to issue five-year cashless warrants to purchase 16,667 and 8,334
shares of common stock at $4.94 per share to Messrs. Davis and Hanson, respectively. Additionally, for each 30 days the principal
amount is outstanding, the Company issued to Messrs. Davis and Hanson an additional 16,667 and 8,334 warrants, respectively, with
the same terms as described above. On March 29, 2016, both notes were amended to change the due dates of the principal amounts
owed to January 11, 2017 and January 31, 2017, under Messrs. Hanson’s and Davis’ notes, respectively. Messrs. Davis
and Hanson will continue to earn warrants on a 30-day basis until the principal is repaid. As of December 31, 2016, Messrs. Davis
and Hanson have received a total of 200,004 and 91,674 warrants, respectively.
On
May 9, 2016, the Company entered into a promissory note agreement for approximately $227,000 with Mr. Davis. The note accrues
interest at the per annum rate of 10%. As an additional inducement to Mr. Davis to advance amounts under the note, the Company
agreed to issue to Mr. Davis a warrant to acquire 22,665 shares of the Company’s common stock at an exercise price of $4.94
per share as an inducement to enter into a promissory note agreement.
On
May 9 and 10, 2016, the Company entered into two demand promissory notes in the principal
amount of $250,000 each with Mr. Davis. Each promissory note accrues interest at the
per annum rate of 10% and is payable upon the written demand of Mr. Davis. As an additional
inducement to Mr. Davis to advance the amounts under each promissory note, the Company
issued to Mr. Davis, under each promissory note, a warrant to acquire 5,000 shares of
the Company’s common stock for each week the applicable note is outstanding. The
warrants under the May 9th promissory note have an exercise price of $4.05 per share
and the warrants under the May 10th promissory note have an exercise price of $3.75 per
share. If a promissory note is outstanding for more than 30 days, the amount of warrants
is increased to from 5,000 to 6,667 shares per week. On May 24, 2016, the Company amended
each warrant to increase the exercise price of the warrant to $4.94 per share. The Company
repaid these notes in June 2016.
On
May 25, 2016, the Company borrowed $200,000 from Mr. Davis and issued to Mr. Davis a demand promissory note in the principal amount
of $200,000. The note did not bear interest and was payable on demand of Mr. Davis. The Company repaid this note in full on June
6, 2016.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
July 13, 2016, the Company issued to Mr. Davis a convertible promissory note in the principal amount of $360,000 and a warrant
to purchase up to 20,000 shares of the Company’s common stock, subject to adjustments, in exchange for an aggregate purchase
price of $300,000. On July 14, 2016, the Company issued to Mr. Hanson a convertible promissory note in the principal amount of
$240,000 and a warrant to purchase up to 13,334 shares of the Company’s common stock, subject to adjustments, in exchange
for an aggregate purchase price of $200,000. The warrants have an exercise price of $6.00 per share, subject to adjustments, and
are exercisable for a five year period. The notes do not bear any interest, other than during an event of default (in which case
default interest at a rate of 24% per annum is applicable). The notes are due and payable six months after the respective issuance
dates. In addition to the Company providing three days advance written notice prior to repayment, under the terms of the note
upon repayment of the note (including on the maturity date) the Company is obligated to pay a 20% premium on the principal amount
and any accrued default interest then due on the note, which in the aggregate is equal to 120% of the principal amount and any
accrued default interest then due on the note. For accounting purposes, the Company accounts for the debt and warrants using an
allocation process. As a result, the reported amount of the debt has been reduced and will be accreted to face value through each
of the maturity dates.
On
August 12, 2016, the Company entered into a securities purchase agreement with Messrs. Hanson and Davis, pursuant to which the
Company issued to each of Messrs. Hanson and Davis a convertible note, due August 2017, in a principal amount of $263,158 and
a warrant to purchase shares of the Company’s common stock in exchange for a purchase price of $250,000 paid in cash by
each such director. The notes are unsecured, do not bear any interest and are payable in full on August 12, 2017. Each of Messrs.
Hanson and Davis may elect to convert the principal amount of the note issued to him into shares of the Company’s common
stock at any time before August 12, 2017 at a conversion price per share equal to the lower of $5.55 and 80% of the per share
sale price of the Company’s common stock in the Company’s next underwritten public offering. The Company has the right
to require each of Messrs. Hanson and Davis to convert the notes into shares of the Company’s common stock at that conversion
price if the Company’s common stock is listed on the Nasdaq Capital Market, the Nasdaq Global Market or the Nasdaq Global
Select Market. For accounting purposes, the Company accounts for the debt, warrants and conversion features using an allocation
process. As a result, the reported amount of the debt has been reduced and will be accreted to face value through each of the
maturity dates.
On
August 1, 2016, Mr. Davis entered into a financial lease agreement to fund the purchase of certain licenses for the exclusive
use and benefit of the Company, in an aggregate amount of approximately $239,000, together with accrued interest thereon. On August
22, 2016, the Company entered into an unsecured promissory note with Mr. Davis, pursuant to which the Company is obligated to
pay to Mr. Davis the sum of approximately $239,000, together with all accrued interest thereon, in six monthly installments. The
Company is required to make the payments under the note directly to the lessor in satisfaction of the Company’s obligations
to Mr. Davis under the note and Mr. Davis’ obligations to the lessor. As consideration for entering into a financial lease
to fund the purchase of certain licenses for the exclusive use and benefit of the, the Company issued to Mr. Davis a warrant to
purchase 24,000 shares of the Company’s common stock at an exercise price of $6.75 per share. The warrants are exercisable
for a five-year period.
On
November 16, 2016, the Company entered into an unsecured promissory note with Mr. Davis, pursuant to which the Company is obligated
to pay to Mr. Davis the sum of $250,000, together with all accrued interest thereon, in six monthly installments of $42,101 each,
which includes interest and equates to an imputed interest rate of 5% per annum. As an additional inducement to Mr. Davis to advance
amounts under the note, on November 16, 2016, the Company also issued to Mr. Davis a warrant to purchase 45,547 shares of the
Company’s common stock, subject to adjustments. The warrants issued to Mr. Davis have an exercise price of $4.94 per share,
subject to adjustments, and are exercisable for a five-year period.
In
December 2016, the Company entered into securities purchase agreements with Messrs. Davis and Hanson pursuant to which the Company
agreed to issue to Messrs. Davis and Hanson convertible notes, due December 2017, in an aggregate principal amount of $378,947
and warrants to purchase 61,451 shares of common stock, subject to adjustments, in exchange for an aggregate purchase price of
$360,000, payable in cash. The notes do not bear any interest and are payable in full in December 2017. Messrs. Davis and Hanson
may elect to convert the principal amount of the notes into shares of common stock at any time before the maturity date at a conversion
price per share equal to the lower of $7.00 and 80% of the per share price of common stock in the Company’s next underwritten
public offering. The Company will have the right to require Messrs. Davis and Hanson to convert the notes into shares of common
stock at that conversion price if the Company’s common stock is listed on the Nasdaq Capital Market, the Nasdaq Global Market
or the Nasdaq Global Select Market. The warrants will have an exercise price per share equal to the lower of $5.55 and 80% of
the per share price of the Company’s common stock in the Company’s next underwritten public offering, subject to adjustments,
and are exercisable for a five-year period.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
December 22, 2016, the Company issued a Convertible Term Promissory Note to Mr. Davis in the amount of $50,000, payable in cash
(the “Davis Note”). The Davis Note is unsecured, bears interest at a rate of 8% per annum and is payable in full on
March 22, 2017, which may, under certain circumstances, be extended to May 31, 2017. The Company may not prepay the note without
the consent of Mr. Davis. Mr. Davis will have the right, at his sole option and discretion, to convert the principal and interest
under the Davis Note into shares of the Company’s common stock at a conversion price of (i) $7.00 per share or (ii) following
an Uplist Transaction at a rate equal to the lower of $7.00 per share and 80% of the Company’s per share price in the Uplist
Transaction. As consideration for entering into the Davis Note, the Company also issued to Mr. Davis a warrant to purchase 2,253
shares of common stock, exercisable for a five-year period from the date of issuance, at the lower of $5.55 per share and 80%
of the Company’s per share price in the Company’s next underwritten public offering.
On
December 22, 2016, the Company issued a Convertible Term Promissory Note to Mr. Hanson in the amount of $85,000, payable in cash
(the “Hanson Note”). The Hanson Note is unsecured, bears interest at a rate of 8% per annum and is payable in full
on March 22, 2017, which may, under certain circumstances, be extended to May 31, 2017. The Company may not prepay the note without
the consent of Mr. Hanson. Mr. Hanson will have the right, at his sole option and discretion, to convert the principal and interest
under the Hanson Note into shares of the Company’s common stock at a conversion price of (i) $7.00 per share or (ii) following
an Uplist Transaction at a rate equal to the lower of $7.00 per share and 80% of the Company’s per share price in the Uplist
Transaction. As consideration for entering into the Hanson Note, the Company also issued to Mr. Hanson a warrant to purchase 3,829
shares of common stock, exercisable for a five-year period from the date of issuance, at the lower of $5.55 per share and 80%
of the Company’s per share price in the Company’s next underwritten public offering.
On
December 29, 2016, the Company entered into a Demand Promissory Note agreement for $250,000 with Davis & Associates, Inc.,
a company owned by Mr. Davis (“Davis & Associates”). The Demand Promissory Note accrues interest at a rate of
4% per annum. All principal and accrued but unpaid interest on the Demand Promissory Note will become payable upon the written
demand of Davis & Associates. The Company repaid this Demand Promissory Note as of the same date, December 29, 2016.
Subsequent
to December 31, 2016, the Company entered into several transactions with Messrs. Davis and Hanson including promissory notes which
consolidated certain of the outstanding debt described above. See Note 14 “Subsequent Events.”
13. Concentrations
The
Company’s revenues consist of recurring revenue, professional services and implementation fees. For the years ended December
31, 2016 and 2015, recurring revenues represented 66.1% and 73.0% of consolidated revenues, respectively, professional
services represented 27.2% and 13.3% of consolidated revenues, respectively, and implementation fees represented 6.7% and
13.7% of consolidated revenues, respectively.
The
Company continues to rely on vendors to provide technology and licensing components that are critical to its solutions. In addition,
the Company engaged development contractors located in Toronto, Canada beginning in March 2014 to augment its software development
efforts. During the year ended December 31, 2015, the Company incurred billings of approximately $837,000, or 12.5% of total billings,
to this vendor. Billings incurred to this vendor for the year ended December 31, 2016 were less than 10% of the Company’s
total billings.
As
of December 31, 2016, the Company had net payables of approximately $317,000 owed to a law firm for legal services rendered in
connection with our previous failed offering, representing 14.4% of its accounts payable balance, and approximately $558,000 owed
to a technology partner for software licenses, representing 25.3% of its accounts payable balance. As of December 31, 2015, the
Company had net payables of approximately $342,000 owed to a law firm for legal services, representing 30.8% of its accounts payable
balance.
During
the year ended December 31, 2016, one customer represented $1.4 million, or 17.2% of the Company’s consolidated
revenues. There was no single customer whose revenue exceeded 10% of the Company’s consolidated revenues for the year
ended December 31, 2015. Within accounts receivable is a receivable from the same customer totaling $1.3 million,
representing 42.8% of the Company’s total receivables as of December 31, 2016. This receivable is due to the
Company in various installments, pursuant to each agreement, beginning in January 2017 and ending in December 2019. As of
December 31, 2015, the Company had receivables due from three customers of approximately $121,000, $113,000 and $95,000
representing 17.0%, 15.8% and 13.3%, respectively, of its gross accounts receivable balance.
14. Subsequent
Events
The
Offering
On
January 20, 2017, the Company filed with the SEC a Registration Statement on Form S-1 (File No: 333-215650), pursuant to which
the Company intends to raise up to $13.8 million in cash proceeds and list its common stock on the Nasdaq Capital Market (the
“Offering”). The Board of Directors approved for submission to a vote of the stockholders of the Company the grant
of authority to the Board of Directors to amend the Company’s Certificate of Incorporation to effect a reverse split of
the Company’s common stock. At a special meeting of stockholders on February 9, 2017, the stockholders of the Company approved
this proposal. The Board of Directors will have the authority, but not the obligation, to implement a reverse stock split, at
any time in a ratio of not less than 1-for-1.01 and not more than 1-for-4, with the final ratio to be determined at the discretion
of the Board of Directors. The Board of Directors does not expect to implement a reverse stock split except to the extent it is
necessary and appropriate to facilitate the Company’s next underwritten public offering or otherwise as necessary to satisfy
the listing requirements of the Nasdaq Capital Market.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Agreement
with Vista Partners
On
January 5, 2017, the Company entered into an addendum to an agreement entered into by and between the Company and Vista Partners,
LLC (“Vista”), dated August 1, 2015 pursuant to which Vista will provide the Company with investor relations and financial
advisory services (as amended, the “Vista Agreement”). The Vista Agreement shall be effective as of January 1, 2017
and continue for a term of six months. The Vista Agreement may be renewed for an additional six months under the same terms and
conditions upon mutual agreement of Vista and the Company. Pursuant to the Vista Agreement, Vista shall be provided the following
consideration by the Company:
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●
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A
non-refundable grant by the Company to Vista of $120,000 convertible bridge note and warrants under the same terms as the
Company’s October Private Placement; and,
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●
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A
non-refundable expense deposit totaling $12,500, due within 15 days of the signing of the Vista Agreement;
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Pursuant
to the Vista Agreement, the Company also issued to Vista a warrant to purchase 19,460 shares of the Company’s common stock.
The note will not bear any interest and is payable in full in January 2018. Vista may elect to convert the principal amount of
the note into shares of the Company’s common stock at any time before the maturity date at a conversion price per share
equal to the lower of $7.00 and 80% of the per share price of the Company’s common stock in the Company’s next underwritten
public offering. The Company will have the right to require Vista to convert the note into shares of the Company’s common
stock at that conversion price if the Company’s common stock is listed on the Nasdaq Capital Market, the Nasdaq Global Market
or the Nasdaq Global Select Market. The warrant will have an exercise price per share equal to the lower of $5.55 and 80% of the
per share price of the Company’s common stock in the Company’s next underwritten public offering, subject to adjustments,
and is exercisable for a five-year period. The Company is required to file with the Securities and Exchange Commission a registration
statement covering the resale of the shares of the Company’s common stock issuable under the notes and the warrants within
21 days following the consummation of the Company’s next underwritten public offering or 90 days following the date on which
the Company’s current financing plan is terminated. If the Company fails to file a registration statement in a timely manner,
it will be required to issue to Vista additional warrants to purchase shares of the Company’s common stock.
Private
Placements
On
January 4, 2017, the Company entered into a securities purchase agreement with David Boehnen. On January 13, 2017, the Company
entered into a securities purchase agreement with Brett Nesland and Cross River Partners LP. On January 17, 2017, the Company
entered into a securities purchase agreement with Anglian Holdings, Inc., David Boehnen and Vikki Lansing Copley (collectively,
the “Investors”) pursuant to which the Company agreed to issue to the Investors convertible notes, due January 2018,
in an aggregate principal amount of $3.2 million and warrants to purchase 568,042 shares of the Company’s common stock,
subject to adjustments, in exchange for an aggregate purchase price of $3.1 million, payable in cash. Subsequent to the issuance
of these warrants, additional warrants to purchase 10,436 shares of the Company’s common stock were issued to certain of
the Investors that did not receive 100% warrant coverage pursuant to their original agreements. See paragraph related to True
Up Warrants under the heading “
Other Events
” below.
The
notes will not bear any interest and are payable in full in January 2018. The Investors may elect to convert the principal amount
of the notes into shares of the Company’s common stock at any time before the maturity date at a conversion price per share
equal to the lower of $7.00 and 80% of the per share price of the Company’s common stock in the Company’s next underwritten
public offering. The Company will have the right to require the Investors to convert the notes into shares of the Company’s
common stock at that conversion price if the Company’s common stock is listed on the Nasdaq Capital Market, the Nasdaq Global
Market or the Nasdaq Global Select Market. The warrants will have an exercise price per share equal to the lower of $5.55 and
80% of the per share price of the Company’s common stock in the Company’s next underwritten public offering, subject
to adjustments, and are exercisable for a five-year period. The Company is required to file with the Securities and Exchange Commission
a registration statement covering the resale of the shares of the Company’s common stock issuable under the notes and the
warrants within 21 days following the consummation of the Company’s next underwritten public offering or 90 days following
the date on which the Company’s current financing plan is terminated. If the Company fails to file a registration statement
in a timely manner, it will be required to issue to the Investors additional warrants to purchase shares of the Company’s
common stock.
Agreements
with Messrs. Hanson and Davis
On
January 24, 2017, the Company entered into an Amended and Restated Term Promissory Note with Mr. Davis, pursuant to which the
Company and Mr. Davis agreed to consolidate the following debt due to Mr. Davis totaling $896,243, including accrued but unpaid
interest thereon, into a single note due April 30, 2018: (i) the note dated February 1, 2016, in the principal amount of $150,000,
(ii) the note dated July 13, 2016, in the principal amount of $432,000 (including a 20% repayment premium as outlined in the
agreement), (iii) the note dated August 12, 2016, in the principal amount of $263,158 and (iv) the note dated December 22,
2016, in the principal amount of $50,000. The consolidated note is unsecured and bears interest at a rate of 7% per annum, with
all principal and accrued interest due and payable at the close of business on April 30, 2018.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
January 24, 2017, the Company entered into an Amended and Restated Term Promissory Note with Mr. Hanson, pursuant to which the
Company and Mr. Hanson agreed to consolidate the following debt due to Mr. Hanson totaling $1,973,735, including accrued but unpaid
interest thereon, into a single note, due April 30, 2018: (i) the note dated July 30, 2014, in the principal amount of $598,000,
(ii) the note dated December 22, 2015, in the principal amount of $150,000, (iii) the note dated February 11, 2016, in the principal
amount of $75,000, (iv) the note dated July 14, 2016, in the principal amount of $288,888 (including a 20% repayment premium,
as outlined in the agreement) and (v) that note dated December 22, 2016, in the principal amount of $85,000. In addition,
the consolidated note amends the line-of-credit dated May 7, 2014 by reducing the principal debt thereunder by $617,957 and incorporating
that amount into the principal amount of the consolidated note. The consolidated note is unsecured and bears interest at a rate
of 8% per annum with all principal and accrued interest due and payable at the close of business on April 30, 2018.
On
January 25, 2017, the Company entered into an unsecured promissory note with Mr. Davis, pursuant to which the Company is obligated
to pay to Mr. Davis the sum of $238,950, together with all accrued interest thereon, in six monthly installments of $40,983 each,
which includes interest and equates to an imputed interest rate of 9.9% per annum. As an additional inducement to Mr. Davis to
advance amounts under the note, on January 25, 2017, the Company also issued to Mr. Davis a warrant to purchase 43,055 shares
of the Company’s common stock, subject to adjustments. The warrants issued to Mr. Davis have an exercise price per share
equal to the lower of $5.55 and 80% of the per share price of the Company’s common stock in the Company’s next underwritten
public offering, subject to adjustments, and are exercisable for a five-year period.
On February 22, 2017,
the Company entered into an agreement with Mr. Hanson in connection with the Line of Credit. Pursuant to the agreement, Mr. Hanson
agreed to convert, upon consummation of the Offering, the principal amount of $678,947 of indebtedness outstanding under the Line
of Credit into shares of the Company’s common stock at a conversion price-per-share equal to the public offering price-per-share
in the Offering. As consideration for this conversion, the Company agreed to issue to Mr. Hanson, upon consummation of the Offering,
five-year warrants to purchase 135,789 shares of the Company’s common stock, at an exercise price equal to the public offering
price-per-share in the Offering.
Other
Events
On
January 24, 2017, the Company and the holder of its notes payable, due October 2016, interest between 8.25% and 12%, agreed to
a settlement to repay the principal and accrued but unpaid interest due under the note. Pursuant to the settlement, the Company
agreed to pay $80,000 cash and issue to the holder of the note 10,000 restricted shares of the Company’s common stock, which
terms the Company satisfied on January 25, 2017.
On
January 26, 2017, the Company issued to certain investors in its recent private placement offering, which was ongoing from October
21, 2016 to January 17, 2017, additional warrants to purchase shares of the Company’s common stock to those investors that
did not receive 100% warrant coverage on their investments. Pursuant to these additional warrant issuances, the Company issued
a total of 106,525 warrants to these investors (“True Up Warrants”). These True Up Warrants have an exercise price
per share equal to the lower of $5.55 and 80% of the per share price of the Company’s common stock in the Company’s
next underwritten public offering, subject to adjustments, and are exercisable for a five-year period.