NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature of Operations and Summary of Significant Accounting Policies
Nature
of Business and Operations Overview
Digiliti
Money Group, 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.
The
Company’s business operations are conducted through its wholly owned subsidiary, Digiliti Money, Inc. (formerly Cachet Financial
Solutions, Inc.), a Minnesota corporation (the “Subsidiary”). The Company was incorporated in Delaware in February
2010 and acquired the business of the Subsidiary in February 2014. In April 2017, the Company changed its corporate name from
Cachet Financial Solutions, Inc. to Digiliti Money Group, Inc. The Company’s common stock trades on the Nasdaq Capital Market
under the symbol “DGLT”.
Basis
of Presentation
The
accompanying condensed consolidated financial statements of the Company included herein were prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) for interim financial information and with
the instructions to the Quarterly Report on Form 10-Q and Articles 8 and 10 of Regulation S-X. Accordingly, they do not include
all the information and footnotes required by GAAP for complete financial statements. The information furnished includes all adjustments
and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results
for the interim periods. The Subsidiary is the only entity with operational activity and therefore no intercompany transactions
exist with the parent entity which would require elimination. These condensed consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and notes thereto contained within the Company’s Current
Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2017 (the “March
2017 8-K”).
Capital
Structure Change
On
July 27, 2016, the Company effected a reverse split of its outstanding shares of common stock at a ratio of 1:15, and on March
9, 2017, the Company effected a reverse split of its outstanding shares of its common stock at a ratio of 1:1.5 (together, the
“Reverse Stock Splits”). As a result of the Reverse Stock Splits, the Company’s historical financial statements
have been revised to reflect share counts and per share data as if the Reverse Stock Splits had been in effect for all periods
presented.
On
March 10, 2017, the Company’s common stock began trading on the Nasdaq Capital Market. On March 15, 2017, the Company closed
an underwritten public offering of 2,333,334 shares of its common stock at a public offering price of $4.50 per share (the “Offering”).
Proceeds received from the Offering were approximately $8.8 million after deducting $1.7 million of underwriting discounts, commissions
and other offering costs. Simultaneously with the closing of the Offering, certain noteholders converted approximately $3.0 million
of the aggregate principal balance of certain convertible notes into 844,446 shares of the Company’s common stock. Upon
closing of the Offering, the Company issued 1,440,310 shares of restricted common stock to holders of the Company’s Series
C Convertible Preferred Stock upon the automatic conversion of the Series C Convertible Preferred Stock triggered by the closing
of the Offering. Additionally, the Company issued 150,878 shares of common stock upon the conversion of approximately $679,000
of indebtedness outstanding under a line of credit. On March 21, 2017, the Company issued 2,799,718 shares of restricted
common stock upon the Company’s exercise of its option, triggered by the listing on the Nasdaq Capital Market, to cause
the mandatory conversion of approximately $10.1 million of the aggregate principal balance of certain convertible notes. See Note
4 and Note 8 to the Condensed Consolidated Financial Statements in this report. As a result of these events, on March 31, 2017,
the Company’s independent registered public accounting firm, Lurie, LLP, reissued its report in connection with the Company’s
consolidated financial statements for the fiscal years ended December 31, 2016 and 2015, to eliminate the going concern uncertainty
paragraph.
DIGILITI
MONEY GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Summary
of Significant Accounting Policies
There
have been no significant changes to the Company’s significant accounting policies during the three months ended March 31,
2017, other than the updates described below and in the subsequent notes. Further information regarding the Company’s significant
accounting policies can be found in the March 2017 8-K.
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 net loss per share:
|
|
Three
Months Ended
|
|
(In
thousands, except share and per share data)
|
|
March
31, 2017
|
|
|
March
31, 2016
|
|
Net loss
|
|
$
|
(2,734
|
)
|
|
$
|
(4,557
|
)
|
Less: Cumulative
unpaid preferred stock dividends
|
|
|
(95
|
)
|
|
|
(372
|
)
|
Net loss attributable
to common shareholders
|
|
|
(2,829
|
)
|
|
|
(4,929
|
)
|
Weighted average common shares outstanding
|
|
|
3,397,782
|
|
|
|
1,637,099
|
|
Net loss per common share – basic
and diluted
|
|
$
|
(0.83
|
)
|
|
$
|
(3.01
|
)
|
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
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Convertible preferred stock
|
|
|
—
|
|
|
|
638,328
|
|
Stock options
|
|
|
217,450
|
|
|
|
212,148
|
|
Warrants
|
|
|
3,597,242
|
|
|
|
1,273,246
|
|
|
|
|
3,814,692
|
|
|
|
2,123,722
|
|
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. Warrants 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, the
following three levels of inputs apply:
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.
DIGILITI
MONEY GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 three
months ended March 31, 2017.
Use
of Estimates
The
preparation of these condensed 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 allowance for doubtful accounts, percentage of completion
used to recognize revenue from professional services, assumptions used to value stock options and warrants, conversion feature
liabilities, conversion incentive and share purchase price adjustments.
Recently
Adopted Accounting Pronouncements
In
March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 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 was effective for the Company on January
and did not have a material impact on the Company’s consolidated financial statements and disclosures.
Accounting
Pronouncements Not Yet Adopted
In
May 2014, the FASB issued 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. In July 2015, the FASB voted to allow a one year deferral of the effective date to annual reporting periods
beginning after December 15, 2017. 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 No. 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 beginning after December 15, 2017, including for interim periods within those
fiscal years.. The Company is currently evaluating the impact of the ASU on its consolidated financial statements and disclosures.
DIGILITI
MONEY GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In
February 2016, the FASB issued No. 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 beginning after December 15, 2018, including
for interim periods within those fiscal years, and requires adoption using a modified retrospective approach. Early adoption is
permitted. The Company is currently evaluating the impact of the ASU on its consolidated financial statements and disclosures.
In
June 2016, the FASB issued ASU No. 2016-13, “
Measurement of Credit Losses on Financial Instruments,
” which
introduces new guidance for the accounting for credit losses on instruments within its scope, including trade and loans receivable
and available-for-sale debt securities. 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 entity’s 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, and requires adoption using a modified retrospective approach.
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.
In
August 2016, the FASB issued ASU No. 2016-15, “
Classification of Certain Cash Receipts and Cash Payments,
”
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. The Company is currently evaluating the impact of the ASU on its consolidated financial statements
and disclosures.
In
January 2017, the FASB issued ASU No. 2017-01, “
Clarifying the Definition of a Business,
” which affects many
areas of accounting such as business combinations and disposals and goodwill impairment. The revised definition of a business
will likely result in more acquisitions being accounted for as asset acquisitions, as opposed to business combinations. The revised
guidance is effective for fiscal years beginning after December 15, 2017, including for interim periods within those fiscal years,
and is required to be applied prospectively to transactions occurring on or after the effective date.
In
January 2017, the FASB issued ASU No. 2017-04, “
Simplifying the Test for Goodwill,
” which eliminates 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 does not expect
the application of this standard to have a significant impact on its consolidated financial statements.
DIGILITI
MONEY GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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)
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Computer equipment
|
|
$
|
259
|
|
|
$
|
255
|
|
Data center equipment
|
|
|
1,252
|
|
|
|
1,230
|
|
Purchased software
|
|
|
833
|
|
|
|
814
|
|
Furniture and fixtures
|
|
|
95
|
|
|
|
90
|
|
Leasehold improvements
|
|
|
81
|
|
|
|
78
|
|
Total property and equipment
|
|
|
2,520
|
|
|
|
2,467
|
|
Less: accumulated
depreciation
|
|
|
(1,874
|
)
|
|
|
(1,771
|
)
|
Net property
and equipment
|
|
$
|
646
|
|
|
$
|
696
|
|
Depreciation
expense for the periods presented was as follows:
|
|
Three
Months Ended
|
|
(In
thousands)
|
|
March
31, 2017
|
|
|
March
31, 2016
|
|
Depreciation expense
|
|
$
|
103
|
|
|
$
|
79
|
|
4.
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 financing arrangements contain various covenants. There are no financial covenants
required by these financing arrangements and as of March 31, 2017, 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 8 to the Condensed Consolidated Financial Statements in this report.
DIGILITI
MONEY GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
Company’s debt and accrued interest outstanding as of the periods presented consisted of the following:
|
|
Principal
Balance
|
|
|
Accrued
Interest
|
|
(In
thousands)
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Note Payable – Bank,
due January 2018, interest at 2.85%
|
|
$
|
725
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Notes Payable to Directors
|
|
|
221
|
|
|
|
3,078
|
|
|
|
12
|
|
|
|
411
|
|
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
|
|
|
|
250
|
|
|
|
228
|
|
Notes Payable, due October 2016, interest
between 8.25% and 12%
|
|
|
—
|
|
|
|
67
|
|
|
|
—
|
|
|
|
32
|
|
Note Payable, due August 2021, interest
at 0%
|
|
|
192
|
|
|
|
192
|
|
|
|
—
|
|
|
|
—
|
|
Installment Note
Payable – Bank
|
|
|
207
|
|
|
|
234
|
|
|
|
—
|
|
|
|
—
|
|
Total debt
|
|
|
1,760
|
|
|
|
13,197
|
|
|
|
262
|
|
|
|
675
|
|
Discount on notes payable
|
|
|
—
|
|
|
|
(8,519
|
)
|
|
|
|
|
|
|
|
|
Unamortized deferred
financing costs
|
|
|
(9
|
)
|
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
Total debt, net
|
|
|
1,751
|
|
|
|
4,545
|
|
|
|
|
|
|
|
|
|
Less: short-term
debt and current portion of long-term debt
|
|
|
1,463
|
|
|
|
4,229
|
|
|
|
|
|
|
|
|
|
Long-term debt,
net of current portion
|
|
$
|
288
|
|
|
$
|
316
|
|
|
|
|
|
|
|
|
|
(1)
Includes notes payable to Messrs. Hanson and Davis totaling approximately $906,000 as of December 31, 2016.
Future
maturities of long-term debt as of March 31, 2017 are as follows (in thousands):
Nine months ending December
31, 2017
|
|
$
|
658
|
|
2018
|
|
|
901
|
|
2019
|
|
|
9
|
|
2020
|
|
|
—
|
|
2021
|
|
|
192
|
|
Total
debt
|
|
$
|
1,760
|
|
Note
Payable – Bank
On
March 29, 2017, the Company executed a commercial loan note payable with Venture Bank and received proceeds of $725,000, which
was primarily used for working capital purposes. The loan bears interest at 2.85% and requires a balloon repayment of the principal
and interest due on the maturity date of January 2, 2018. Upon the occurrence of an event of default, as defined by the debt agreement,
the interest rate would increase to 8.85%. The loan is secured by a $725,000 certificate of deposit which the Company is required
to maintain at Venture Bank for a nine-month term. The certificate of deposit is classified as restricted cash.
Notes
Payable to Directors
The
Company has historically relied on two directors of the Company, Michael J. Hanson (“Mr. Hanson”) and James L. Davis
(“Mr. Davis,” and collectively with Mr. Hanson, “Messrs. Hanson and Davis”), to provide financing to fund
the Company’s operations. See Note 10 to the Condensed Consolidated Financial Statements in this report.
Convertible
Notes, due 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 as of December 31, 2016 had been reduced and was being accreted
to face value through each of the maturity dates.
DIGILITI
MONEY GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Convertible
notes that converted upon listing
Between June 2016 and
January 2017, the Company issued to several investors convertible notes, which were unsecured and did not bear any interest, and
warrants to purchase the Company’s common stock. On March 10, 2017, the Company’s common stock began trading on the
Nasdaq Capital Market (the “Triggering Event”) and on March 15, 2017, the Company closed an underwritten public offering
of 2,333,334 shares of common stock at a public offering price of $4.50 per share. As a result of the Triggering Event, the Company
exercised its right to mandatorily convert outstanding principal on the convertible notes totaling $10.8 million into 2,950,596
shares of common stock with approximately $679,000 converted at $4.50 and $10.1 million converted at a price equal to 80% of the
Offering price, or $3.60 per share. Additionally, three investors elected to convert outstanding principal on the convertible
notes totaling approximately $3.0 million into 844,446 shares of common stock at a price equal to 80% of the Offering price,
or $3.60 per share.
Convertible
notes to other investors
In
December 2016, the Company entered into a securities purchase agreement with FirstFire Global Opportunities Fund, LLC (“FirstFire”),
pursuant to which the Company issued to FirstFire a Convertible Promissory Note in the amount of $550,000 (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 bore interest at a rate of 5% per annum and was due June 12,
2017. On March 15, 2017, the Company repaid the FirstFire Note from the Offering proceeds. The repayment including principal,
accrued interest and prepayment premium totaled approximately $640,000.
On
December 23, 2016, the Company issued a Convertible Term Promissory Note to FLMM Ltd. (“FLMM”) in the amount of $1,440,000,
payable in cash (the “FLMM Note”). The FLMM Note was secured by substantially all of the assets of the Subsidiary,
bore interest at a rate of 8% per annum and was payable in full on March 15, 2017. FLMM elected to convert $240,000 of principal
into 66,667 shares of common stock at a price equal to 80% of the Offering price, or $3.60 per share. On March 15, 2017, the Company
repaid the remaining principal balance of $1.2 million, plus accrued interest.
On
December 22, 2016, the Company issued a Convertible Term Promissory Note to Jon D and Linda W Gruber Trust (“Gruber”)
in the amount of $75,000, payable in cash (the “Gruber Note”). The Gruber Note was unsecured, bore interest at a rate
of 8% per annum and was payable in full on March 22, 2017, which under certain circumstances, could be extended to May 31, 2017.
Gruber consented to receiving prepayment of the Gruber Note and on March 15, 2017, the Company repaid in full the total balance
of approximately $76,000, including accrued interest.
Series
Subordinated Note, due January 2016, interest at 12%
The
series subordinated note, in original principal amount of approximately $415,000, was due in January 2016. As of March 31, 2017,
the Company had not repaid the note. On March 31, 2016, the holder of the note commenced legal action against the Company. During
April 2017, after the close of its fiscal quarter, the Company settled this legal action and paid approximately $665,000 in full
satisfaction of the claim. See Note 6 to the Condensed Consolidated Financial Statements in this report.
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, and 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 6,667 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 covenants associated with the loan, which has a maturity date of August 2021, at which time
the full principal amount of $192,000 is due. The loan contains a provision whereby, if the Company transfers more than a majority
of its current 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.
The Company is in compliance with all covenants and has no past due obligations under the loan.
DIGILITI
MONEY GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 outstanding principal of this note at March 31, 2017 was approximately $207,000. The prime rate of interest
was 4% as of March 31, 2017 and 3.75% as of December 31, 2016.
5.
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 either of the three-month periods ended March 31, 2017 or 2016.
6.
Commitments and Contingencies
Operating
Leases
Rent
expense pursuant to operating leases for the periods presented is as follows:
`
|
|
Three
Months Ended
|
|
(In
thousands)
|
|
March
31, 2017
|
|
|
March
31, 2016
|
|
Rent expense
|
|
$
|
99
|
|
|
$
|
102
|
|
The
lease for office space of the Company’s headquarters contains 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 March 31, 2017 are as follows (in thousands):
Nine months ending December
31, 2017
|
|
$
|
211
|
|
2018
|
|
|
242
|
|
2019
|
|
|
241
|
|
2020
|
|
|
248
|
|
2021
|
|
|
255
|
|
Thereafter
|
|
|
21
|
|
|
|
$
|
1,218
|
|
The
Company is due $8,400 in future minimum lease receivables through June 30, 2017, the expiration date of its sublease on office
space in Dallas, Texas.
Capital
Leases
The
total cost of capital leased assets, net of accumulated depreciation, included in property and equipment as of March 31, 2017
and December 31, 2016 totaled approximately $516,000 and $575,000, respectively.
DIGILITI
MONEY GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Future
minimum lease payments pursuant to capital leases as of March 31, 2017 are as follows (in thousands):
Nine months ending December
31, 2017
|
|
$
|
305
|
|
2018
|
|
|
154
|
|
2019
|
|
|
89
|
|
2020
|
|
|
5
|
|
Total payments
|
|
|
553
|
|
Less: portion
representing interest
|
|
|
(13
|
)
|
Principal portion
|
|
|
540
|
|
Less: unamortized
deferred financing costs
|
|
|
(34
|
)
|
Capital lease balance
|
|
|
506
|
|
Less: current
maturities of capital lease obligations
|
|
|
(311
|
)
|
Capital lease,
net of current maturities
|
|
$
|
195
|
|
Litigation
Cachet
Banq
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.
On October 27, 2016,
the Court entered a judgment against the Company which, effective from April 15, 2017, enjoins the Company 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.
In April 2017, the
Company changed its name to “Digiliti Money Group, Inc.” and the name of its subsidiary to “Digiliti Money,
Inc.”. The Court denied Cachet Banq’s request for attorney’s fees and costs.
DIGILITI
MONEY GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Series
Subordinated Note
On
March 31, 2016, the holder of the series subordinated note referred to in Note 4 to the Condensed Consolidated Financial Statements
in this report, 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 alleged that the Company was in default and owed the note holder approximately $695,000 plus interest and assessments accruing
after April 1, 2016. The dispute centered on the note holder’s interpretation of the agreement. Based on the note holder’s
interpretation of the agreement, the note holder sought an extraordinary amount in alleged liquidated damages (approximately $300,000
on an outstanding debt of approximately $415,000). The Company continued to dispute the allegations of the note holder and intended
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. On October 19, 2016, the Court entered an order granting
in part and denying in part the note holder’s motion for summary judgment. If the plaintiff in this matter were successful
in its lawsuit, the Company would have been subject to a penalty of $500 per day for each day that the Company was in default
of the note. As of March 31, 2017 and December 31, 2016, the Company had accrued approximately $250,000 and $176,000, respectively,
related to this $500 per day penalty, which is reflected in accrued interest on the condensed consolidated balance sheets. In
April 2017, after close of the Company’s fiscal quarter, the Company paid approximately $665,000 in full satisfaction and
settlement of this claim, consisting of outstanding debt of approximately $415,000 plus accrued interest and penalty.
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 17,778 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 another payment totaling $30,000. In February 2016, the Company renewed
the services agreement and issued the firm an additional 20,667 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
8,000 shares of common stock. In January 2017, the Company again renewed the services agreement and issued the firm an additional
33,334 shares of common stock, a warrant to purchase 12,974 shares of the Company’s common stock and a non-refundable expense
deposit of $12,500, in exchange for another six months of services.
In
January 2017, the Company entered into an agreement with a firm to provide public relations, investor relations, shareholder communications
and other consulting services. The agreement required the issuance of 16,667 shares of the Company’s common stock and a
warrant to purchase 6,487 shares of the Company common stock, in addition to a non-refundable expense deposit of $6,250. Additionally,
in January 2017, the Company entered into an agreement with another firm to provide investor relations, shareholder communications
and other consulting services. The agreement required the issuance of 2,334 shares of the Company’s common stock and payments
totaling $18,000. The term of each agreement is three months commencing January 18, 2017.
In
February 2017, the Company entered into an agreement with a firm to provide general investor relations, shareholder communications
and other consulting services. The agreement required the issuance of 16,667 shares the Company’s common stock and payments
totaling $96,000. The term of the agreement is 12 months commencing February 15, 2017.
7.
Goodwill and Finite Life 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 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.
DIGILITI
MONEY GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 both March 31, 2017 and December 31, 2016. The Company conducted its annual goodwill
impairment test as of December 31, 2016 and determined there to be no indication of impairment related to the Company’s
goodwill. The Company does not believe that an indicator of impairment exists as of March 31, 2017 and will continue to monitor
conditions and changes that could indicate an impairment of goodwill.
Amortization
expense for identified intangible assets is summarized below:
|
|
Three
Months Ended
|
|
|
Statement of
|
|
|
March
31,
|
|
|
March
31,
|
|
|
Operations
|
(In
thousands)
|
|
2017
|
|
|
2016
|
|
|
Classification
|
Customer contracts
|
|
$
|
23
|
|
|
$
|
41
|
|
|
Cost of Revenue
|
Proprietary software
|
|
|
53
|
|
|
|
76
|
|
|
Cost of Revenue
|
Total amortization
on identified intangible assets
|
|
$
|
76
|
|
|
$
|
117
|
|
|
|
DIGILITI
MONEY GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8.
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 446,983 shares of its common stock at $7.41 per share, as adjusted, in a private placement. As of December
31, 2016, 43,530 shares of Series C Preferred Stock were outstanding. On March 15, 2017, upon closing of the Offering,
all outstanding Series C Preferred Stock and accumulated dividends were automatically converted into 1,440,310 shares of common
stock. Also, effective simultaneously with the closing of the Offering, certain noteholders converted principal owed under convertible
promissory notes into shares of common stock at a conversion price of $3.60 per share (the “Note Conversions”). Because
the conversion price of the Note Conversions was less than $7.41 per share, the conversion price of all Series C Preferred Stock
was automatically set at $3.60 per share.
Common
Stock
The
Company’s common stock issuances for the three months ended March 31, 2017 were as follows:
|
|
Shares
of
|
|
|
|
Common
Stock
|
|
Balance, December 31, 2016
|
|
|
2,103,392
|
|
Conversion of preferred stock and dividends
to common stock
|
|
|
1,440,310
|
|
Conversion of convertible notes
|
|
|
3,795,042
|
|
March 2017 equity offering
|
|
|
2,333,334
|
|
Issuance of common stock under Associate
Stock Purchase Plan
|
|
|
9,701
|
|
Issuance of common
stock for professional services
|
|
|
75,669
|
|
Balance, March 31, 2017
|
|
|
9,757,448
|
|
Warrants
The
Company’s warrant activity for the three months ended March 31, 2017 consisted of the following:
|
|
Number of
|
|
|
|
|
|
Weighted
|
|
|
|
Shares Issuable
|
|
|
Weighted Avg.
|
|
|
Remaining
|
|
|
|
Under Warrants
|
|
|
Exercise Price
|
|
|
Life (Years)
|
|
Balance, December 31, 2016
|
|
|
2,895,685
|
|
|
$
|
11.60
|
|
|
|
4.23
|
|
Issued
|
|
|
706,642
|
|
|
|
3.95
|
|
|
|
|
|
Expired
|
|
|
(5,085
|
)
|
|
|
31.50
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Balance, March 31, 2017
|
|
|
3,597,242
|
|
|
$
|
8.13
|
|
|
|
4.16
|
|
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.
DIGILITI
MONEY GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As
of March 31, 2017 and December 31, 2016, the Company’s warrant and conversion feature liabilities consisted of the following
(in thousands except share and per share data):
|
|
|
|
|
Current
|
|
|
Balance
as of
|
|
|
|
Shares
|
|
|
Exercise
|
|
|
March 31,
|
|
|
December 31,
|
|
Counterparty
|
|
Issuable
|
|
|
Price
|
|
|
2017
|
|
|
2016
|
|
Series A, B and C preferred
shareholders
|
|
|
45,004
|
|
|
$
|
3.60
|
|
|
$
|
119
|
|
|
$
|
1,164
|
|
Lincoln Park Capital Fund
|
|
|
66,667
|
|
|
|
3.60
|
|
|
|
179
|
|
|
|
234
|
|
Trooien Capital, LLC
|
|
|
333,333
|
|
|
|
3.60
|
|
|
|
908
|
|
|
|
968
|
|
Convertible noteholders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,369
|
|
June 2016 investors
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
406
|
|
Lender of October 2016 notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
Messrs. Hanson and Davis
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
64
|
|
Sutter Securities Incorporated
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
Craft Capital
Management LLC
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
Warrant and conversion feature liability,
total
|
|
|
|
|
|
|
|
|
|
$
|
1,206
|
|
|
|
10,222
|
|
Less: current
portion of warrant and conversion feature liability
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
(2,870
|
)
|
Warrant liability
|
|
|
|
|
|
|
|
|
|
$
|
1,206
|
|
|
|
7,352
|
|
Warrants
that contain anti-dilution 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 and the following significant assumptions, or a Monte
Carlo simulation, depending on the instrument.
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 was 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 that corresponds to the term of the security
|
The
conversion features on the Company’s convertible notes were accounted for as derivative financial instruments. The Company
recorded all derivatives on the balance sheet at fair value as of the end of each reporting period. 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 obtained 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.
The
fair value of the warrants issued during the periods presented 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:
|
|
Three
Months Ended
|
|
|
|
March
31, 2017
|
|
|
March
31, 2016
|
|
Stock price
|
|
|
$3.70
to $4.59
|
|
|
|
$8.10
to $11.25
|
|
Exercise price
|
|
|
$3.60
to $4.95
|
|
|
|
$7.40
to $7.88
|
|
Expected term
|
|
|
5.0
years
|
|
|
|
2.5
years
|
|
Expected dividend
|
|
|
0%
|
|
|
|
0%
|
|
Volatility
|
|
|
73%
to 74%
|
|
|
|
65%
to 75
%
|
|
Risk-free interest rate
|
|
|
1.87%
to 2.11%
|
|
|
|
0.81%
to 1.31
%
|
|
DIGILITI
MONEY GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9.
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
and 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
adopted the 2014 Stock Incentive Plan (the “2014 SIP”) and on June 2, 2016, the Board of Directors adopted the 2016
Stock Incentive Plan (the “2016 SIP”).
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 4,445 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, 17,778 shares of common stock in any
fiscal year. The term of each stock option shall be determined by the Board or committee of the Board, 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 2016
SIP 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.
The
following is a summary of shares issuable pursuant to options granted as of March 31, 2017:
|
|
Maximum
|
|
|
Outstanding
|
|
|
Exercisable
|
|
2010 EIP
|
|
|
30,000
|
|
|
|
4,965
|
|
|
|
4,965
|
|
2014 SIP
|
|
|
67,628
|
|
|
|
37,142
|
|
|
|
29,161
|
|
2016 SIP
|
|
|
400,000
|
|
|
|
31,034
|
|
|
|
12,277
|
|
Issued outside
of plans
|
|
|
—
|
|
|
|
144,309
|
|
|
|
120,729
|
|
Shares issuable
pursuant to options granted
|
|
|
|
|
|
|
217,450
|
|
|
|
167,132
|
|
The
following is a summary of stock option activity for the three months ended March 31, 2017:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Number
of
|
|
|
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Shares
Issuable
|
|
|
Weighted
Avg.
|
|
|
Contractual
|
|
|
Value
|
|
|
|
Under
Options
|
|
|
Exercise
Price
|
|
|
Life
(Years)
|
|
|
(in
thousands)
|
|
Balance, December 31, 2016
|
|
|
225,231
|
|
|
$
|
21.99
|
|
|
|
3.52
|
|
|
$
|
29
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited or
expired
|
|
|
(7,781
|
)
|
|
|
12.04
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2017
|
|
|
217,450
|
|
|
$
|
22.35
|
|
|
|
3.19
|
|
|
|
—
|
|
Exercisable at March 31, 2017
|
|
|
167,132
|
|
|
$
|
25.48
|
|
|
|
2.96
|
|
|
|
—
|
|
DIGILITI
MONEY GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Information
with respect to stock options outstanding and exercisable was of March 31, 2017 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
(in thousands)
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
$6.15 to $9.22
|
|
|
34,703
|
|
|
|
3.94
|
|
|
$
|
8.33
|
|
|
$
|
—
|
|
|
|
19,859
|
|
|
$
|
8.48
|
|
|
$
|
—
|
|
$9.22 to $13.95
|
|
|
49,318
|
|
|
|
3.84
|
|
|
|
10.48
|
|
|
|
—
|
|
|
|
26,639
|
|
|
|
10.24
|
|
|
|
—
|
|
$15.75 to $30.38
|
|
|
49,780
|
|
|
|
3.21
|
|
|
|
19.13
|
|
|
|
—
|
|
|
|
36,985
|
|
|
|
19.31
|
|
|
|
—
|
|
$33.74 to $90.00
|
|
|
83,649
|
|
|
|
2.47
|
|
|
|
37.09
|
|
|
|
—
|
|
|
|
83,649
|
|
|
|
37.09
|
|
|
|
—
|
|
|
|
|
217,450
|
|
|
|
3.19
|
|
|
$
|
22.35
|
|
|
$
|
—
|
|
|
|
167,132
|
|
|
$
|
25.48
|
|
|
$
|
—
|
|
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 9,701 shares to associates pursuant to the Performance Bonus Plan during the three months ended March
31, 2017.
Stock
Compensation Expense Information
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 was 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 that corresponds to the term of the security.
|
There
were no stock options issued during the three months ended March 31, 2017.
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.
DIGILITI
MONEY GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Compensation
expense recognized for the issuance of warrants, stock options, restricted stock grants and stock bonuses for the periods presented
is classified in each of the operating expense categories in our consolidated statements of operations as follows:
|
|
Three
Months Ended
|
|
(In
thousands)
|
|
March
31, 2017
|
|
|
March
31, 2016
|
|
Cost of revenue
|
|
$
|
22
|
|
|
$
|
21
|
|
Sales and marketing
expenses
|
|
|
33
|
|
|
|
31
|
|
Research and development
expenses
|
|
|
21
|
|
|
|
30
|
|
General
and administrative expenses
|
|
|
33
|
|
|
|
47
|
|
Total
stock-based compensation expense
|
|
$
|
109
|
|
|
$
|
129
|
|
As of March 31, 2017, the total compensation cost related to unvested option awards not yet recognized was
approximately $156,000, which will be recognized over a weighted-average period of approximately one year.
2014
Associate Stock Purchase Plan
On
September 8, 2014, the Company’s Board of Directors adopted the 2014 Associate Stock Purchase Plan and authorized the Company
to issue up to 22,223 shares of its common stock under this plan. On December 29, 2016, the Company’s Board of Directors
authorized an additional 100,000 shares of common stock under this plan. The 2014 Associate Stock Purchase Plan permits eligible
associates (employees) to purchase shares of the Company’s common stock at the end of pre-established offering periods at
a maximum 15% discount from the common stock’s fair market value on the date of purchase or the offering date, whichever
is lower. Offering periods are every six months ending on June 30 and December 31. Eligible associates may designate up to 10%
of their compensation for the purchase of shares under the plan. As of March 31, 2017, there are 99,564 shares available for purchase
remaining in the plan.
10.
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 for the periods presented. No debt is held by executive officers of the Company.
|
|
As
of
|
|
(In
thousands, except warrants held)
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Notes Payable
to Directors (1)
|
|
$
|
221
|
|
|
$
|
3,078
|
|
Convertible Notes,
due 2016 and 2017, interest between 0% and 8%, held by related parties
|
|
|
—
|
|
|
|
906
|
|
Accrued interest to
related parties
|
|
|
12
|
|
|
|
411
|
|
Warrants held by Directors
|
|
|
1,055,871
|
|
|
|
888,802
|
|
(1)
|
Included
within this line item as of December 31, 2016 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, 2017, of approximately $194,000.
|
|
|
Three
Months Ended
|
|
(In
thousands)
|
|
March
31, 2017
|
|
|
March
31, 2016
|
|
Related
party interest expense
|
|
$
|
55
|
|
|
$
|
44
|
|
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 was unsecured and bore 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. On March 15, 2017, in connection with the Offering, Mr. Davis
converted the total indebtedness of $896,243 into 248,957 shares of the Company’s common stock.
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 was unsecured and bore 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 March 15,
2017, in connection with the Offering, Mr. Hanson converted $1,903,757 into 528,822 shares of the Company’s common stock.
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 28,704 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 $8.33 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, $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 90,526 shares of the Company’s common stock, at an exercise price equal to
the public offering price-per-share in the Offering. On March 15, 2017, in connection with the Offering, Mr. Hanson converted the
total indebtedness outstanding under the Line of Credit into 150,878 shares of the Company’s common stock.
DIGILITI
MONEY GROUP, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11.
Concentrations
The
Company’s revenues consist of recurring revenue, professional services and implementation fees. For the three months ended
March 31, 2017 and 2016, recurring revenues represented 56.2% and 71.9% of consolidated revenues, respectively, professional services
represented 41.3% and 18.9% of consolidated revenues, respectively, and implementation fees represented 2.5% and 9.2% of consolidated
revenues, respectively.
As
of March 31, 2017, the Company had net payables of $775,000 owed to technology partners for software licenses, representing 35.3%
of its accounts payable balance. 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.
For
the three months ended March 31, 2017, three customers accounted for 23.8%, 22% and 10.7% of the Company’s consolidated
revenues. For the three months ended March 31, 2016, one customer accounted for 12% of the Company’s total revenue. As of
March 31, 2017, the Company had receivables due from two customers totaling $1.9 million and $705,000, representing 43.7% and
16.3%, respectively, of the Company’s total receivables. As of December 31, 2016, the Company had receivables due from one
customer totaling $1.3 million, representing 42.8% of the Company’s total receivables. These receivables are due to the
Company in various installments, pursuant to each agreement, through December 2019.
12.
Subsequent Events
As
more fully described in Note 6 to the Condensed Consolidated Financial Statements in this report under the caption
Series Subordinated
Note,
during April 2017, the Company paid approximately $665,000 in full satisfaction and settlement of this claim, consisting
of outstanding debt of approximately $415,000 plus accrued interest and penalty.
On
April 21, 2017, the Company entered into a 36-month capital lease for hardware and software upgrades to its data centers at a
cost of approximately $906,000. Future minimum lease payments related to this capital lease, including sales tax and financing
costs, are estimated to be approximately $269,000 in 2017, $381,000 in each of 2018 and 2019 and $111,000 in 2020.
On
May 1, 2017, the Company entered into a 36-month installment note payable with a bank, replacing a previous note, for a principal
amount of $250,000. The Company received the net amount between the two notes, or approximately $51,000, which will be used primarily
for expenditures related to office expansion. The note bears interest at the prime rate plus 1%. The prime rate of interest was
4% as of March 31, 2017.
DIGILITI
MONEY GROUP, INC.