NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND OPERATIONS
Organization
Quadrant 4 System Corporation (sometimes referred to herein as “Quadrant 4” or the “Company”) was incorporated by the Florida Department of State on May 9, 1990 as Sun Express Group, Inc. and changed its name on March 31, 2011. The Company changed its domicile to Illinois on April 25, 2014. The Company generates revenue from clients located mostly in North America operating out of multiple office locations in the United States. In addition, the Company’s revenues are derived from a few select industries pertaining to information technology, consulting, professional services and vertical cloud platforms that include a large number of participants and are subject to rapid change.
Operations
The Company is engaged in the Information Technology sector as a provider of Platform-as-a-Service (PaaS) and Software-as-a-Service (SaaS) systems to the health insurance (QBIX/QHIX), media (QBLITZ) and education (QEDX) verticals (collectively “Platforms”). Along with these platforms, we also provide relevant services that leverage on our proprietary Social Media, Mobility, Analytics and Cloud (SMAC) technology stack. Our core services include Consulting, Application Life Cycle Management, Enterprise Applications & Data Management, Mobility Applications and Business Analytics (collectively “Consulting”). We blend these services with our technology platforms to offer client specific and industry specific solutions to Healthcare, Media, Education, Retail and Manufacturing industry segments (collectively “Solutions”). Consulting and Solutions are grouped together as “Services”.
The Company generates revenues principally from two broad segments, namely Services and Platforms. The Services component includes Consulting that bills on a time & material basis; Solutions that bills on time & material basis; and managed services that bills fixed monthly fees and provides pre-determined services. The Platform segment bills on transaction basis such as per member per month enrolled for the QBIX/QHIX; per bandwidth consumed for the QBLITZ; and per student per month for the QEDX platforms. The QBIX revenue stream started in 2015. The Company anticipates to increase the Platform based revenues in 2016.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidated Financial Statements
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include all the accounts of the Company. As of January 1, 2015, the two wholly owned subsidiaries have been merged with Quadrant 4 System Corporation. All intercompany transactions for 2014 have been eliminated.
Estimates
The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (‘U.S. GAAP”) requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Significant estimates include the allowance for uncollectible accounts receivable, depreciation and amortization, intangible assets, including customer lists and technology stacks, capitalization, fair value and useful lives, accruals, contingencies, impairment and valuation of stock warrants and options. These estimates may be adjusted as more current information becomes available, and any adjustment could have a significant impact on recorded amounts. Accordingly, actual results could defer from those estimates.
Fair Value of Financial Instruments
The Company considers the carrying amounts of financial instruments, including cash, accounts receivable, accounts payable, accrued expenses and notes payable to approximate their fair values because of their relatively short maturities.
Accounts and Unbilled Receivables
Accounts and unbilled receivables consist of amounts due from customers which are presented net of the allowance for doubtful accounts at the amount the Company expects to collect. The Company records a provision for doubtful receivables, if necessary, to allow for any amounts which may be unrecoverable, which is based upon an analysis of the Company’s prior collection experience, customer creditworthiness, past transaction history with the customers, current economic trends, and changes in customer repayment terms.
Unbilled receivables are established when revenue is deemed to be recognized based on the Company's revenue recognition policy, but due to contractual restraints over the timing of invoicing, the Company does not have the right to invoice the customer by the balance sheet date.
Vendors and Contractors
The Company outsources portions of its work to third party service providers (Note 14). These providers can be captive suppliers that undertake software development, research & development and custom platform development. Some vendors may provide specific consultants or resources (often called Corp to Corp) or independent contractors (often designated as 1099) to satisfy agreed deliverables to its clients.
Equipment
Equipment is recorded at cost and depreciated for financial statement purpose using the straight line method over estimated useful lives of five to fifteen years. Maintenance and repairs are charged to operating expenses as they are incurred. Improvements and betterments, which extend the lives of the assets, are capitalized. The cost and accumulated depreciation of assets retired or otherwise disposed of are removed from the appropriate amounts and any profit or loss on the sale or disposition of assets is credited or charged to income.
Inventory
Inventory consists primarily of manufactured and preassembled units ready for distribution. Inventory is stated at the lower of cost (first-in, first-out) or market. In evaluating whether inventory is stated lower of cost or market, management considers such factors as the amount of inventory on hand and the distribution channel, the estimated time to sell such inventory, and the current market conditions. Adjustments to reduce inventory to its net realizable value are charged to cost of goods sold.
Intangible Assets
Intangible assets, consisting of customer lists and technology stacks, are recorded at fair value and amortized on the straight-line method over the estimated useful lives of the related assets.
The carrying value of intangible assets are reviewed for impairment by management of the Company at least annually or upon the occurrence of an event which may indicate that the carrying amount may be greater than its fair value. Management of the Company has decided to perform its impairment testing on a quarterly basis starting with the September 30, 2015 quarter. If impaired, the Company will write-down such impairment. In addition, the useful life of the intangible assets will be evaluated by management at least annually or upon the occurrence of an event which may indicate that the useful life may have changed.
Customer lists are valued based on management’s forecast of expected future net cash flows, with revenues based on projected revenues from customers acquired and are being amortized over years ranging from 2 to 5 years.
Technology stacks are valued based on management’s forecast of expected future net cash flows, with revenues based on projected sales of these technologies and are amortized over years ranging from 2 to 7 years.
Software Development Costs
Costs that are related to the conceptual formulation and design of licensed software programs are expensed as incurred to research, development engineering and other administrative support expenses; costs that are incurred to produce the finished product after technological feasibility has been established and after all research and development activities for any other components of the product or process have been completed are capitalized as software development costs. Capitalized amounts are amortized on a straight-line basis over periods ranging up to five years and are recorded in amortization expense which started during 2015 when the platforms first became available for sale. The Company performs periodic reviews to ensure that unamortized software development costs remain recoverable from future revenue. Cost to support or service licensed program are charged to cost of revenue as incurred.
The Company’s Product Development and R&D are carried out by both our employees in the US as well as outsourced contractors in India. The US employees mainly focus on the domain, market relevance, feasibility and possible pilots/prototypes. The Indian contractors mostly focus on execution in terms of software development and testing.
Pre-paid Expenses
The Company incurs certain costs that are deemed as prepaid expenses. The fees that are paid to the Department of Homeland Security for processing H1 visa fees for its international employees are amortized over 36 months, typically the life of the visa. One third of these pre-paid expenses are included in other current assets and two thirds in other assets.
Deferred Financing Costs
Financing costs incurred in connection with the Company’s notes payable and revolving credit facilities are capitalized and amortized into expense using the straight-line method over the life of the respective facility (Note 9).
Deferred Licensing and Royalty Fees
The Company licenses software, platforms and/or content on a needed basis and enters into market driven licensing and royalty fee arrangements. If no consumption or usage of such licenses happen during the reporting period, the Company has no obligation for any minimum fees or royalties and no accruals are posted. The deferred licensing fee is being amortized over a period of five years.
Operating Leases
The Company has operating lease agreements for its offices some of which contain provisions for future rent increases or periods in which rent payments are abated. Operating leases which provide for lease payments that vary materially from the straight-line basis are adjusted for financial accounting purposes to reflect rental income or expense on the straight-line basis in accordance with the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”). No such material difference existed as of December 31, 2015 and 2014.
Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks.
The Company reviews the terms of convertible debt and equity instruments it issues to determine whether there are embedded derivative instruments, including the embedded conversion option, that are required to be bifurcated and accounted for separately as a derivative financial instrument. In connection with the sale of convertible debt and equity instruments, the Company may issue freestanding warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity.
Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the convertible debt or equity instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds allocated to the convertible host instruments are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, usually resulting in those instruments being recorded at a discount from their face amount.
The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense, using the effective interest method.
Goodwill
In connection with the Company's acquisitions, valuations are usually completed to determine the allocation of the purchase prices. The factors considered in the valuations include data gathered as a result of the Company's due diligence in connection with the acquisitions, projections for future operation, and data obtained from third-party valuation specialists as deemed appropriate. Goodwill represents the future economic benefits of a business combination measured as the excess purchase price over the fair market value of net assets acquired.
Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed. The Company has selected December 31 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values.
Revenue Recognition
Revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed and determinable, performance of service has occurred and collection is reasonably assured. Revenue is recognized in the period the services are provided on which service ranges from approximately 2 months to over 1 year. The Company specifically recognizes three kinds of revenues:
1.
|
Time & material - consulting and project engagements fall in this category and revenues are recognized when the client signs and approves the time sheet of consultants who have completed work on their assignment.
|
2.
|
Managed services – engagements where the Company bills a fixed contracted amount per billing period for the defined services provided such as software maintenance, break-fix and hosting services. The client provides no acknowledgement of delivery since the agreed upon service level agreements determine any service deficiencies. Any service deficiencies are addressed within the normal course of the engagement. Since the revenue is not subject to forfeiture, refund or other concession and all delivery obligations are fulfilled and the fee is fixed and determinable, the Company follows the guidance under FASB ASC 985-605 to recognize the revenues.
|
3.
|
Software As A Service – subscription revenues for using the Company’s software platforms will fall in this category. The Company recognizes the revenues for each period using the starting and ending average of subscriber fees during the billing period. The objective of the period average is to accommodate frequent changes such as new hires, terminations, and/or births/deaths on our QHIX health insurance platform. Our platforms automatically determine the average users and no further acknowledgement is required from the clients to recognize these revenues.
|
As of December 31, 2015 and 2014, the Company does not have any multiple-element revenue streams.
Income Taxes
Deferred income taxes have been provided for temporary differences between financial statement and income tax reporting under the liability method, using expected tax rates and laws that are expected to be in effect when the differences are expected to reverse. A valuation allowance is provided when realization is not considered more likely than not.
The Company’s policy is to classify income tax assessments, if any, for interest expense and for penalties in general and administrative expenses. The Company’s income tax returns are subject to examination by the IRS and corresponding states, generally for three years after they are filed.
Loss per Common Share
Basic loss per share is calculated using the weighted-average number of common shares outstanding during each period. Diluted income per share includes potentially dilutive securities such as outstanding options and warrants outstanding during each period.
For the years ended December 31, 2015 and 2014, there were 20,096,454 and 17,588,760 respectively, potentially dilutive securities not included in the calculation of weighted-average common shares outstanding since they would be anti-dilutive.
Derivatives
We account for derivatives pursuant to ASC 815,
Accounting for Derivative Instruments and Hedging Activities
. All derivative instruments are recognized in the consolidated financial statements and measured at fair value regardless of the purpose or intent for holding them. We record our interest rate and foreign currency swaps at fair value based on discounted cash flow analysis and for warrants and other option type instruments based on option pricing models. The changes in fair value of these instruments are recorded in income or expense.
Share based compensation
The Company recognizes compensation expense for all share-based payment awards made to employees, directors and others based on the estimated fair values on the date of the grant. Common stock equivalents are valued using the Black-Scholes model using the market price of our common stock on the date of valuation, an expected dividend yield of zero, the remaining period or maturity date of the common stock equivalent and the expected volatility of our common stock.
The Company determines the fair value of the share-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either the date at which a commitment for performance to earn the equity instrument is reached or the date the performance is complete.
The Company recognizes compensation expense for stock awards with service conditions on a straight-line basis over the requisite service period, which is included in operations.
Concentrations of Credit Risk
The Company maintains cash at various financial institutions, which at times, may be in excess of insured limits. The Company has not experienced any losses to date as a result of this policy and, in assessing its risk, the Companies’ policy is to maintain cash only with reputable financial institutions.
The Company currently banks at two national institutions with one being the primary and the other for petty cash purposes. The Company does not maintain large balances in its lockbox account due to the daily automatic sweeping arrangement with its lenders that credits its debts on a daily basis.
The Company’s largest customer represented 14.9% and 13.7% of consolidated revenues and 15.8% and 7.8% of accounts receivable as of and for the years ended December 31, 2015 and 2014, respectively. The Company had one customer that represented 15.8% of the total accounts receivable as of December 31, 2015, while one customer had 10.5% of the total accounts receivable as of December 31, 2014. The Company’s largest vendor represented 30.7% and 23.8% of total vendor payments for the years ended December 31, 2015 and 2014, respectively.
Recent Accounting Pronouncements
In May 2014, the FASB issued guidance creating Accounting Standards Codification ("ASC") Section 606, "Revenue from Contracts with Customers". The new section will replace Section 605, "Revenue Recognition" and creates modifications to various other revenue accounting standards for specialized transactions and industries. The section is intended to conform revenue accounting principles with a concurrently issued International financial Reporting Standards with previously differing treatment between United States practice and those of much of the rest of the world, as well as, to enhance disclosures related to disaggregated revenue information The updated guidance is effective for annual reporting periods beginning on or after December 15, 2016, and interim periods within those annual periods. The Company will adopt the new provisions of this accounting standard at the beginning of fiscal year 2017, given that early adoption is not an option. The Company will further study the implications of this statement in order to evaluate the expected impact on its financial statements.
In August 2014, the FASB issued ASU No. 2014-15 "Presentation of Financial Statements-Going Concern." The provisions of ASU No.2014-15 require management to assess an entity’s liability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. audit standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require evaluation of every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt in not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is currently assessing the impact of ASU No. 2014-15 on the Company’s consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. The amendments in this ASU require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial positions. The amendments in this ASU are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The amendments in this ASU may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods permitted.
In February 2016, the FASB issued ASU 2016-02, Leases, which is intended to improve financial reporting for lease transactions by increasing transparency and comparability among organizations. The guidance in ASU No. 2016-02 requires a lessee to recognize the following at the commencement date for all leases with lease terms of more than 12 months: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. The guidance in ASU No 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Management is currently assessing the impact the guidance will have upon adoption.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
NOTE 3 – ACQUISITIONS
On May 1, 2014, the Company acquired certain technology assets specific to media platforms for a total consideration of 4,444,445 shares priced at $0.45/share aggregating to $2,000,000 which was capitalized in 2014 as part of the technology stacks, and 2 million warrants exercisable over 3 years, with an exercise prices of $0.50 and $0.10, per share. The value of the warrants, using Black Scholes model is $977,171 which was capitalized in 2014 as part of the technology stacks. These assets are critical to executing the long-term sales contract that the Company signed effective May 1, 2014 to provide media platform services valued up to $50,000,000 over five years to an existing client.
Brainchild Corporation
On January 1, 2015, the Company completed the acquisition of 100% of the outstanding stock of Brainchild Corporation ("Brainchild"). Brainchild based in Naples, Florida is a leading provider of web-based and mobile learning solutions for kindergarten through high school, grades K-12. The acquisition of Brainchild includes technology, staffing and software solutions developed for providing its educational solutions.
This acquisition represents the Company’s entry into its newest vertical. This will not change the Company’s business model since the Company intends to leverage its experience in building and operating cloud-based exchanges for healthcare and media to the education market. The Company believes there is a growing demand for platforms that will bring together the delivery of digital instructional content, assessments and analysis of student information and performance data by educators in K-12 schools throughout the US.
The Company paid $500,000 in cash, less certain loan balances at closing; issued 250,000 shares of the Company’s common stock with a buy back at thirty-six months at a guaranteed valuation of $2.00, per share, and a note for $1,000,000 for thirty-six months with interest at 8%, per annum. In addition, the Agreement calls for a performance based earn-out of up to $400,000, as defined, to be paid on a semi-annual basis on January 1 and July 1 each year based on actual cash received from the sale of units during the period. As of December 31, 2015, the Company has paid $80,469 as performance based earn-out in cash. The Seller has the option to receive any or all of the earn-out payment in common stock of the Company priced at a five trading day average price, as defined. On January 20, 2015, the Company merged Brainchild with its parent.
The following unaudited proforma summary presents consolidated information of the Company as if these business combinations occurred on January 1, 2014 and includes the amortization of acquired intangibles.
|
|
2014
|
|
Gross Sales:
|
|
$
|
50,482,572
|
|
Net Loss:
|
|
$
|
(2,119,398
|
)
|
DialedIn Corporation
On December 1, 2015, the Company acquired 100% shares of DialedIn Corporation and merged it with the Company. DialedIn built a platform to create, distribute and track enterprise communications. DialedIn’s platform allows organizations to better communicate internally and improve sales and marketing communications by developing web-based, interactive communications and provides in-depth insights into audience engagement.
The Company issued 4,000,000 shares of the Company’s common stock, valued at $760,000, in exchange for all the assets and liabilities of DialedIn Corporation. Each outstanding share of stock of DialedIn was cancelled and converted into the right to receive stock of the Company as defined.
The following unaudited proforma summary presents consolidated information of the Company as if these business combinations occurred on January 1, 2015.
|
|
December 31, 2015
|
|
Gross Sales:
|
|
$
|
52,248,554
|
|
Net Loss:
|
|
$
|
(1,605,980
|
)
|
The Company calculated the significance of the acquisition based upon the past five year’s losses and determined that audited financial statements were not required.
DUS Corporation
Effective October 1, 2015, the Company entered into an asset purchase agreement with DUS Corporation to acquire certain assets, properties and rights connected with the Intelligent Help Desk business, subject to certain liabilities totaling $2,950,000, for 500,000 shares of the Company's stock valued at $75,000. The business provides help desk support services for purchasers of hardware and software solutions. The seller agreed to a non-compete clause for a period of three years. The Company obtained a valuation report from a consultant who it hired to perform the allocation of the DUS purchase price.
Since the Company recorded goodwill of $2,004,600 in connection with its acquisition of DUS on October 1, 2015, the Company has determined that no impairment testing was deemed necessary at December 31, 2015.
The table below summarizes the allocation of the purchase price of the acquisition over the estimated fair values of the assets acquired and liabilities assumed.
Fair value of consideration transferred from the acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Brainchild
|
|
|
DialedIn
|
|
|
DUS
|
|
|
Total
|
|
Cash
|
|
$
|
500,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
500,000
|
|
Subordinated debt
|
|
|
1,000,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000,000
|
|
Common stock
|
|
|
142,500
|
|
|
|
760,000
|
|
|
|
75,000
|
|
|
|
977,500
|
|
Contingent earn-out payments
|
|
|
400,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
400,000
|
|
|
|
$
|
2,042,500
|
|
|
$
|
760,000
|
|
|
$
|
75,000
|
|
|
$
|
2,877,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed:
|
|
|
|
|
|
Cash
|
|
$
|
30,272
|
|
|
$
|
98,962
|
|
|
$
|
-
|
|
|
$
|
129,234
|
|
Customer lists/Technology intangibles, net
|
|
|
649,265
|
|
|
|
695,339
|
|
|
|
-
|
|
|
|
1,344,604
|
|
Inventory
|
|
|
90,442
|
|
|
|
-
|
|
|
|
-
|
|
|
|
90,442
|
|
Deposits
|
|
|
2,000
|
|
|
|
7,163
|
|
|
|
-
|
|
|
|
9,163
|
|
Accounts receivable
|
|
|
121,715
|
|
|
|
33,318
|
|
|
|
-
|
|
|
|
155,033
|
|
Fixed assets
|
|
|
12,045
|
|
|
|
3,676
|
|
|
|
75,000
|
|
|
|
90,721
|
|
Accounts payable and accrued liabilities
|
|
|
(151,774
|
)
|
|
|
(161,398
|
)
|
|
|
(2,950,000
|
)
|
|
|
(3,263,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub total
|
|
|
753,965
|
|
|
|
677,060
|
|
|
|
(2,875,000
|
)
|
|
|
(1,443,975
|
)
|
Excess of purchase price allocated to intangible assets
|
|
|
1,288,535
|
|
|
|
82,940
|
|
|
|
945,400
|
|
|
|
2,316,875
|
|
Excess of purchase price allocated to Goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
2,004,600
|
|
|
|
2,004,600
|
|
Total
|
|
$
|
2,042,500
|
|
|
$
|
760,000
|
|
|
$
|
75,000
|
|
|
$
|
2,877,500
|
|
NOTE 4 – INTANGIBLE ASSETS OF CUSTOMER LISTS AND TECHNOLOGY STACKS
As of December 31, 2015 and 2014, intangible assets consisted of the following:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
Gross
|
|
|
Accumulated amortization
|
|
|
Balance
|
|
|
Gross
|
|
|
Accumulated amortization
|
|
|
Balance
|
|
Customer list
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
24,217,238
|
|
|
$
|
(21,129,178
|
)
|
|
$
|
3,088,060
|
|
|
$
|
23,281,196
|
|
|
$
|
(19,145,168
|
)
|
|
$
|
4,136,028
|
|
Education
|
|
|
290,670
|
|
|
|
(58,140
|
)
|
|
|
232,530
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Media
|
|
|
1,639,750
|
|
|
|
(1,169,008
|
)
|
|
|
470,742
|
|
|
|
1,639,750
|
|
|
|
(797,808
|
)
|
|
|
841,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,147,658
|
|
|
|
(22,356,326
|
)
|
|
|
3,791,332
|
|
|
|
24,920,946
|
|
|
|
(19,942,976
|
)
|
|
|
4,977,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology stack
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
7,237,637
|
|
|
$
|
(4,892,300
|
)
|
|
$
|
2,345,337
|
|
|
$
|
6,450,000
|
|
|
$
|
(3,797,411
|
)
|
|
$
|
2,652,589
|
|
Education
|
|
|
1,647,130
|
|
|
|
(235,308
|
)
|
|
|
1,411,822
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Health
|
|
|
175,000
|
|
|
|
(74,988
|
)
|
|
|
100,012
|
|
|
|
175,000
|
|
|
|
(49,992
|
)
|
|
|
125,008
|
|
Media
|
|
|
5,642,171
|
|
|
|
(1,724,031
|
)
|
|
|
3,918,140
|
|
|
|
5,642,171
|
|
|
|
(918,002
|
)
|
|
|
4,724,169
|
|
|
|
|
14,701,938
|
|
|
|
(6,926,627
|
)
|
|
|
7,775,311
|
|
|
|
12,267,171
|
|
|
|
(4,765,404
|
)
|
|
|
7,501,767
|
|
Total
|
|
$
|
40,849,596
|
|
|
$
|
(29,282,953
|
)
|
|
$
|
11,566,643
|
|
|
$
|
37,188,117
|
|
|
$
|
(24,708,380
|
)
|
|
$
|
12,479,737
|
|
For the years ended December 31, 2015 and 2014, the changes in intangible assets were as follows:
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Balance, January 1,
|
|
$
|
12,479,737
|
|
|
$
|
15,058,253
|
|
Additions
|
|
|
3,661,477
|
|
|
|
3,001,921
|
|
Impairment of assets
|
|
|
(170,951
|
)
|
|
|
-
|
|
Amortization
|
|
|
(4,404,620
|
)
|
|
|
(5,580,437
|
)
|
Balance, December 31,
|
|
$
|
11,566,643
|
|
|
$
|
12,479,737
|
|
For the years ended December 31, 2015 and 2014, amortization expense was $4,404,620 and $5,580,437, respectively. For the years ended December 31, 2015 and 2014, the Company recognized an impairment loss of $170,951 and nil respectively. The impairment loss in 2015 pertains to the reduction in revenue from the acquired customers which was calculated using the present value of future cash flows.
As of December 31, 2015, the estimated aggregated amortization expense for each of the five succeeding years is as follows:
Year
|
|
Amount
|
|
2016
|
|
$
|
3,742,540
|
|
2017
|
|
|
3,510,211
|
|
2018
|
|
|
1,477,145
|
|
2019
|
|
|
1,364,959
|
|
2020
|
|
|
913,616
|
|
2021 and thereafter
|
|
|
558,172
|
|
Total
|
|
$
|
11,566,643
|
|
NOTE 5 – SOFTWARE DEVELOPMENT COSTS
The Company specifically recognizes capitalized software costs by its product platforms as follows:
|
December 31, 2015
|
|
December 31, 2014
|
|
|
Gross
|
|
Accumulated amortization
|
|
Balance
|
|
Gross
|
|
Accumulated amortization
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QBIX
|
|
$
|
1,527,060
|
|
|
$
|
(305,412
|
)
|
|
$
|
1,221,648
|
|
|
$
|
1,427,485
|
|
|
$
|
-
|
|
|
$
|
1,427,485
|
|
QHIX
|
|
|
4,823,355
|
|
|
|
-
|
|
|
|
4,823,355
|
|
|
|
3,121,313
|
|
|
|
-
|
|
|
|
3,121,313
|
|
QBLITZ
|
|
|
3,879,899
|
|
|
|
-
|
|
|
|
3,879,899
|
|
|
|
597,249
|
|
|
|
-
|
|
|
|
597,249
|
|
QEDX
|
|
|
1,432,622
|
|
|
|
-
|
|
|
|
1,432,622
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
11,662,936
|
|
|
$
|
(305,412
|
)
|
|
$
|
11,357,524
|
|
|
$
|
5,146,047
|
|
|
$
|
-
|
|
|
$
|
5,146,047
|
|
For the year ending December 31, 2015, the change in Software Development costs was as follows:
Balance, January 1,
|
|
$
|
5,146,047
|
|
Additions
|
|
|
6,516,889
|
|
Impairment of assets
|
|
|
-
|
|
Amortization
|
|
|
(305,412
|
)
|
Balance, September 30,
|
|
$
|
11,357,524
|
|
Amortization expenses on software development cost was $305,412 and nil for the years ending December 31, 2015 and 2014, respectively.
The Company began amortizing the QBIX platform development costs in 2015. The Company anticipates the QHIX and QEDX platforms to be offered for sale starting in the first quarter of 2016 and for QBLITZ starting in year 2018. As of December 31, 2015, the estimated aggregated amortization expense for each of five succeeding years is as follows:
Year
|
|
Amount
|
|
2016
|
|
$
|
1,556,604
|
|
2017
|
|
|
1,556,604
|
|
2018
|
|
|
2,332,584
|
|
2019
|
|
|
2,332,584
|
|
2020
|
|
|
2,027,189
|
|
2021 and thereafter
|
|
|
1,551,959
|
|
Total
|
|
$
|
11,357,524
|
|
NOTE 6 – INVENTORY
Inventory consists of the following:
Description
|
|
December 31, 2015
|
|
|
|
|
|
Hardware Assessment Devices
|
|
$
|
82,574
|
|
Display Devices
|
|
|
9,431
|
|
Accessories – Power adaptors & Cables
|
|
|
3,395
|
|
|
|
$
|
95,400
|
|
NOTE 7 – EQUIPMENT
Equipment consists of the following:
Description of Cost
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
Furniture & fixtures
|
|
$
|
35,993
|
|
|
$
|
5,000
|
|
Leasehold improvements
|
|
|
33,311
|
|
|
|
-
|
|
Computing equipment
|
|
|
594,319
|
|
|
|
44,431
|
|
Total
|
|
|
663,623
|
|
|
|
49,431
|
|
Less: Accumulated depreciation
|
|
|
(128,493
|
)
|
|
|
(13,500
|
)
|
Balance
|
|
$
|
535,130
|
|
|
$
|
35,931
|
|
Description
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
Equipment – net
|
|
$
|
168,169
|
|
|
$
|
35,931
|
|
Equipment under capital lease – net
|
|
|
366,961
|
|
|
|
-
|
|
|
|
$
|
535,130
|
|
|
$
|
35,931
|
|
Depreciation expense was $114,993 and $6,000 for the years ended December 31, 2015 and 2014, respectively.
NOTE 8 – NOTE PAYABLE - REVOLVER
In October 2014, the Company refinanced its factoring facility and replaced it with a new Asset Based Lending (ABL) revolver bank facility that has a term of 36 months and a maximum line of $10,000,000. The ABL was priced at 4.5% over 30-day LIBOR (with a minimum floor of 2%) plus an administrative fee of 0.1% per month on the outstanding balance and 0.084% per month on the unused portion of the revolver. As of December 31, 2015, the Company has borrowings of $7,601,904 on the Revolver.
The Company has agreed for two specific financial covenants that include (a) Fixed Charge Coverage Ratio for trailing 12 months cannot be less than 1.3 and 1.0. Fixed Charge Coverage Ratio being defined as the ratio of Operating Cash Flows to Fixed Charges; and (b) Total Leverage Ratio for the trailing 12 months to be between 1.0 and 3.0. Total Leverage Ratio being defined as the ratio of Total Debt to EBITDA. As of December 31, 2015, the Company is in compliance with the two specific financial covenants.
As of December 31, 2014, the Company was in compliance with the two specific financial covenants, however, the Company did not meet providing a copy of the audited consolidated financial statements to the bank within 90 days of its year-end. In addition, the Company’s December 31, 2014 borrowing base report that was provided to the bank was subsequently discovered to have been calculated incorrectly.
In addition, the Company entered into a term loan commitment with the lender for $3,000,000 (Note 9).
All borrowings under this revolving line of credit are collateralized by the accounts receivable and substantially all other assets of the Company.
In connection with the financing, the Company incurred legal, loan origination and advisory expenses totaling $600,583 which has been recorded as deferred financing costs and are being amortized over three years as interest expense. Amortization for the years ending December 31, 2015 and 2014 on the deferred financing costs is $141,382 and $56,505,respectively.
In addition, the Company entered into an advisory agreement on April 6, 2014 with a financial advisor to facilitate arranging the financing. A termination fee of $560,000 incurred as a result of the change in lenders has been expensed as interest expense for the year ending December 31, 2014.
NOTE 9 – LONG-TERM DEBT
As of December 31, 2015 and 2014, long-term debt consisted of the following:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Note payable due December 31, 2017, as extended, plus interest at 6.5% per annum (a)
|
|
$
|
3,117,538
|
|
|
$
|
3,117,538
|
|
Note payable due October 1, 2017, plus interest at approximately 10% per annum (b)
|
|
|
1,825,447
|
|
|
|
2,853,571
|
|
Note payable due July 1, 2016, plus interest at 8% per annum (c)
|
|
|
1,232,000
|
|
|
|
1,100,000
|
|
Note payable due December 31, 2017, plus interest at 8% per annum (d)
|
|
|
1,000,000
|
|
|
|
-
|
|
Note payable due September 23, 2018, plus interest at 6.7% per annum (e)
|
|
|
30,400
|
|
|
|
-
|
|
|
|
|
7,205,385
|
|
|
|
7,071,109
|
|
Less: Debt Discount
|
|
|
(229,278
|
)
|
|
|
(585,611
|
)
|
Total
|
|
|
6,976,107
|
|
|
|
6,485,498
|
|
Less: Current maturities, net of debt discount of $31,945
|
|
|
(2,637,344
|
)
|
|
|
(650,810
|
)
|
Total long-term debt
|
|
$
|
4,338,763
|
|
|
$
|
5,834,688
|
|
(a) In December 2013, $2 million of the original $5,000,000 Promissory note was converted to 3,333,334 shares of common stock (at $0.60/share) with 1,666,667 warrants exercisable at $1/share through December 31, 2018. The warrant was valued using the Black Scholes Option Pricing model and the Company recorded additional interest related to the conversion of debt and grant of warrants of $1,350,000. In March 2014, the note was extended to December 31, 2015 without any further considerations. On October 1, 2014, the note was extended to December 31, 2017 with the new interest rate at 6.5%. Additionally, 350,000 shares of common stock was granted as consideration for the extension.
(b) In October 2014, the Company entered into a term loan for $3,000,000. The term loan was priced at 8% over 30-day LIBOR (with a minimum floor of 2%) with a term of 36 months. The term loan, as amended, is payable over three years, $83,928.57/month from January 1, 2015 through and including December 1, 2015, and $104,910.71/month from January 1, 2016 through maturity. The Company also issued 250,000 warrants, exercisable at $0.60/share for five years.
The Company calculated the fair value of the warrant as $119,991, based on a Black-Scholes Option Pricing Model using the market price of the Company's stock on the date of grant of $0.48, per share; volatility of 355%; a risk-free interest rate of 1.64%; a term of five years and zero dividend and has allocated the value of the warrant over the term note. The allocated value of the warrant of $115,000 has been recorded as a discount on the term note payable and will be amortized over three years as interest expense.
(c) In December 2014, the Company entered into a securities purchase agreement for a senior debenture in the amount of $1,232,000 at 8%. The senior debenture does not contain a provision for the debt to be converted into shares of the Company’s common stock. Interest is payable on October 1, 2015 with principal payments of 25% on 1/1/2016, 25% on 4/1/2016 and the remaining 50% on 7/1/2016. The Company issued 2,053,333 warrants priced at $0.60/share. The Company is obligated to issue additional 2,053,333 warrants priced at $0.60/share in the event of a default.
The Company calculated the fair value of the warrant as $841,771, based on a Black-Scholes Option Pricing Model using the market price of the Company's stock on the date of grant of $0.41, per share; volatility of 349%; a risk-free interest rate of 1.64%; a term of five years and zero dividend and has allocated the value of the warrant over the note payable. The allocated value of the warrant of $477,000 has been recorded as a discount on the note payable and will be amortized over eighteen months as interest expense.
(d) In January 2015, the Company issued a subordinated note for $1,000,000 with an interest rate of 8% to be amortized quarterly over eighteen months beginning July 1, 2016.
(e) On September 23, 2015, the Company issued an unsecured note for $32,898 at an interest rate of 6.7%, payable over 36 months.
Maturities of long term debt are as follows for the years ended December 31,
Year
|
|
Amount
|
|
2016
|
|
$
|
2,834,677
|
|
2016 (Less: Debt Discount)
|
|
|
(197,333
|
)
|
2017
|
|
|
4,361,855
|
|
2017 (Less: Debt Discount)
|
|
|
(31,945
|
)
|
2018
|
|
|
8,853
|
|
|
|
$
|
6,976,107
|
|
A termination fee of $560,000 incurred as a result of the change in lenders has been expensed as interest expense for the year ending December 31, 2014.
NOTE 10 – FAIR VALUE
Fair Value
The Company’s financial instruments consist primarily of receivables, accounts payable, accrued expenses and short-term and long-term debt. The carrying amount of receivables, accounts payable and accrued expenses approximates its fair value because of the short-term maturity of such instruments. In addition, the Company believes that its short and long term debt terms are commensurate with market terms for similar instruments and approximate fair value.
The Company categorizes its assets and liabilities that are valued at fair value on a recurring basis into a three-level fair value hierarchy as defined by ASC 820
“Fair Value Measurements and Disclosures”
(“ASC 820”)
.
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and lowest priority to unobservable inputs (Level 3).
Assets and liabilities recorded in the consolidated balance sheet at fair value are categorized based on a hierarchy of inputs, as follows:
|
Level 1
|
Unadjusted quoted prices in active markets for identical assets or liabilities;
|
|
|
|
|
Level 2
|
Quoted prices for similar assets or liabilities in active markets or inputs that are observable for the asset or the asset or liability, either directly or indirectly through market corroboration; and
|
|
|
|
|
Level 3
|
Unobservable inputs for the asset or liability.
|
As of December 31, 2015 and 2014, the Company did not have any assets and or liabilities subject to the fair value hierarchy.
NOTE 11 – STOCKHOLDERS' EQUITY