NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature of Operations and Summary of Significant Accounting Policies
Nature
of Business and Operations Overview
Cachet
Financial Solutions, Inc. (the “Company” or “Cachet”) is a provider of technology solutions and services
to the financial services industry. The Company’s solutions and services enable its clients—banks, credit unions and
other types of financial institutions or financial service organizations—to provide their customers with remote deposit
capture technology (“RDC”) and related services. The Company’s cloud based Software as a Service (“SaaS”)
RDC solutions allow customers to scan checks remotely through their smart phones or other devices and transmit the scanned, industry
compliant images to a bank for posting and clearing. In addition, the Company’s offerings include a mobile wallet solution
which provides a virtual account for customers that do not have a bank account and is focused on the pre-paid card market. Through
the Company’s cloud based SaaS mobile wallet offering we provide consumers the ability to deposit and withdraw funds, transfer
funds, and pay bills with their mobile phone or tablet. As of December 31, 2015, we had entered into 500 contracts with customers
for our products and services. Approximately 397 of those agreements were “active,” meaning that customers have implemented
the RDC software enabling the processing of customer transactions or deployed the mobile wallet application. The Company offers
its services to financial institutions in the United States, Canada and Latin America. Our business operations are conducted through
our wholly owned subsidiary, Cachet Financial Solutions Inc., a Minnesota corporation.
Basis
of Presentation
The
accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary Cachet Financial
Solutions Inc. as of December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015 and 2014. The wholly owned
subsidiary is the only entity with operational activity and therefore no intercompany transactions exist with the parent entity
which would need to be eliminated. The Company has prepared the consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern.
From inception to December 31, 2015, the Company has an accumulated deficit of approximately $69.3 million, and current liabilities
exceeded current assets by approximately $6.8 million. In 2016, the Company expects to continue to grow its client base and increase
revenues through higher RDC transaction volumes and monthly active user fees (“MAUs”) from its Select Mobile Money
offering. Nevertheless, the Company expects to continue to incur operating losses through December 31, 2016.
In
2015, the Company raised approximately $8.0 million in gross proceeds from various PIPE transactions, and the exercising of warrants
and borrowed approximately $1.2 million, net principal from its directors. Since December 2015, the Company has extended debt
and accrued interest payments of approximately $1.8 million due in January 2016 to January of 2017. In addition, the Company has
raised approximately $1,361,000 in gross proceeds from a March 2016 equity offering, approximately $807,000 from warrant exercises
and $225,000 from note agreements with two directors. See Note 16.
Subsequent Even
t
s
for details on the March 2016
equity offering.
In
October 2015, the Company entered into a $10 million equity purchase agreement with Lincoln Park Capital Fund, LLC (the “Purchase
Agreement”). Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right to sell
to and Lincoln Park is obligated to purchase, up to $10.0 million in shares, as described below, of the Company’s common
stock, subject to certain limitations, from time to time, over the 36-month period commencing November 6, 2015, the date that
the registration statement was declared effective by the Securities and Exchange Commission The purchase price of shares of common
stock related to the future funding will be based on the prevailing market prices of such shares at the time of sales. The Company
may direct Lincoln Park, at its sole discretion and subject to certain conditions, to purchase up to 50,000 shares of common stock
on any business day (a “Regular Purchase”), provided that at least one business day has passed since the most recent
Regular Purchase, increasing to up to 200,000 shares, depending upon the closing sale price of the common stock. However, in no
event shall a Regular Purchase be more than $500,000. The Company may also direct Lincoln Park at its sole discretion and subject
to certain conditions, to purchase up to $100,000 worth of shares of common stock on any business day (an “Additional Purchase”),
provided that at least six business days have passed since the most recent Additional Purchase was completed. In addition, the
Company may direct Lincoln Park to purchase additional amounts as accelerated purchases if the request is submitted on a Regular
Purchase date and on that date the closing sale price of the common stock is not below $1.00. The Company may not sell shares
of common stock to Lincoln Park under the Purchase Agreement at any time to the extent that the number of shares to be sold would
result in the beneficial ownership by Lincoln Park and its affiliates exceeding 9.99% of the then outstanding shares of the common
stock.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company is actively
seeking additional sources of financing and has engaged in discussions with investment banking firms to assist in raising additional
capital through the issuance of debt or equity, as well as the Company’s continued efforts to raise capital through the
exercise of its existing warrants and, if need be, will utilize the Purchase Agreement with Lincoln Park Capital Fund, LLC to
fund working capital. Additionally, the Company is negotiating to extend the maturity date on some of its outstanding debt.
Historically, the Company has demonstrated an ability to raise funds to support the business operations.
The Company believes based
on its current cashflow forecast and estimated availability, subject to the terms as disclosed on the Purchase Agreement, it has
enough cash to continue operations until December 12, 2016, when certain debts mature.
Summary
of Significant Accounting Policies
A
summary of the significant accounting policies applied in the preparation of the accompanying financial statements is as follows:
Revenue
Recognition
The
Company generates revenue from the following sources: (1) subscription and support fees (2) transaction volume fees, (3) active
monthly user fees for mobile wallet offering (4) fees related to the implementation of RDC and mobile wallet software for clients,
and (5) professional services such as client specific software customization and other products and services.
The
Company’s arrangements do not contain general rights of return. The Company’s subscription arrangements do not provide
customers with the right to take possession of the SaaS technology platform and, as a result, are accounted for as service arrangements.
The Company records revenue net of any sales or excise taxes.
The
Company commences revenue recognition for its SaaS technology platform and professional services when all of the following criteria
are met:
|
●
|
there
is persuasive evidence of an arrangement;
|
|
|
|
|
●
|
the
service has been or is being provided to the customer;
|
|
|
|
|
●
|
collection
of the fees is reasonably assured; and
|
|
|
|
|
●
|
the
amount of fees to be paid by the customer is fixed or determinable.
|
Subscription
and Support Revenue
Subscription
and support revenue is primarily derived from customers accessing the SaaS technology platform and includes subscription, support,
transaction volume fees and active user fees for mobile wallet offering. Subscription and support revenue is recognized ratably
over the contracted term of each respective subscription agreement, commencing on the date the service is provisioned to the customer,
provided the four revenue recognition criteria have been satisfied. Transaction volume fees are recognized as transactions are
processed and monthly services performed and active user fees for mobile wallet offering revenue is recognized on a monthly basis
as earned provided the four revenue recognition criteria have been satisfied.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Professional
Services and Other Revenue
Professional
services include implementation services, development of interfaces requested by customers, assistance with integration of the
Company’s services with the customers’ applications, dedicated support, and advisory services to customers who choose
to develop their own interfaces and applications. Professional services are typically performed within three to six months of
entering into an arrangement with the customer. Professional services are typically sold on a fixed-fee basis, but are offered
on a time-and-material basis as well. Revenue for time-and-material arrangements is recognized as the services are performed.
Revenue for professional services is recognized under a percent of completion method matching the revenue with the costs of the
computer programmer’s time. The Company uses internal milestones to estimate the costs and related percent of completion.
Professional services are not considered essential to the functionality of the SaaS offering.
Implementation
Fees
The
implementation fees are recognized over the term of the contract or expected life of the contract where no contractual term exists.
Generally, client agreements are entered into for 12 to 36 months. A majority of the implementation service component of the arrangement
with customers is performed within 120 days of entering into a contract with the customer.
Multiple
Element Arrangements
The
Company enters into multiple element arrangements in which a customer may purchase a subscription and professional services. For
arrangements with multiple deliverables, the Company evaluates whether the individual deliverables qualify as separate units of
accounting. In order to treat deliverables in a multiple element arrangement as separate units of accounting, the deliverables
must have standalone value upon delivery. If the deliverables have standalone value upon delivery, the Company accounts for each
deliverable separately and revenue is recognized for the respective deliverables as they are delivered. If one or more of the
deliverables does not have standalone value upon delivery, the deliverables that do not have standalone value are combined with
the final deliverable within the arrangement and treated as a single unit of accounting.
Subscription
and support contracts have standalone value as the Company sells subscriptions and support separately. In determining whether
professional services can be accounted for separately from subscription and support services, the Company considers the availability
of the professional services from other vendors, the nature of its professional services and whether the Company sells its applications
to new customers without professional services. Based on these considerations the Company assessed that its professional services
have standalone value.
The
Company determines the selling price for each element based on the selling price hierarchy of: (i) vendor-specific objective evidence
(“VSOE”) of fair value, (ii) third-party evidence (“TPE”), and (iii) estimated selling price (“ESP”).
The Company is unable to establish VSOE for any of its services, as the Company has not historically priced its services with
sufficient consistency. The Company is also unable to establish TPE, as the Company does not have sufficient information regarding
pricing of third-party subscription and professional services similar to its offerings. As a result, the Company has developed
estimates of selling prices based on margins established by senior management as the targets in the Company’s selling and
pricing strategies after considering the nature of the services, the economic and competitive environment, and the nature and
magnitude of the costs incurred. The amount of arrangement fee allocated is limited by contingent revenue, if any.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred
Revenue
Deferred
revenue consists of billings and payments received in advance of revenue recognition from the Company’s subscription and
support offerings as described above and is recognized as the revenue recognition criteria are met. For subscription agreements,
the Company typically invoices its customers in monthly or annual fixed installments. Accordingly, the deferred revenue balance
does not represent the total contract value of these multi-year subscription agreements. Deferred revenue also includes certain
deferred professional services fees, which are recognized in accordance with the Company’s revenue recognition policy. The
portion of deferred revenue the Company expects to recognize during the succeeding 12-month period is recorded as current deferred
revenue, and the remaining portion is recorded as noncurrent.
Cost
of Revenue
Cost
of revenue primarily consists of costs related to hosting the Company’s cloud-based application, providing customer support,
data communications expense, salaries and benefits of operations and support personnel, software development fees, software license
fees, amortization expense associated with acquired developed technology assets, and property and equipment depreciation.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity
of three months or less to be cash equivalents. Cash and cash equivalents are maintained at one financial institution and, at
times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances and
does not believe it is exposed to any significant credit risk on cash and cash equivalents.
Accounts
Receivable
Accounts
receivable represent amounts due from customers. Management determines the allowance for doubtful accounts by regularly evaluating
individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions.
Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded
when received. The allowance for doubtful accounts was approximately $10,000 and $25,000 as of December 31, 2015 and 2014, respectively.
Concentrations of credit risk with respect to accounts receivable are limited because a large number of geographically diverse
customers make up the Company’s customer base, thus spreading the credit risk.
Property
and Equipment
Depreciation
and amortization is computed using the straight-line method over the following estimated useful lives:
Computer
and Data Center Equipment
|
|
3
years
|
Purchased
and Acquired software
|
|
3
years
|
Leasehold
Improvements
|
|
3-5
years, or lease term if less
|
Furniture
and fixtures
|
|
7
years
|
Major
additions and improvements are capitalized, while replacements, maintenance and repairs, which do not improve or extend the life
of the respective assets, are expensed as incurred. When assets are retired or otherwise disposed of, related costs and accumulated
depreciation and amortization are removed and any gain or loss is reported.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill
Goodwill
represents the excess purchase price over the appraised value of the portion of identifiable assets that were acquired from the
DeviceFidelity Inc. acquisition completed in March 2014. Goodwill is not amortized but is reviewed at least annually for impairment,
or between annual dates if circumstances change that would more likely than not cause impairment. Management performs its annual
impairment test at the close of each fiscal year, and considers several factors in evaluating goodwill for impairment, including
the Company’s current financial position and results, general economic and industry conditions and legal and regulatory
conditions. No impairment of goodwill was identified for the years ended December 31, 2015 and 2014. See Note 11 for further discussion.
Impairment
of Long-lived Assets, Including License Agreements
The
Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount
of an asset to future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of
the assets. In December 2015, the Company determined that an impairment of $216,369 had occurred on its finite-lived intangible
assets related to certain customer contracts acquired in the acquisition of the Select Mobile Money business on March 4, 2014.
In determining the impairment loss, the Company reviewed all circumstances, including the undiscounted cash flows it expects to
derive from those contracts going forward.
Deferred
Financing Costs
Deferred
financing costs are capitalized and amortized over the lives of the related debt agreements. The costs are amortized to interest
expense using the effective interest method. In the event debt is converted or paid prior to maturity, any unamortized issuance
costs are charged to expense in the period in which the conversion or repayment occurs.
Advertising
Costs
Advertising
costs are expensed as incurred and are included in sales and marketing expense on the accompanying statements of operations. During
the years ended December 31, 2015 and 2014, advertising costs totaled approximately $65,000 and $16,000, respectively.
Deferred
Commissions
The
Company capitalizes commission costs that are incremental and directly related to the acquisition of customer contracts. Commission
costs are capitalized and amortized over the term of the related customer contract.
Net
Loss Per Common Share
Basic
and diluted net loss per common share for all periods presented is computed by dividing the net loss available to common shareholders
by the weighted average common shares outstanding and common stock equivalents, when dilutive. Potentially dilutive common stock
equivalents include common shares issued pursuant to stock warrants, stock options and convertible preferred stock. Common stock
equivalents were not included in determining the fully diluted loss per share as they were antidilutive.
On
February 12, 2014, the Company completed a merger transaction with DE Acquisition 2, Inc. (“DE2”), a public company
with no operations. Pursuant to the terms of the merger, each share of the Company’s common stock that was issued and outstanding
at such time was cancelled and converted into 10.9532 (the “exchange ratio”) shares of DE2’s common stock.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On
March 18, 2014, the Company completed a reverse stock split of the Company’s issued and outstanding common stock on a 1-for-10.9532
basis. The Company’s authorized capital shares previous to this transaction consisted of 22,500,000 shares of $.01 par value
common stock and 2,500,000 shares of preferred stock. As a result of the DE 2 transaction, the Company’s new authorized
capital consists of 500,000,000 shares of $.0001 par value common stock and 20,000,000 shares of preferred stock.
All
amounts in the accompanying financial statements and notes related to shares, share prices and loss per share reflect retrospective
presentation of the reverse split.
The
following table reflects the amounts used in determining loss per share:
|
|
Year Ended
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Net loss
|
|
$
|
(18,252,632
|
)
|
|
$
|
(15,709,782
|
)
|
Less: Cumulative unpaid preferred stock dividends
|
|
|
(260,233
|
)
|
|
|
(48,409
|
)
|
Net Loss attributable to common stockholders
|
|
|
(18,512,865
|
)
|
|
|
(15,758,191
|
)
|
Weighted average common shares outstanding
|
|
|
26,576,027
|
|
|
|
11,337,482
|
|
Net loss per common share – basic and diluted
|
|
$
|
(0.70
|
)
|
|
$
|
(1.39
|
)
|
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 stockholders because their effect would have been anti-dilutive for the periods
presented:
|
|
As of
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Convertible Preferred Stock
|
|
|
14,173,972
|
|
|
|
2,229,702
|
|
Stock Options
|
|
|
3,748,667
|
|
|
|
2,703,587
|
|
Warrants
|
|
|
25,854,380
|
|
|
|
8,903,348
|
|
|
|
|
43,777,019
|
|
|
|
13,836,637
|
|
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 carrying
value of cash and cash equivalents, accounts receivable and accounts payable approximated fair value due to the short maturity
of those instruments. With respect to determination of fair values of financial instruments there are the following three levels
of inputs:
Level
1 Inputs– Quoted prices for identical instruments in active markets.
Level
2 Inputs– Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in
markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level
3 Inputs– Instruments with primarily unobservable value drivers.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
warrants that are carried at fair value are valued using level 3 inputs utilizing a Black-Scholes option pricing model under probability
weighted estimated outcomes.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that may affect certain reported amounts and disclosures in the
consolidated financial statements. Actual results could differ from those estimates. Significant estimates include the Company’s
ability to continue as a going concern, allowance for doubtful accounts, assumptions used to value stock options and warrants,
conversion incentive and share purchase price adjustment, and the value of shares of common stock issued for services.
Stock-Based
Compensation
The
Company accounts for stock-based compensation using the estimated fair values of warrants and stock options. For purposes of determining
the estimated fair values the Company uses the Black-Scholes option pricing model. For the periods prior to the Company’s
common stock being traded, the Company estimated the volatility of its common stock at the date of grant based on the volatility
of comparable peer companies which are publicly traded; for later periods, the Company includes its actual common stock trading
to compute volatility. The Company determines the expected life based on historical experience with similar awards, giving consideration
to the contractual terms, vesting schedules and post-vesting forfeitures. The Company uses the risk-free interest rate on the
implied yield currently available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected
life of the award. The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends
in the foreseeable future. Compensation expense for all share-based payment awards is recognized using the straight-line amortization
method over the vesting period. The fair values of stock award grants are determined based on the number of shares granted and
estimated fair value of the Company’s common stock on the date of grant.
Research
and Development Costs
The
Company considers those costs incurred in developing new processes and solutions to be research and development costs and they
are expensed as incurred.
Recent
Accounting Pronouncements
On
May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09,
Revenue from Contracts with Customers
. The core principle of the ASU is for companies to recognize revenue
to depict the transfer of goods or services to customers in amounts that reflect the consideration, or payment, to which the company
expects to be entitled in exchange for those goods or services. The ASU may also result in enhanced disclosures about revenue.
For public entities, the ASU is effective for annual reporting periods beginning after December 15, 2016. On July 9, 2015, the
FASB voted to allow a one year deferral of the effective date. The deferral permits early adoption, but does not allow adoption
any earlier than the original effective date of the standard. We are currently evaluating the impact this standard will have on
our consolidated financial statements.
In
June 2014, the FASB issued updated guidance related to stock compensation. The amendment requires that a performance target that
affects vesting and that could be achieved after the requisite period, be treated as a performance condition. The updated guidance
is effective for annual reporting periods and interim periods within those annual periods beginning after December 15, 2015. Earlier
adoption is permitted but we do not anticipate electing early adoption. We do not expect the adoption of this guidance to have
a material impact on our consolidated financial statements.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In
August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern.
The amendments provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an
entity’s ability to continue as a going concern and to provide related footnote disclosures. The standard will be effective
for the Company on December 31, 2016. The adoption of this pronouncement may impact future assessment and disclosures related
to the Company’s ability to continue as a going concern.
In
January 2015, the FASB issued guidance, which completely eliminates all references to and guidance concerning the concept of an
extraordinary item from GAAP. The updated guidance is effective for annual reporting periods and interim periods within those
annual periods beginning after December 15, 2015. Earlier adoption is permitted but we do not anticipate electing early adoption.
We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In
April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of
debt issuance costs in financial statements to present such costs as a direct deduction from the related debt liability rather
than as an asset. The ASU will become effective for public companies during interim and annual reporting periods beginning after
December 15, 2015. Early adoption is permitted. We do not expect the adoption of the ASU will have a material impact on our consolidated
financial statements.
In
January 2016, the FASB issued ASU 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities,”
which requires that most equity instruments be measured at fair value, with subsequent changes in fair value recognized in net
income. The pronouncement also impacts the financial liabilities under the fair value option and the presentation and disclosure
requirements for financial instruments. The ASU does not apply to equity method investments or investments in consolidated subsidiaries.
The new standard will be effective for us for the year ended December 31, 2018, with early adoption permitted and amendments to
be applied as a cumulative-effect adjustment to the balance sheet in the year of adoption. We are currently in the process of
assessing the impact of the ASU on our consolidated financial statements and disclosures.
In
February 2016, the FASB issued ASU 2016-2 Leases, under which lessees will recognize most leases on the balance sheet. This will
generally increase reported assets and liabilities. For public entities, this ASU is effective for annual and interim periods
in fiscal years beginning after December 15, 2018. The ASU mandates a modified retrospective transition method for all entities.
We are currently in the process of assessing the impact of the ASU on our consolidated financial statements and disclosures.
2.
Note Receivable
The
Company has a note receivable, bearing interest at 5%, for fees being refunded for an unsuccessful capital raising transaction.
The note has a face value of $501,000 and was due in October 2013. The collectability of this note is uncertain and the Company
has established a reserve for 100% of the balance owed as of December 31, 2015 and December 31, 2014. In February 2015 the Company
obtained a default judgment in its favor relating to such note in the amount of approximately $542,000 (including interest). As
of December 31, 2015, this amount has not been collected. Due to the financial limitations of the judgment debtor, the Company
continues to believe the collectability of the note is uncertain and therefore maintains a reserve for 100% of the balance owed.
3.
Prepaid Expenses
Prepaid
expenses primarily consist of prepayment of licenses and maintenance fees, or deposits with, the providers of RDC software capabilities
to the Company.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4.
Property and Equipment
Property
and equipment consists of the following:
|
|
As of
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Computer equipment
|
|
$
|
227,206
|
|
|
$
|
216,486
|
|
Data center equipment
|
|
|
1,011,173
|
|
|
|
444,906
|
|
Purchased software
|
|
|
692,143
|
|
|
|
651,016
|
|
Furniture and fixtures
|
|
|
89,774
|
|
|
|
84,433
|
|
Leasehold improvements
|
|
|
75,103
|
|
|
|
58,024
|
|
Total property and equipment
|
|
|
2,095,399
|
|
|
|
1,454,865
|
|
Less: accumulated depreciation
|
|
|
(1,430,983
|
)
|
|
|
(1,158,940
|
)
|
Net property and equipment
|
|
$
|
664,416
|
|
|
$
|
295,925
|
|
Depreciation
expense was approximately $322,000 and $214,000, for the years ended December 31, 2015 and 2014, respectively.
5.
Accrued Expenses
Accrued
expenses consist of the following:
|
|
As of
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Accrued compensation
|
|
$
|
119,817
|
|
|
$
|
128,135
|
|
Accrued rent
|
|
|
-
|
|
|
|
36,149
|
|
Accrued sales tax
|
|
|
6,298
|
|
|
|
37,484
|
|
Total accrued expenses
|
|
$
|
126,115
|
|
|
$
|
201,768
|
|
6.
Financing Arrangements
The
Company has raised debt through several forms of borrowing including bank loans, loans from directors and other affiliated parties
and unaffiliated third party investors. 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 12 for additional information
regarding conversions of debt and accrued interest into common stock during the years ended December 31, 2015 and 2014.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Following
is a summary of debt outstanding:
|
|
As of
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Notes Payable to Directors and Affiliates
|
|
$
|
1,748,000
|
|
|
$
|
1,350,000
|
|
Convertible Term Loan, due December 2016, interest at 10%
|
|
|
2,300,000
|
|
|
|
2,300,000
|
|
Series Subordinated Note, due January 2016, interest at 12%
|
|
|
415,398
|
|
|
|
613,808
|
|
Notes Payable, due the earlier of raising $10 million in proceeds from private placements or
January 2016, interest between 8.25% and 12%
|
|
|
74,486
|
|
|
|
74,486
|
|
Note Payable, due August 2021, interest 0%
|
|
|
192,000
|
|
|
|
192,000
|
|
Installment Note Payable – Bank
|
|
|
260,949
|
|
|
|
252,244
|
|
Total
|
|
|
4,990,833
|
|
|
|
4,782,538
|
|
Unamortized discount
|
|
|
-
|
|
|
|
(145,835
|
)
|
Total debt, net
|
|
|
4,990,833
|
|
|
|
4,636,703
|
|
Less: current maturities
|
|
|
4,798,833
|
|
|
|
2,070,217
|
|
Long-term portion
|
|
$
|
192,000
|
|
|
$
|
2,566,486
|
|
Future
maturities of long-term debt at December 31, 2015 are as follows:
2016
|
|
$
|
4,798,833
|
|
2017
|
|
|
-
|
|
2018
|
|
|
-
|
|
2019
|
|
|
-
|
|
2020
|
|
|
-
|
|
Thereafter
|
|
|
192,000
|
|
|
|
$
|
4,990,833
|
|
Senior
Secured Note Payable
In
October 2012, the Company entered into a Loan and Security Agreement (the “Secured Loan Agreement”) with Michaelson
Capital Partners, LLC (the “Senior Secured Lender”) that provides for borrowings of up to $1,500,000. Borrowing under
the Secured Loan Agreement is secured by all property of the Company including tangible and intangible property. In addition,
the Secured Loan Agreement contained certain negative pledges and restrictions on certain types of transactions and use of loan
proceeds. The note is guaranteed by a Company director and the spouse of the director. The loans carried stated interest rates
from 10-16%. In the event of default the interest rate increased to 14% - 20%. The Secured Loan Agreement’s stated expiration
date was April 23, 2013. Beginning in August 2013, the Company was in default and outstanding borrowings and interest began to
accrue at the default rates. In addition, the agreement contained certain covenants, some of which the Company was not in compliance
with. The note was amended in February 2013 and an additional $1,000,000 was borrowed. Further, as part of this amendment the
lender received a payoff premium of $750,000 which the Company accrued as interest expense in 2013 and paid in 2014.
On
December 6, 2013, the Company entered into a Forbearance Agreement (the “Forbearance Agreement”) with the Senior Secured
Lender. The Forbearance Agreement provided that the Senior Secured Lender would not accelerate repayment of the amounts owing,
or enforce its security interests or any other rights, under the Secured Loan Agreement, until March 6, 2014.
In
March 2014 the Forbearance Agreement was extended to May 12, 2014. In consideration for the extension the Company agreed to issue
$1 million of the Company’s common stock, the number of shares to be determined by reference to the lowest per share price
in the Company’s then planned public offering of common stock. On July 14, 2014 the Company issued to the Senior Secured
Lender 666,667 shares of common stock at $1.50 per share for a total value of $1,000,000. In 2014, the Company recorded interest
expense of $1,000,000, related to this extension.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On
May 1, 2014, the Company entered into an agreement with an investor to draw on the $4 million convertible term loan, due December
2016, described below for an amount sufficient to satisfy their outstanding obligation to the Senior Secured Lender, but not to
exceed the loan limit of $4 million, for a maximum borrowing of $3.4 million as of March 31, 2014. On May 19, 2014, the Company
entered into a second forbearance agreement with the Senior Secured Lender through May 23, 2014 in return for the Company repaying
a total sum of $500,000 on this date. In addition, the Company agreed to reduce the price per share related to the $1.0 million
of common stock to 80% of the lowest price per share of common stock issued to any investor in the Company if the stock was not
publicly traded on or before July 15, 2014. On May 29, 2014, the Company received an advance totaling $1.950 million under the
terms of the convertible term loan and repaid a total of $2.0 million of the outstanding balance to the Senior Secured Lender,
leaving a remaining balance of $150,660. On May 30, 2014, the Company entered into an unsecured convertible note payable with
the Senior Secured Lender for a total of $150,660. The note bore interest at an annual rate of 10% and the principal and accrued
interest were due on or prior to July 31, 2014. Upon a thirty day written notice to the Company from the issuance date, the Senior
Secured Lender had an option to convert the note into common stock at 90% of the conversion terms offered in the Convertible Subordinated
Notes, due June 2015, described below. In addition, upon conversion of the note, the holder was entitled to receive warrants equal
to the number of shares received from the conversion at a price of 125% of the IPO price. In July 2014, the Company repaid the
remaining note outstanding of $150,660, along with accrued interest totaling $2,559 which satisfied all remaining obligations
to the Senior Secured Lender.
The
Senior Secured Lender also received a warrant to purchase 76,228 shares of Company common stock at $9.00 per share. The warrant
expires in October 2017. Including the value of the warrant at the date of issuance, the effective interest rate on the full $2,500,000
available under the Secured Loan Agreement was 38%. The exercise price of the warrant is subject to downward adjustment in the
event of the subsequent sale of common stock or convertible debt at a lower price, as defined, prior to exercise of the warrant.
As a result of this provision, the Company determined that the warrant should be accounted for as a liability carried at fair
value. In February 2013, the exercise price was adjusted to $2.88 and the number of shares of Company common stock to be acquired
was increased to 238,212 based on a qualifying transaction. In July 2014, the Company entered into an agreement to modify the
terms of the warrant. Under the new terms, the exercise price was reduced to $1.20 per share which is 80% of the IPO share price
and the number of shares of Company common stock to be acquired was increased to 571,708. In connection with the issuance of warrants
with an exercise price of $1.15 as part of the PIPE transaction completed in 2015, the Company increased the total number of shares
of common stock issuable upon exercise of the warrant issued to the Senior Secured Lender to 745,706 and reduced the exercise
price to $.92 per share. In connection with the reduction in exercise price of the warrants issued as part of the PIPE transaction
to $0.329, the Company increased the total number of shares of common stock issuable upon exercise of the warrant issued to the
Senior Secured Lender to 2,638,653 and reduced the exercise price to $0.26 per share.
The
Company determined the value of the warrant to be $537,000 and $146,000 at December 31, 2015 and 2014, respectively, and both
of these amounts were recorded as a liability on the balance sheet as of these dates.
The
Company also incurred financing costs in conjunction with this transaction aggregating $62,500 that are owed under the same terms
as terms as the Secured Loan Agreement. The entire amount was fully amortized as of December 31, 2014.
Secured
Convertible Notes, due June through August 2014
From
June through August 2013, the Company borrowed $770,000 under various secured convertible notes. The notes bore interest at the
annual rate of 10% and mature one year from the date of issue. Borrowings under the notes were secured by all property of the
Company including tangible and intangible property. In addition, the notes contained certain negative pledges and restrictions
on certain types of transactions and use of loan proceeds.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Upon
completion of certain equity financing transactions as defined in the notes, the outstanding principal and unpaid interest was
automatically converted into common stock. The conversion rate per share was equal to 75% of the per share price of the securities
offered in the defined financing transaction
.
On May 12, 2014, the Company entered into a loan modification agreement
under which the holder of the note agreed to provide a $40,000 discount of the outstanding balance with a repayment of $150,000
of principal outstanding as of this date.
During the year ended December 31, 2014, the Company repaid a total of
$660,000 of principal and $66,055 of accrued interest. In addition, the Company converted into equity $70,000 of principal and
$1,764 of accrued interest at a conversion rate of $4.00 per share. (See Note 12). No obligation remained outstanding under these
notes as of December 31, 2014.
Notes
Payable to Directors and Affiliates
In
March 2014, the Company borrowed $1,500,000 from a director to fund the acquisition of Select Mobile Money from DeviceFidelity.
(See Note 10) The note had an interest rate equal to 24%, payable monthly commencing April 2014. The Company failed to pay the
accrued interest on the note due April 2014. As a result, the interest rate increased to 48% in April 2014 and continued to accrue
at this rate until the note and all accrued interest was repaid in full. The principal and any unpaid accrued interest became
due on May 15, 2014. In addition, the Company agreed to issue common stock as consideration for the note equal to 12.5% of the
principal amount or $187,500, which equaled 78,125 shares using the required share price of $2.40. Because the Company failed
to pay the accrued interest due April 2014, the Company owed additional common stock equal to 3.125% of the outstanding principal
amount or $46,875, which equaled 19,531 shares on each successive 5th business day for as long as any portion of the principal
amount of the loan was outstanding. The Company issued a total of 382,809 shares of common stock in connection with this note
and recorded interest expense of $890,624 related to the common stock issued for the year ended December 31, 2014. A total of
$1,731,781 of principal and accrued interest was repaid in July 2014.
In
addition to the $1,500,000 March 2014 note above, the Company also issued a total of $3,690,000 of new notes to three directors
during the year ended December 31, 2014. Of this amount, $1,925,000 of the notes bears interest at a rate of 10% and becomes due
between February and September of 2015, and $1,500,000 represents a line-of-credit agreement with one director of the Company.
The original terms of the line-of-credit agreement provided for a stated interest rate of 10% on the principal amount outstanding.
Both the principal and unpaid accrued interest is payable upon the earlier of September 30, 2014 or completion of a public offering
of securities. There are no financial covenants with the line-of-credit. Through the second quarter of 2014, the Company had drawn
down the entire $1,500,000 under this facility. At the option of the director, all the principal and unpaid accrued interest under
the line-of-credit could have been converted upon the completion of an IPO of the Company’s common stock at a 20% discount
to the price at which the shares are of the Company’s stock were sold in the offering. The director exercised this conversion
right with respect to $500,000 of indebtedness in connection with our July 2014 IPO (see June 24, 2014 Letter Agreement below).
The Company entered into three notes with directors totaling $265,000 that were due June 30, 2015 and accrued interest at a rate
of 8%. The terms of these notes included a provision whereby all principal and accrued interest automatically converted into the
Company’s common stock upon the successful consummation of an IPO. On July 14, 2014, the Company completed an IPO and the
conversion price equaled 80% of the per share purchase price at which the Company’s common stock was sold in the IPO. On
July 14, 2014, $265,000 of principal and $6,763 of accrued interest converted into 226,468 shares of common stock.
On
June 17, 2014, the Company entered into a conversion agreement with two directors under which a total of $1,050,000 of principal
related to the 10% term notes due between February and March 2015 would automatically convert into common stock upon the completion
of an IPO of the Company’s common stock at a 20% discount to the price at which the shares of the Company’s stock
were sold in the IPO. These notes were converted into common stock at the time of our IPO. Upon conversion, the two directors
also received 100% warrant coverage at a price equal to 125% of the IPO price or $1.875.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On
June 24, 2014, the Company entered into a letter agreement with two directors under which a total of $900,000 of the principal
of the 10% term notes due between February and March 2015 and $500,000 of principal owed under the 10% line-of-credit due September
2014 would automatically convert upon the Company completing an IPO. In addition, the director agreed to amend the repayment terms
of the line-of-credit to occur on the earlier of (a) raising an aggregate gross proceeds in one or more financing transactions
(other than the IPO) of at least $10 million or (b) July 31, 2015. The conversion terms are the same as described in the conversion
agreement dated June 17, 2014 above.
On
July 14, 2014, the Company completed its IPO resulting in $3,375,000 of principal and $204,134 of accrued interest of short-term
notes payable with a stated interest rate of 10% converting into 2,982,611 shares of the Company’s common stock. In addition,
the two directors received five-year warrants to purchase a total of 2,250,000 shares of the Company’s common stock at an
exercise price of 125% of the IPO price or $1.88 per share. Lastly, as part of the letter agreement entered into on June 24, 2014,
a director agreed to convert $500,000 of principal related to the $1.5 million line-of-credit outstanding into 416,667 shares
of common stock and also received five-year warrants to purchase a total of 333,333 shares of the Company’s common stock
at an exercise price of 125% of the IPO price or $1.88 per share. The amount of principal owed under the $1.5 million line-of-credit
as of December 31, 2015 and December 31, 2014 was $1,000,000 plus accrued interest as of $171,973 and $71,973, respectively. In
February 2016, the Company amended the terms of the line of credit to extend the maturity date to January 31, 2017. The Company
also agreed to make interest only payments on June 30, 2016, September 30, 2016 and December 31, 2016. The interest only payments
are for interest accrued on the principal balance from February 1, 2016 to date of payment. The outstanding principal and accrued
interest balance is due in full on January 31, 2017.
As
a result of the Company completing its IPO on July 14, 2014, the Company determined there was a beneficial conversion feature
related to the $1.0 million outstanding balance of the line-of-credit which totaled $250,000. This amount was recorded as a discount
to the debt and is being amortized into interest expense through the maturity date of July 31, 2015. For the fiscal year ended
December 31, 2015 and December 31, 2014, the Company recorded interest expense of $145,835 and $104,165, respectively, related
to amortization expense associated with the beneficial conversion feature. The unamortized balance of the beneficial conversion
feature as of the end of December 31, 2015 and December 31, 2014 was approximately $0 and $146,000, respectively.
On
July 30, 2014, the Company entered into a financing commitment letter with Messrs. Hanson and Davis to lend the Company up to
$2.5 million through December 31, 2014, bearing interest at 10%, and due January 31, 2015, which was later extended to January
31, 2016. The terms provided if any portion of the notes issued under the commitment letter were outstanding beyond January 31,
2015, the default interest rate would be adjusted to 18%. As of December 31, 2014, $350,000 was outstanding. In January 2015,
the Company received advancements totaling $350,000. On February 3, 2015, Michael Hanson, one of our directors, converted $250,000
of the amount owed into 217,391 shares of Series B Convertible Preferred Stock (which Series B Convertible Preferred Stock was
converted into common stock on February 27, 2015). Also in February 2015, the Company amended the terms of the commitment letter
to extend the repayment of the outstanding principal balance owed as of that date of $450,000 to January 31, 2016 at a rate of
10% per annum. As part of the amendment, the directors did not renew the remaining amount available under the original terms of
the commitment letter. In June 2015, Michael Hanson converted $102,000 of the amount owed into 1,020 shares of Series C Convertible
Preferred Stock and also received a five-year warrant to purchase 232,983 shares of common stock at $0.4816 per share (since adjusted
to $0.329 per share.) On October 23, 2015, the Company entered into an addendum to the financing commitment letter under which
Mr. Hanson agreed to an additional advancement of $250,000. As of December 31, 2015, the total principal and accrued interest
amount outstanding to Messrs. Davis and Hanson related to advances under the commitment letter equaled $598,000 and $54,857, respectively.
In February 2016, the Company amended the terms of the commitment letter to extend the maturity date to January 31, 2017 and maintain
the interest rate at 10%. The Company also agreed to make interest only payments on June 30, 2016, September 30, 2016 and December
31, 2016. The interest-only payments are for interest accrued on the principal balance from February 1, 2016 to date of payment.
The outstanding principal and accrued interest balance is due in full on January 31, 2017.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In
March 2015, the Company issued a total of $400,000 of new demand promissory notes to Messrs. Davis and Hanson. The notes bore
interest at a rate of 10% and were due June 30, 2015. In June 2015, the $400,000 of notes were converted into 4,000 shares of
Series C Convertible Preferred Stock as part of the Series C preferred offering. Messrs. Davis and Hanson also received five year
warrants to purchase 913,659 shares of common stock at $0.4816 (since adjusted to $0.329) per share. In December 2015, the Company
issued a $150,000 demand promissory note to Mr. Hanson. The note bears an interest rate of 10% and is due June 30, 2016.
In
February 2016, the Company entered into a thirty-day note payable with James L. Davis for $150,000 and Michael J. Hanson for $75,000.
Under the note agreements, in lieu of interest, the Company agreed to issue five-year cashless warrants to purchase 250,000 and
125,000 shares of common stock at $0.329 per share to Messrs. Davis and Hanson, respectively. Additionally, for each 30 days the
principal amount is outstanding, the Company will issue the note holders an additional 250,000 and 125,000 warrants, respectively,
with the same terms as described above. On March 29, 2016, both notes were amended to change the due dates of the principal amounts
owed to January 11 and January 31, 2017, under Messrs. Hanson’s and Davis’ notes, respectively. Messrs. Davis and
Hanson will continue to earn the warrants on a 30-day basis until the principal is repaid.
Convertible
Notes due March 2015
In
2013, the Company borrowed $575,000 under convertible notes. These notes were due March 15, 2015. The notes bore a stated interest
rate of 10%. Warrants to purchase 87,500 shares of common stock at $4.00 per share were issued with $350,000 of this debt, resulting
in an effective interest rate of 19% on that portion of the borrowing.
In
May 2014, the Company entered into an amendment with various lenders to modify the terms on $350,000 of these convertible notes
to the terms provided under the convertible notes due December 2016. Therefore, prior to the Company’s completion of its
IPO on July 14, 2014, the total principal amount outstanding of convertible notes due March 31, 2015 was $225,000. Upon the completion
of the Company’s IPO, the total outstanding balance of $225,000 in principal and $15,015 of accrued interest automatically
converted into 177,786 shares of common stock.
Convertible
Term Loan, due December 2016
In
December 2013, the Company entered into an agreement to issue convertible notes with Trooien capital, LLC (the “Trooien
Capital Note”) in a principal amount of up to $4 million. The proceeds of borrowings under the Notes are expressly to be
used to repay amounts owed under the Senior Secured Note Payable. Borrowings under the agreement bear interest at 10% and the
note matures in December 2016. In the event of default, the interest rate increases by either 2% or 4%, depending on the nature
of the default. Under the note agreement, the investor has the right, but not the obligation, to advance additional amounts up
to the $4 million. The terms of the agreement originally provided that the investor may have several options to convert for converting
the Trooien Capital Notes at varying rates and times following the completion of a qualifying financing transaction. Depending
on the timing of conversion, the holder may also receive warrants to purchase common stock. In addition to conversion of the Trooien
Capital Notes, the holder has the right to request shares of common stock, rather than cash, as payment for interest. In May 2014
the Company agreed to include $356,616 in principal and accrued interest of the convertible notes originally issued to our senior
debt holder during the fourth quarter of 2014, due March 2015, under the terms of the Trooien Capital Note, due December 2016.
On
May 1, 2014, the Company entered into an agreement which requires, within 10 calendar days of a written request on or prior to
May 12, 2014, the holder of the convertible notes to make additional advances to the Company in an amount sufficient to satisfy
the senior debt amount outstanding, but not to exceed the loan limit of $4.0 million.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On
May 12, 2014, the Company entered into an agreement to amend the conversion terms of the Convertible Term loan, due December 2016
as follows:
First
Conversion Right
. The holder had the right at its election to convert the principal and accrued interest of the note into
common stock at a conversion rate equal to 90% of the price based on the terms offered in the Convertible Subordinated Note, due
June 2015. The first conversion right was extended for a period of 120 days following the closing date of the IPO, July 14, 2014.
Upon the holder’s election to convert, the conversion price would have equaled 125% of the price at which the common stock
was sold in the IPO. The first conversion right expired on October 11, 2014.
Second
Conversion Right
. To the extent that the holder did not elect to exercise the First Conversion Right, then the holder has
the right through the maturity date of the Note, December 2016, to convert the principal and accrued interest into common stock
at a conversion rate equal to 125% of the price at which the common stock was sold in the IPO. Under the terms of this conversion
agreement, the holder will receive 100% warrant coverage under the same terms provided pursuant to the First Conversion Right.
On
June 18, 2014, the holder agreed to convert $1,000,000 of the then outstanding principal balance of $3,250,000 together with the
accrued related interest into common stock upon the completion of the IPO based on the terms described above in the First Conversion
Right. Upon completion of the Company’s IPO on July 14, 2014, the $1,000,000 of principal and $58,630 of accrued interest
converted into 980,213 shares of common stock and the Company also issued to the investor a five-year warrant to purchase 980,213
shares of the Company’s common stock at an exercise price equal to 125% of the IPO price, or $1.875.
As
a result of the Company completing its IPO on July 14, 2014, the Company determined there was a beneficial conversion feature
related to the remaining $2.3 million outstanding balance of the Convertible Term Loan, due December 2016 which totaled $894,444.
This amount was recorded as a discount to the debt and was amortized into interest expense on a straight-line basis over the 120
days following the closing of the IPO which represents the period that during which the debt could be converted at a discount
to the IPO price. The Company recorded interest expense of $894,444 related to amortization expense associated with the beneficial
conversion feature for the year ended December 31, 2014. The balance of the note as of December 31, 2015 and December 31, 2014
was $2.3 million plus accrued interest of $370,274 and $140,275, respectively.
Convertible
Subordinated Notes, due March 2012
In
March 2011, the Company issued $1,432,561 in face amount of convertible debt, the “March 2011 Notes”. These notes
had a stated interest rate of 6%. The terms of the notes allowed the holders to convert the debt into common stock at any time
prior to maturity at a conversion rate equal to the lesser of $9.00 per share or 25% below the offering price in the sale of securities
in a qualified sale of securities, as defined. Payment of principal and interest on these notes was unsecured and subordinated
to senior indebtedness, as defined. Concurrent with the issuance of these notes, the Company issued warrants to purchase 107,442
shares of Company common stock at $4.00 per share. In July and August 2011, the Company prepaid the majority of these notes and
accrued interest. After the prepayment, holders of these notes purchased 124,449 shares of Company stock at $9.00 per share for
an aggregate purchase price of $1,120,000. In February 2013 and January 2014 an additional $200,000 and $14,422 was converted
into common stock, respectively. (See Note 12) The remaining outstanding balance of $100,000 was converted into 25,000 shares
of the Company’s common stock as part of its IPO on July 14, 2014 and the Company repaid accrued interest totaling $19,644
as of this date.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Convertible
Subordinated Note, due April 2015
In
April 2013 the Company borrowed $200,000 under a convertible note. The note had a stated interest rate of 9% and was due April
1, 2015. The note was convertible at the option of the holder any time after April 1, 2014. The note would be automatically converted
upon the occurrence of certain equity financing transactions or a change in control as defined in the note. The conversion price
was $4.00 per share. On July 14, 2014, the outstanding principal balance of $200,000 and $21,699 of accrued interest was converted
into 55,424 shares of common stock as a result of completing the Company’s IPO.
Convertible
Subordinated Notes, due February 2015
In
February 2014 the Company borrowed $100,000 under a convertible note. The note was non-interest bearing and was due the earlier
of February 27, 2015 or the completion of an equity offering by the Company of at least $5,000,000. The note was convertible at
the option of the holder at the time at in which the Company completed such an equity offering of its common stock. The conversion
price was equal to the offering price of the Company’s common stock. During the year ended December 31, 2014, the Company
repaid the principal balance outstanding of $100,000.
Convertible
Subordinated Notes, due June 2015
In
May 2014 the Company borrowed $330,000 under convertible notes. The notes bore interest at a stated rate of 8% per annum. The
principal amounts of the notes, along with the accrued interest, were both due June 2015. The terms of these notes includes a
provision whereby all principal and accrued interest automatically converted into the Company’s common stock upon the successful
consummation of an IPO. The conversion price was 80% of the per share price at which the Company’s common stock was sold
in our IPO. Upon completion of the July 14, 2014 IPO which raised $6,750,000 gross proceeds, the principal amount outstanding
of $330,000 was converted into 275,000 shares of common stock. The Company repaid accrued interest totaling $5,017 to the holders
of the notes.
Series
Subordinated Notes
The
Series Notes were issued in tranches that contained various terms with regard to maturity dates, interest rates, subordination,
conversion features and the number of warrants issued with each tranche. In 2013, all but $863,808 face amount of the Series Notes
had been converted into common stock and all but approximately 75,000 of the related warrants were exchanged for common stock.
In January 2014, $250,000 in debt and $650,647 in accrued interest were converted into 225,162 share of common stock at a conversion
rate of $4.00 per share. (See Note 12) The remaining $613,808 in principal and accrued interest of $100,745, at December 31, 2014,
was originally due in December 2014. In December 2014, the Company amended the terms of the note to include monthly installments
of $50,000 due December 2014 and additional $50,000 due at the end of each following month through April of 2015, when the remaining
principal balance and related accrued interest becomes due. In May 2015, the Company entered into an amendment of the note to
extend the maturity date from April 30, 2015 to December 31, 2015. Under the amended note, the Company was required to make monthly
payments of $50,000 beginning May 31, 2015 and continuing to December 31, 2015, which time any remaining principal and unpaid
accrued interest would become due. As of October 31, 2015, the Company had not paid the $50,000 monthly installments since August
2015. On November 2, 2015, the Company renegotiated the terms of the note. Under the amended terms, payments of $30,000 were due
on each of November 15, 2015, December 15, 2015 and January 15, 2016, with the remaining balance of accrued, unpaid interest and
principal due on January 31, 2016. As of April 12, 2016, the Company has not paid the $30,000 monthly installments since December
2015. On March 31, 2016, the holder of the note commenced an action against the Company in Hennepin County Court in the State
of Minnesota alleging the Company breached the terms of the note. The law suit alleges the Company owes the note holder $694,869
plus interest and assessments accruing after April 1, 2016. The Company disputes the allegations of the note holder and intends
to vigorously defend the claim. The principal balance as of December 31, 2015 and 2014 was $415,398 and $613,808, respectively.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Notes
Payable, due February 2015
In
December 2013 and January 2014, the Company issued promissory notes for $100,000 and $150,000, respectively. The notes accrued
interest at a rate of 10% and were originally due the earlier of the Company raising sufficient new funds as determined by the
holder or March 31, 2014. In February 2014, the Company entered into an amendment which extended the maturity date of the agreement
to February 18, 2015. All other terms of the agreement remained unchanged. During the year ended December 31, 2014, the Company
repaid the principal amount outstanding of $250,000, along with accrued interest totaling $13,233.
During
fiscal year 2014, the Company issued detachable warrants to purchase common stock equal to 25% of the principal amounts under
these notes. The life of the warrants range between three and five years with an exercise price of $3.60. The total number of
shares issuable under the warrants totaled 821,250 related to a total of $3,285,000 short term notes issued in consideration for
the loans to the Company. Of this total, $2,875,000 and warrants to purchase 718,750 shares relates to two directors of the Company.
In addition, of the total warrants issued, warrants to purchase 302,500 shares relates to short term notes, which were converted
into equity during 2013. The Company determined the fair value of the warrants to be $573 using the Black-Scholes model. See Note
12 for the inputs used in valuing the warrants using the Black-Scholes model.
Notes
Payable, due January 2016
In
January 2014, the Company assumed notes payable totaling $74,486 related to the acquisition of DE2. The original terms of the
notes required repayment on the earlier of January 31, 2016 or the date the Company completes a business combination with an operating
company in a reverse merger or reverse takeover transaction or other transaction after which the Company would cease to be a shell
company. The reverse merger was completed in February 2014, and the terms of the note were amended to state that the principal
and related accrued interest is due the earlier of January 31, 2016 or the date the Company completes one or more private placements
of debt or equity securities resulting in aggregate proceeds of $10,000,000. In March 2016, the Company paid off one of the notes
with a principal and interest balance of approximately $3,500 and amended all other notes to change the earlier of date from January
31, 2016 to April 30, 2016. A warrant for the issuance of 75,000 shares with an exercise price of $0.35 was issued in consideration
for the note extensions.
Note
Payable, due August 2021
In
August 2014, the Company entered into a 0% interest $192,000 note payable with the State of Minnesota as part of an Angel Loan
program fund. There are no financial loan covenants associated with the loan, which has a maturity date of August 2021. The loan
contains a provision whereby if the Company transfers more than a majority of its ownership, the loan becomes immediately due,
along with a 30% premium amount of the principal balance. In addition, if the Company is more than 30 days past due on any payments
owed under the loan, an interest rate of 20% per annum becomes due.
Installment
Note Payable – Bank
In
March 2014, the Company entered into an installment note with a bank for a total of $330,020. The note bears interest at the prime
rate plus 1%, but not less than 5%. The note is due on demand; if no demand is made then the note is due in monthly payments of
$9,903 from April 2014 through April 2017. Borrowings are secured by substantially all of the Company’s property and are
guaranteed by three of the Company’s directors. In April 2015, the Company entered into a new installment note replacing
the above mentioned note. The balance of the existing note totaled approximately $216,000, while the new note was issued for approximately
$330,000. The Company received the net amount between the two notes or $113,000, which was primarily used for working capital
purposes. The new note bears interest at the prime rate plus 1%, but not less than 5%. The note is due on demand; if no demand
is made then the note is due in monthly payments of $9,903 from May 2015 through May 2018. Borrowings remained secured by substantially
all of the Company’s property and are guaranteed by three of the Company’s directors. The principal balance as of
December 31, 2015 and 2014 was approximately $261,000 and $252,000, respectively.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In
January 2016, the Company entered into a new installment note replacing the above mentioned note. The balance of the existing
note totaled approximately $261,000, while the new note was issued for approximately $330,000. The company received the net amount
between the two notes or $69,000, which was primarily used for working capital purposes. The new note bears interest at the prime
rate plus 1%, but not less than 5%. The note is due on demand: if no demand is made then the note if due in monthly payments of
$9,901 from February 2016 through January 2019.
Other
Information Regarding Debt
The
Company determined there was a contingent beneficial conversion feature related to $6.0 million of principal and accrued interest
for various convertible term loans and other short-term borrowings which automatically converted upon completion of its IPO. The
total beneficial conversion feature of $1,612,251 was recognized as interest expense in fiscal year 2014 upon the successful completion
of the Company’s IPO.
The
prime interest rate was 3.50% and 3.25% at December 31, 2015 and 2014, respectively.
As
a result of either the short term duration of the financing, the Company believes that the fair value of its outstanding debt
approximates market value.
7.
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, Company contributions; the Company did not make any contributions for the year ended December
31, 2015 and 2014.
8.
Commitments and Contingencies
Operating
Leases
The
Company leases approximately 22,000 square feet of office space in Chanhassen, Minnesota. The lease commenced on May 1, 2012 and
extends through August 31, 2016. In August 2015, the Company amended the terms of the lease agreement to extend the term through
January 2022. In addition to the office space, the Company leases certain office furniture and equipment under operating leases
through November 2018. The Company has two vehicles on 36-month leases which commenced in January and June 2015. The Company also
entered into a lease agreement in April 2014 for a total of 1,812 square feet of office space in Dallas, Texas related to the
employees retained as part of the acquisition of Select Mobile Money. The lease commenced on May 1, 2014 and extends through June
30, 2017. The Company has sub-leased the Dallas, Texas office space, commencing on November 19, 2015 and expiring on June 30,
2017. Rent expense under all leases was $476,169 in 2015 and $441,148 in 2014.
The
Company’s headquarters office space lease calls for rent increases over the term of the lease. The Company records rent
expense on a straight line basis using average rent for the term of the lease. The excess of the expense over cash rent paid is
shown as accrued rent.
The
Company also has various computer leases with three year terms. The Company is recording the expense on a monthly basis.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total
future minimum contractual lease payments for all operating leases are as follows:
Minimum
Lease Commitments:
2016
|
|
$
|
347,599
|
|
2017
|
|
|
292,245
|
|
2018
|
|
|
241,894
|
|
2019
|
|
|
241,275
|
|
2020
|
|
|
247,726
|
|
There after
|
|
|
276,563
|
|
|
|
$
|
1,647,302
|
|
Capital
Leases
The
Company entered into a master capital lease arrangement with one of its directors from March 2015 to November of 2015 for certain
computer equipment and software licenses with an imputed interest rate ranging from 3.8% to 18% per year. The total cost and accumulated
amortization included in property and equipment as of December 31, 2015 totaled approximately $636,000 and $135,000, respectively.
The
Company also entered into a capital lease with a third-party leasing company, which was co-guaranteed by one of its directors,
for prepaid software licenses totaling $252,628. The lease carries an imputed interest rate of 10% per year and requires monthly
payments of $10,759 per month through July 2017.
Future
lease payments under capital leases are as follows:
2016
|
|
$
|
402,906
|
|
2017
|
|
|
309,967
|
|
2018
|
|
|
15,563
|
|
Total payments
|
|
|
728,436
|
|
Less: portion representing interest
|
|
|
(43,772
|
)
|
Principal portion
|
|
|
684,664
|
|
Less: current portion
|
|
|
(367,837
|
)
|
Long-term portion
|
|
$
|
316,827
|
|
In
February 2015, the Company entered into an agreement with a director, James L. Davis which guarantees financial responsibility
for the obligations under the terms of a lease arrangement which he entered into on behalf of the Company. In addition, the Company
entered into an agreement with Mr. Davis which provides for the same lease terms as he entered into on behalf of the Company.
The three-year lease agreement provides financing for up to $500,000 of computer equipment the Company procured for its data centers
to accommodate the overall increase in transactions and ensure it is able to meet customer uptime requirements. As consideration
to the director for entering into the lease, the Company issued the director a five-year warrant to purchase up to 407,614 shares
of common stock at $1.15 per share. The warrant was 100% vested and exercisable upon issuance. In June 2015, Mr. Davis provided
his personal guarantee as part of lease the Company entered into with a third-party leasing company totaling approximately $242,000.
As consideration to the director for providing his personal guarantee, the Company issued the director a five-year warrant to
purchase up to 241,900 shares of common stock at $.44 per share in June 2015. The warrant was 100% vested and exercisable upon
issuance. The Company amortizes the fair value of the warrants over the term of the leases.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Litigation
An
entity named Cachet Banq contacted us in December 2010 relative to their U.S. Trademark Registration No. 2,857,465 (registered
on June 29, 2004) for the standard character mark CACHET covering “financial services, namely automated clearing house processing
services for the payroll service industry.” Cachet Banq has alleged that our use of “CACHET” infringes on their
federal trademark registration. On March 4, 2013, Cachet Banq filed a trademark infringement lawsuit against the Company in the
United States District Court for the Central District of California. The parties filed cross motions for summary judgment. The
initial brief was filed on May 30, 2014, replies were filed on June 26, 2014 and the court took these motions under advisement
on July 8, 2014. We have denied that our use of the character mark CACHET infringes on Cachet Banq’s purported rights in
their mark, and will vigorously defend this and any similar claims made by Cachet Banq in the future. On September 21, 2015, the
Court issued an order (1) granting Cachet Banq’s motion for summary judgment, (2) denying our motion for summary judgment,
and (3) ordering the parties to submit memoranda regarding remedies. The last of those memoranda were submitted on October 12,
2015. Cachet Banq is not seeking any monetary damages as a result of the alleged infringement. Cachet Banq seeks an injunction
and their attorney’s fees. The parties are currently awaiting the Court’s decision on remedies. In any event, the
Company believes that the Court’s order granting Cachet Banq’s motion for summary judgment was in error, and plans
to appeal its decision.
On
March 31, 2016, the holder of our series subordinated note, referred to in Note 6, commenced an action against us in Hennepin
County Court in the State of Minnesota alleging we breached the terms of the note. The law suit alleges Cachet owes the note holder
$694,869 plus interest and assessments accruing after April 1, 2016. As of December 31, 2015, the Company had recorded $415,398
of outstanding debt and $2,048 of accrued interest related to this matter. We dispute the allegations of the note holder and intend
to vigorously defend the claim.
Financial
Service Agreements
The
Company has an agreement with a financial advisory services company. The agreement contains various provisions including assisting
the Company in identifying potential investors. The agreement may require the Company to pay the advisor a monthly fee of cash,
warrants or combination thereof, based upon certain defined events including the closing of financing transactions. The agreement
also contains a termination provision which requires the Company to pay the advisor for transactions closing subsequent to the
agreement termination.
The
Company amended the agreement on March 25, 2014, to include an additional financial advisory services company. Per the terms of
the amended agreement, both investment firms are to provide investment advisory services in connection with raising additional
capital for a six month period. The agreement provides for a fixed retainer for advisory services aggregating $100,000 in cash
and equity securities. In addition, the agreement provides for a fee based upon the amount of capital raised (the “Agent
fee”). The Agent fee is to be paid in cash based upon a percentage and type of the capital raised. The Company has also
agreed to sell to the parties to the agreement, at a nominal price, warrants to purchase shares of the Company’s common
stock. The number of shares and the exercise price of the warrant are based upon the size and terms of the securities issued.
On June 23, 2014, the Company amended the agreement to have $100,000 fee be paid 100% in cash.
On
August 8, 2014, the Company entered into an agreement with the same financial advisory services company to assist in identifying
potential investors with the intent of conducting a private offering of equity. The terms of the agreement include compensation
of 8% of any funds raised as well as the issuance of five-year warrants to purchase the Company’s stock equal to 3% of shares
issued as part of the offering for a fee of $50. The exercise price of the warrants is equal to the same provided to the investors
as part of the offering. If there are no warrants offered to the investors, the exercise price is equal to the conversion price
of the common stock issued in the offering. The Company also agreed to pay a total of $50,000 of legal and other out of pocket
expenses incurred from the offering. The term of this agreement is for a period of six months, but may be extended upon mutual
consent of the parties. The Company provided a notice of termination to this financial advisory services company in December 2014.
No additional fees were owed upon terminating the agreement.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In
January 2015, the Company entered into an engagement letter with a new financial advisory services company. The terms of this
agreement include a six month term in which the financial advisory services company will assist the Company is completing a $15.0
million offering of its equity or equity-linked securities at a 7% commission. In addition, the Company agreed to provide the
financial advisory services company warrants equal to 7% of the securities issued in the offering at 120% of the price of the
securities sold under the offering. The terms of the warrant will be five years from the closing date of the offering. The Company
also agreed to reimburse any reasonable out of pocket expenses in connection with this engagement. The agreement is cancelable
by either party with a 30 day notice.
In
June 2015, the Company entered into an additional engagement letter with another financial advisory services company as part of
completing PIPE offering. The Company agreed to provide the financial advisory services company with compensation for completing
an offering consisting of a 5% commission. In addition, the Company agreed to provide warrants equal to 7% of the common stock
issuable upon conversion of the convertible preferred stock with an exercise price equal to the exercise price of the warrants
issued to investors on the completion of the offering.
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 400,000 shares of the Company common stock and payments totaling
$30,000. After the initial six month term, the Company has the option to extend for an additional six months which would require
issuing the firm an additional 400,000 shares of common stock and payments totaling $30,000. In February 2016, the Company renewed
the services agreement and issued the firm an additional 465,000 shares of common stock for another six months of investor relations
and financial advisory services.
In
January 2016, the Company entered into an agreement with an independent contractor to provide investor relations, capital raising
services and other consulting duties. The agreement requires annual compensation for services of $100,000 as well as discretionary
bonuses paid in cash or stock based on the consultant’s ability to complete particular projects for the Company. The term
of this agreement is for 12 months from January 1, 2016. The agreement is cancelable by either party with a 30-day notice.
In
February 2016, the Company entered into an engagement letter with a financial advisory services company as part of completing
a PIPE offering. The Company agreed to provide the financial advisory services company with compensation for completing an offering
consisting of a 6% commission. In addition, the Company agreed to provide warrants equal to 3% of the common stock issued in the
offering with an exercise price equal to the exercise price of the warrants issued to investors on the completion of the offering.
The term of this agreement is for a period of six weeks and can be extended on a month-to-month basis by agreement between both
parties.
9.
Income Taxes
The
Company has not recorded a current or deferred tax provision for the years ended December 31, 2015 and 2014 due to the Company’s
net tax losses incurred and the uncertainty of realization of any related tax benefit in the future. Due to the full valuation
allowance on the Company’s net deferred tax assets, there was no deferred tax benefit or provision recorded.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A
reconciliation of our statutory tax expense (benefit) to our actual tax expense (benefit) is as follows:
|
|
Year Ended
|
|
|
|
December 31, 2014
|
|
|
December 31, 2014
|
|
Federal statutory rate at 34 percent
|
|
$
|
(6,206,000
|
)
|
|
$
|
(5,341,000
|
)
|
State taxes, net of federal tax expense (benefit)
|
|
|
(499,000
|
)
|
|
|
(440,000
|
)
|
|
|
|
|
|
|
|
|
|
Nondeductible interest
|
|
|
2,002,000
|
|
|
|
750,000
|
|
Stock-based compensation
|
|
|
59,000
|
|
|
|
67,000
|
|
Nondeductible acquisition costs
|
|
|
-
|
|
|
|
34,000
|
|
Nondeductible meals & entertainment
|
|
|
21,000
|
|
|
|
27,000
|
|
Other
|
|
|
84,000
|
|
|
|
-
|
|
Change in valuation allowance
|
|
$
|
4,539,000
|
|
|
$
|
4,903,000
|
|
The
components of our net deferred tax assets and liabilities are as follows:
|
|
Year Ended
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Non-Current:
|
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
7,662,000
|
|
|
$
|
4,396,000
|
|
Definite-lived intangibles
|
|
|
394,000
|
|
|
|
142,000
|
|
Non-qualified stock-based compensation
|
|
|
347,000
|
|
|
|
293,000
|
|
Property, plant and equipment
|
|
|
22,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Accounts receivable allowance
|
|
|
4,000
|
|
|
|
9,000
|
|
Accrued expenses
|
|
|
998,000
|
|
|
|
72,000
|
|
Gross deferred tax assets
|
|
|
9,427,000
|
|
|
|
4,912,000
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Non-Current:
|
|
|
|
|
|
|
|
|
Amortization of indefinite-lived intangible
|
|
|
(8,000
|
)
|
|
|
(4,000
|
)
|
Property, plant and equipment
|
|
|
-
|
|
|
|
(28,000
|
)
|
Gross deferred tax liabilities
|
|
|
(8,000
|
)
|
|
|
(32,000
|
)
|
Net deferred tax assets before valuation allowance
|
|
|
9,419,000
|
|
|
|
4,880,000
|
|
Less: valuation allowance
|
|
|
(9,419,000
|
)
|
|
|
(4,880,000
|
)
|
Total net deferred tax asset (liability)
|
|
$
|
-
|
|
|
$
|
-
|
|
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
valuation allowance for net deferred tax assets as of December 31, 2015 and 2014 was $9,419,000 and $4,880,000, respectively.
In assessing the need for a valuation allowance, management considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become deductible. Management has assessed the
potential realization of its deferred tax assets and determined that sufficient uncertainty exists regarding the realization of
its deferred tax assets and therefore continues to record a valuation allowance on all of its deferred tax assets.
As
of December 31, 2015 and, 2014, the Company had approximate Federal NOL carryforwards of $20,910,000 and $11,818,000, respectively,
and various state NOL carryforwards of $10,246,000 and $6,886,000, respectively. The loss carryforwards for federal tax purposes
will begin expiring in 2030. The expiration of the statute of limitations related to the state NOL carryforwards varies by state.
The Company is subject to income taxes in the U.S. federal and various state jurisdictions. We are generally subject to U.S. federal
and state tax examinations for all years after 2011.
Section
382 of the U.S. Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards
that might be used to offset taxable income when a corporation has undergone significant changes in stock ownership. During 2015
and 2014 the Company has had significant equity transactions resulting from the reverse merger, IPO, additional stock issuances
and debt-to-equity conversions. The Company has not yet completed a Section 382 analysis of the net operating loss carryforwards.
Consequently, the Company’s NOL carryforwards may be subject to annual limitations under Section 382.
The
Company recognizes tax liabilities for uncertain income tax positions based on management’s estimate of whether it is more
likely than not that additional taxes will be required. The Company had no uncertain tax positions as of December 31, 2015 or
2014 respectively. It is the Company’s practice to recognize interest and penalties accrued on any unrecognized tax benefits
as a component of income tax expense. The Company does not expect any material changes in unrecognized tax positions over the
next twelve months.
10.
Acquisition
Acquisition
of Select Mobile Money
On
March 4, 2014, the Company purchased from DeviceFidelty, Inc. (“DFI”), a Texas corporation, certain tangible and intangible
assets of a business engaged in the development and provision of technology platforms supporting mobile wallet applications. The
acquisition includes strategic relationships with Visa, Mastercard, MoneyGram and Navy Federal Credit Union, the providers of
those services to their consumers. The Company believes this capability complements and supports its RDC and mobile deposit business
by adding new features and services for consumers, creating an expanded consumer base and target market, and also expands the
scope of its potential partners in the FSO market. The software asset the Company purchased included an assignment of a contract
with Visa, to provide their customers the Visa endorsed mobile platform. It also includes the first mobile Moneygram implementation
and Moneygram’s endorsement of the mobile solution to their customers.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
aggregate purchase price of up to $2,125,000 includes $1,125,000 paid at closing and contingent consideration aggregating up to
$1,000,000 based on satisfaction of certain performance related contingencies. The performance related contingencies are as follows:
(1) $375,000 in the event the Company enters into a new master services agreement or other agreement with a party of Visa U.S.A.
Inc. or any affiliate of Visa, (2) $250,000 on or before April 15, 2014 upon the Company’s receipt of written confirmation
from MoneyGram Payment Systems, Inc. on or before April 14, 2014 that its service is operational pursuant to a previously executed
contract between DFI and MoneyGram, and (3) $375,000 upon the Company’s execution of a contract with U.S. Bank on or before
August 1, 2014. The Company received written confirmation from MoneyGram Payment Systems that its service was operational as of
April 7, 2014 and the $250,000 was paid in May 2014. The Company also entered into a master services agreement with Visa U.S.A.
Inc. in July 2014 resulting in $375,000 of contingent consideration becoming due. The Company made a payment to DFI in July 2014
related to the signing of this contract. The Company received a contract with U.S. Bank in July 2014, resulting in the third and
final contingent consideration becoming due of $375,000. The Company made the final installment payment in October 2014.
Purchase Price:
|
|
|
|
|
Cash paid
|
|
$
|
1,125,000
|
|
Contingent consideration
|
|
|
1,000,000
|
|
Total purchase price
|
|
|
2,125,000
|
|
Fair Value of Assets Acquired and Liabilities Assumed
|
|
|
|
|
Tangible assets acquired:
|
|
|
|
|
Property and equipment, net
|
|
$
|
4,000
|
|
Total tangible assets acquired
|
|
|
4,000
|
|
Identified intangible assets acquired:
|
|
|
|
|
Customer contracts
|
|
|
1,000,000
|
|
Proprietary software
|
|
|
917,000
|
|
Total assets acquired in excess of liabilities assumed
|
|
|
1,921,000
|
|
Goodwill
|
|
|
204,000
|
|
Total purchase price
|
|
$
|
2,125,000
|
|
The
fair value of assets acquired and liabilities assumed has been determined based upon our estimates of the fair values of assets
acquired and liabilities assumed in the acquisition as determined by an independent third-party valuation firm. The Company recorded
goodwill because the purchase price exceeded the fair value of net assets acquired, due to Select Mobile Money’s assembled
workforce and other intangible assets which do not qualify for separate recognition as well as anticipated synergies to be realized
from combining the Select Mobile Money operations with the Company’s.
The
following tables set forth the unaudited pro forma results of the Company for the year ended December 31, 2014, as if the acquisition
had taken place on the first day of year. These combined results are not necessarily indicative of the results that may have been
achieved had the companies always been combined:
|
|
Year Ended
|
|
|
|
December 31, 2014
|
|
|
|
(unaudited)
|
|
Revenue
|
|
$
|
2,670,142
|
|
Net Loss
|
|
$
|
(16,443,673
|
)
|
Net loss per common share - basic and fully diluted
|
|
$
|
(1.43
|
)
|
Weighted average common shares outstanding - basic and diluted
|
|
|
11,477,666
|
|
11.
Goodwill and Finite Life Intangible Assets
The
Company assesses the carrying amount of our goodwill for potential impairment annually or more frequently if events or a change
in circumstances indicate that impairment may have occurred. The Company performs an impairment test for finite-lived assets,
such as intangible assets, and other long-lived assets, such as fixed assets, whenever events or changes in circumstances indicate
that the carrying value of such assets may not be recoverable.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 operations decision maker. Accordingly, the Company completes its goodwill
impairment testing on this single reporting unit.
In
conducting the annual impairment test of the Company goodwill, qualitative factors are first examined to determine whether the
existence of events, or circumstances, indicate 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 with 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.
Goodwill
was $204,000 as of December 31, 2015. The Company conducted its annual goodwill impairment test as of December 31, 2015 and determined
there to be no indication of impairment. The Company will continue to monitor conditions and changes that could indicate an impairment
of goodwill.
In
December 2015, the Company determined that an impairment of $216,369 had occurred on its finite-lived intangible assets related
to certain customer contracts acquired in the acquisition of the Select Mobile Money business on March 4, 2014. In determining
the impairment loss, the Company reviewed all circumstances, including the undiscounted cash flows it expects to derive from those
contracts going forward.
Identified
intangible assets are summarized as follows:
|
|
Amortizable
|
|
|
December 31, 2015
|
|
|
|
Period
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
(years)
|
|
|
Assets
|
|
|
Amortization
|
|
|
Assets
|
|
Customer Contracts
|
|
|
3 - 5
|
|
|
$
|
783,631
|
|
|
$
|
(510,201
|
)
|
|
$
|
273,430
|
|
Proprietary Software
|
|
|
3
|
|
|
|
917,000
|
|
|
|
(558,794
|
)
|
|
|
358,206
|
|
Total identified intangible assets
|
|
|
|
|
|
$
|
1,700,631
|
|
|
$
|
(1,068,995
|
)
|
|
$
|
631,636
|
|
|
|
Amortizable
|
|
|
December 31, 2014
|
|
|
|
Period
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
(years)
|
|
|
Assets
|
|
|
Amortization
|
|
|
Assets
|
|
Customer Contracts
|
|
|
3 - 5
|
|
|
$
|
1,000,000
|
|
|
$
|
(226,869
|
)
|
|
$
|
773,131
|
|
Proprietary Software
|
|
|
3
|
|
|
|
917,000
|
|
|
|
(253,130
|
)
|
|
|
663,870
|
|
Total identified intangible assets
|
|
|
|
|
|
$
|
1,917,000
|
|
|
$
|
(479,999
|
)
|
|
$
|
1,437,001
|
|
Amortization
expense for identified intangible assets is summarized below:
|
|
|
|
|
|
|
|
Statement of
|
|
|
|
Year Ended
|
|
|
Operations
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
Classification
|
|
Customer Contracts
|
|
$
|
283,332
|
|
|
$
|
226,869
|
|
|
|
Cost of Revenue
|
|
Proprietary Software
|
|
|
305,664
|
|
|
|
253,130
|
|
|
|
Cost of Revenue
|
|
Total amortization on identified intangible assets
|
|
$
|
588,996
|
|
|
$
|
479,999
|
|
|
|
|
|
Based
on the identified intangible assets recorded at December 31, 2015, future amortization expense is expected to be as follows:
2016
|
|
$
|
469,000
|
|
2017
|
|
|
114,000
|
|
2018
|
|
|
39,000
|
|
2019
|
|
|
10,000
|
|
|
|
$
|
632,000
|
|
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12.
Shareholders’ Equity
Reverse
Merger
On
February 12, 2014, the Company completed a merger transaction with DE Acquisition 2, Inc. (“DE2”), a public company
with no operations. Pursuant to the terms of the merger, each share of the Company’s common stock that was issued and outstanding
at such time was cancelled and converted into 10.9532 (the “exchange ratio”) shares of DE2’s common stock. As
a result of the merger, all of the Company’s outstanding warrants and stock options at the time were converted and exchanged
for warrants and stock options of DE2. The number of shares subject to and exercise prices of DE2 convertible securities issued
under the exchange was determined by application of the exchange ratio to the terms of the Cachet convertible debt and options
outstanding as of the Merger date. Subsequently DE2 changed its name to Cachet Financial Solutions, Inc.
On
dates up to 30 and 120 days following the merger, additional shares were required to be issued to those DE2 shareholders existing
immediately prior to the merger, for no additional consideration, such that they would hold 3% of the fully diluted shares outstanding
as of those dates. Accordingly, as of the 120
th
day following the merger acquisition, the Company issued an additional
32,484 shares to the shareholders of DE2.
The
fair value of estimated consideration paid to DE2 in exchange for the 3% interest was estimated to be $507,000 plus the long term
debt assumed of $85,105. As DE2 had no tangible or identifiable intangible assets at the time of the Merger, and recognition of
goodwill is not permitted in this type of merger transaction, no assets were recorded as a result of the Merger.
On
March 18, 2014, the Company completed a reverse stock split of the Company’s issued and outstanding common stock on a 1-for-10.9532
basis. The Company’s authorized capital consists of 500,000,000 shares of $.0001 par value common stock and 20,000,000 shares
of preferred stock.
Convertible
Preferred Stock
During
2014, the Company issued 2,229,702 shares of Series A Convertible Preferred Stock at $1.50 per share and issued five-year warrants
to purchase an aggregate of 2,229,702 shares of its common stock at a per-share price of $2.00 (since adjusted to $0.329 per share).
Net proceeds to the Company after offering costs were $3.0 million. During the first quarter of 2015, the Company issued (i) 9,000
shares of Series A Convertible Preferred Stock at $1.50 per share and issued five-year warrants to purchase an aggregate of 9,000
shares of its common stock at a per-share price of $2.00 (since adjusted to $0.329 per share) and (ii) 2,065,891 shares of Series
B Convertible Preferred Stock at $1.15 per share and issued five-year warrants to purchase an aggregate of 2,065,891 shares of
its common stock at a per-share price of $1.15 (since adjusted to $0.329 per share). Net proceeds to the Company after offering
costs were approximately $2.2 million, including the cancellation of $250,000 in debt held by Michael J. Hanson, one of our directors.
In February 2015, all 2,238,702 outstanding Series A preferred shares were converted into 2,920,039 shares of the Company’s
common stock, while all 2,065,891 outstanding Series B preferred shares converted into 2,065,891 shares of the Company’s
common stock. In addition, the Company issued 74,764 shares of common stock to the Series A and B convertible preferred holders
related to the 8% dividend accrued through the conversion date.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Both
the Series A Convertible Preferred Stock and the Series B Convertible preferred stock entitled their holders to an 8% per annum
dividend, payable quarterly in cash or in kind (or a combination of both) as determined by the Company. Subject to certain customary
exceptions, our Series A Convertible Preferred Stock had full-ratchet conversion price protection in the event that the Company
issued common stock below the conversion price, as adjusted, until the earlier of (i) 180 days from the closing or (ii) such time
as the Company shall have obtained, after the closing, financing aggregating to at least $5 million. The warrants issued to purchasers
of the Series A Convertible Preferred Stock contain similar full-ratchet exercise price protection in the event that the Company
issues common stock below the exercise price, as adjusted, again subject to certain customary exceptions. On February 3, 2015,
the Company issued the Series B Convertible Preferred Stock at $1.15 per share, resulting in an adjustment to (i) the conversion
price of the Series A Convertible Preferred Stock from $1.50 per share to $1.15 per share and (ii) and the exercise price of the
warrants issued therewith, from $2.00 per share to $1.15 per share (since adjusted to $0.329 per share). Since the Company has
now raised an aggregate of more than $5 million, these full-ratchet price protections can no longer be triggered.
Upon
any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of the preferred stock
would have been entitled to receive out of the assets, whether capital or surplus, of the Company an amount equal to the Stated
Value (as defined in the Company’s Certificate of Designation for the applicable series of preferred stock), plus any accrued
and unpaid dividends thereon and any other fees or liquidated damages then due and owing thereon under the applicable Certificate
of Designation, for each share of Series A and B Preferred Stock, before any distribution or payment would have been made to the
holders of any Junior Securities (as defined in the Company’s Certificate of Designation for the applicable series of preferred
stock), and would not have participated with the holders of Common Stock or other Junior Securities thereafter. If the assets
of the Company had been insufficient to pay in full such amounts, then the entire assets distributed to the holders would have
been ratably distributed among the holders in accordance with the respective amounts that would have been payable on such shares
if all amounts payable thereon had been paid in full.
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 10,057,119 shares of its common stock at a per-share price of $0.4816 (since adjusted to $0.329) in a private
placement. Total (cash and non-cash) gross proceeds to the Company were $4,403,000. Gross proceeds to the Company in the form
of cash were $2,951,000. Gross proceeds to the Company in the form of promissory notes payable within 150 days were $950,000.
These promissory notes were provided by James L. Davis and Michael J. Hanson, both of whom are directors of the Company. The Company
also issued 2,000 and 3,020 shares of the Series C Preferred to James L. Davis and Michael J. Hanson, respectively, in exchange
for the cancellation of Company debt in the amount of $200,000 and $302,000 held by them. As of December 31, 2015, the Company
had received $950,000 in principal from Messrs. Hanson and Davis in satisfaction of the notes receivable related to the Series
C Convertible Preferred Stock offering described above.
In
connection with the Company’s Series C Preferred Stock offering, the Company agreed to amend the warrants to purchase the
Company’s common stock held by former holders of the Company’s Series A and B Preferred Stock to contain the same
anti-dilution protections that are contained in the warrants issued in connection with the Series C Preferred stock. In addition,
the exercise price of the warrants issued to the former Series A and B Preferred Stock holders was reduced from $1.15 to $0.4816
(since adjusted to $0.329) per share.
The
Series C Preferred Stock entitles its holders to a 10% per annum dividend, payable quarterly in cash or in additional shares of
Series C Preferred Stock (or a combination of both) as determined by the Company, and may be converted to Cachet common stock
at the option of a holder at an initial conversion price of $0.4378 per share (since adjusted to $0.329 per share). The Series
C Preferred Stock contains anti-dilution conversion price protection allowing the stock’s conversion price to adjust, prior
to conversion, should the Company sell common stock at a price below the then current conversion price. The warrants issued to
purchasers of the Series C convertible preferred stock contain similar anti-dilution exercise price protection in the event the
Company issues common stock below the current exercise price, subject to certain customary exceptions. The Series C Preferred
Stock will automatically convert into common stock upon the occurrence of any of the following: (a) an underwritten public offering
of shares of the Company’s common stock providing at least $10 million in gross proceeds, (b) the Company’s common
stock closing price being greater than 100% above the conversion price then in effect for at least 40 of 60 consecutive trading
days, (c) four years after the closing of the offering of the Series C Preferred Stock, or (d) the written consent of holders
representing 50% of the issued and outstanding Series C Preferred Stock. The holders of the Series C Preferred Stock will be entitled
to vote their shares on an as-converted basis and will be entitled to a liquidation preference equal to the stated value (i.e.,
purchase price) of their shares plus any accrued but unpaid dividends thereon.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Common
Stock
During
the year ended December 31, 2014, the Company issued 488,970 shares of common stock to the shareholder of DE2 as consideration
for completing the reverse merger described above. In addition, the Company issued a total of 382,809 shares of commons stock
to a member of the Board of Directors as part of consideration for the promissory note provided to the Company to finance the
acquisition of Select Mobile Money from DeviceFidelity and also issued 4,500,000 shares of common stock at $1.50 per share for
gross proceeds of $6,750,000 from the IPO completed on July 14, 2014. In addition, the Company issued to a consultant 2,222 shares
of common stock as consideration for identifying prospective investors. The Company recognized $3,000 of expense associated with
the fair value of this common stock issued in fiscal year 2014.
In
January 2014, $986,793 of debt and accumulated interest was converted into 246,867 shares of common stock. The Company did not
provide a share premium to those debt holders that converted in January 2014.
In
July 2014, the Company completed its IPO resulting in $6,301,241 of debt and accumulated interest converting into 5,139,169 shares
of common stock.
During
the year ended December 31, 2014, the Company exchanged warrants to purchase 19,692 shares of common stock with an exercise price
of $4.00 for 3,938 shares of common stock. The Company recorded $7,906 in other expense which represents the excess of the fair
value of the stock issued and the fair value of the warrants as determined using the Black-Scholes option pricing model. In addition,
the Company issued a total of 382,809 shares of common stock to a director related to the loan for the Company’s acquisition
of Select Mobile Money during the year ended December 31, 2014.
In
connection with the offer and sale of the Series C Preferred Stock, the Company issued additional shares of the Company’s
common stock totaling 8,232,628 to former holders of the Company’s Series A and B Preferred Stock (all of which has been
converted to common stock), such that following the issuance of such shares, such holders received the same number of shares of
the Company’s common stock in total as they would have received upon conversion of the Series A and B Preferred Stock if
the conversion price for the Series A and B Preferred Stock had been the same as the initial conversion price under the Series
C Preferred Stock. The Company granted the recipients of these shares the same registration rights as are provided in Series C
Preferred Stock holders. As a result, the Company recognized expense totaling $3,704,682 during the year ended December 31, 2015.
In
August 2015, the Company issued a firm 400,000 shares of common stock as part of compensation for six months of investor relations
and financial advisory services. In February 2016, the Company issued the firm an additional 465,000 shares of common stock as
part of compensation for another six months of investor relations and financial advisory services.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In
October 2015, the Company entered into an Equity Exchange Agreement with Michael J. Hanson, one of the Company’s directors
and a large shareholder of the Company, to exchange 382,809 shares of common stock previously issued to Hanson for a five year,
fully vested warrant to purchase 756,618 shares of common stock at an exercise price of $1.35 per share.
In
October 2015, the Company entered into a purchase agreement together with a registration rights agreement with Lincoln Park Capital
Fund, LLC (“Lincoln Park”), an Illinois limited liability company. As consideration for entering into the Purchase
Agreement, the Company issued to Lincoln Park 416,666 shares of common stock. Under the terms and subject to the conditions of
the Purchase Agreement, the Company has the right to sell to and Lincoln Park is obligated to purchase up to $10.0 million of
the Company’s common stock, subject to certain limitations, from time to time, over the 36-month period commencing November
6, 2015, the date that the registration statement was declared effective by the Securities and Exchange Commission. During the
year ended December 31, 2015, Lincoln Park purchased 763,421 common shares under the agreement for net proceeds of $190,327 which
includes $82,428 of equity issuance costs related to entering into the agreement.
In
November 2015, the Company issued ROTH Capital Partners, a financial advisory services firm, a total of 175,000 shares of unregistered
common stock in consideration for services provided as part of completing the Company’s Series C Convertible Preferred Stock
offering in June 2015.
From
February 25, 2016 through the date hereof, the Company sold 3,678,378 shares of common stock in a private placement to accredited
investors at a price of $0.37 per share together with five-year warrants to purchase 1,839,189 shares of common stock with an
exercise price of $0.46 per share. The aggregate gross proceeds were $1,361,000. See Note 16.
Subsequent Events
for further
details on this equity offering.
Warrants
In
addition to warrants issued in connection with debt described above, the following are transactions involving issuance of warrants
during the years ended December 31, 2015 and 2014:
In
January 2014, the Company issued detachable warrants to purchase common stock equal to 25% of the principal amounts under $3,285,000
of short term notes payable issued by the Company from March 2013 to February 2014. The life of the warrants ranges between three
and five years with an exercise price of $3.60. The total number of shares issuable under the warrants totaled 821,250. Of this
$3,285,000 total, $2,875,000 or 718,750 of the shares issuable under the warrants, relates to two directors of the Company. In
addition, of the total warrants issued, 302,500 of the shares issuable under the warrants relates to short term notes, which were
converted into equity during 2013. The Company determined the fair value of the warrants to be $573 using the Black-Scholes option
pricing model. In April 2015, the exercise price of 821,250 warrants was adjusted to $1.40 per share.
In
May 2014, the Company entered into an agreement to issue five-year warrants to purchase 50,000 shares of common stock to a consulting
firm providing professional services, upon the completion of an IPO. Additional warrants to purchase 30,000 shares of common stock
may be issued upon achieving certain performance goals agreed to between the Company and the consulting firm. The exercise price
of the warrants was set to equal the price of the shares offered in the Company’s IPO of $1.50 per-share. The Company recognized
expense of $20,611 in 2014 related to the fair value of warrants to purchase 50,000 shares of common stock issued in July 2014.
In June 2015, the Company modified the price of the 50,000 share warrants to $0.45 per share resulting in an incremental fair
value of $4,587. In addition, the Company issued a five-year to purchase 30,000 shares of its common stock with an exercise price
of $0.45 per share and a fair value totaling $2,787. The Company recognized related stock compensation expense totaling $7,374
for the year ended December 31, 2015.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In
July 2014, the Company issued five-year warrants to purchase 3,563,546 shares of its common stock at an exercise price equal to
125% of the IPO price, or $1.88, as a result of providing warrants on $5.1 million of the $6.3 million of debt and accumulated
interest that converted as of this date. Of these warrants, warrants to purchase 2,583,333 shares of common stock were issued
as part of an inducement to convert the debt into equity.
In
December 2014, the Company entered into an Amendment to Conversion Agreement with two of our directors, effective June 17, 2014.
Under the amendment the number of shares to be covered by warrants to be received by the two directors as part of converting debt
as outlined in the Conversion Agreement upon the successful completion of our IPO was clarified. Specifically, (i) Michael Hanson
received warrants to purchase 438,161 shares of common stock and (ii) James Davis received warrants to purchase 591,432 shares
of common stock, which in each case equals 100% of the number of shares of common stock received by Hanson and Davis under the
Conversion Agreement. The amendment also reflects that the warrants have an exercise price of $2.00 per share and a five-year
term. The Company recognized a non-cash expense during the year ended December 31, 2014 of approximately $46,000 which represented
the fair value of the warrants determined using the Black-Scholes option pricing model.
Effective
December 2014, the Company entered into an agreement with an investor which provided for the exchange of 162,662 shares of common
stock for a five-year warrant to purchase up to 325,324 shares of common stock at a per-share price of $1.50. A total of $590,320,
representing the difference between the fair value of the stock on the issuance date of $650,647 and the fair value of the warrant
issued using the Black-Scholes model of $60,327, was recorded as a reduction to additional paid in capital and accumulated deficit.
As
mentioned above, the Company issued five-year warrants to purchase 2,229,702 shares of the Company’s stock at a per share
price of $2.00 (since adjusted to $0.4816 prior to exercise and $0.329 for outstanding warrants at December 31, 2015) as part
of issuing 2,229,702 shares of Series A Convertible Preferred Stock sold in 2014. As of December 31, 2014, the Company accounted
for the warrants as a liability on the consolidated balance sheet at their estimated fair value because the warrants had full-ratchet
conversion price protection in the event that the Company issued common stock below the conversion price, as adjusted. The Company
determined the fair value of the warrants as of December 31, 2014 to be $163,570 based on the Black-Scholes option pricing model.
During the year ended December 31, 2015, the Company issued five-year warrants to purchase 9,000 shares of the common stock at
a per share price of $2.00 (since adjusted to $0.329 per share) as part of issuing 9,000 shares of Series A Convertible Preferred
Stock. Additionally, the Company issued five-year warrants to purchase 2,065,891 shares of common stock at a per share price of
$1.15 (since adjusted to $0.4816 prior to exercise and $0.329 for outstanding warrants at December 31, 2015) as part of issuing
2,065,891 shares of Series B Convertible Preferred Stock. Since the Company exceeded the $5.0 million of gross proceeds threshold
in February 2015, the full-ratchet provisions provided in the terms of the warrants expired and at which time the warrant liability
was classified to additional paid in capital. The Company also issued five-year warrants to purchase 10,057,119 shares of common
stock at a per share price of $0.4816 (since adjusted to $0.329 for warrants outstanding at December 31, 2015) as part of issuing
44,030 shares of Series C Convertible Preferred Stock. In addition, the Company modified the terms of the warrants issued in the
Series A & B Convertible Stock offering to the same terms offered to the warrant holders in the Series C offering. In addition,
the exercise price of the warrants issued to the former Series A and B Preferred Stock holders was reduced from $1.15 to $0.4816
(since adjusted to $0.329 per share for warrants outstanding at December 31, 2015.) After the modification, the terms of the warrant
holders in the Series A, B & C Preferred Stock offering all have share price anti-dilution protection. The fair value of the
warrants related to the Series A, B & C Preferred Stock as of December 31, 2015 totaled $2,175,332.
In
January 2015, the Company issued three individual investors warrants to purchase 75,000 shares of common stock as part of an agreement.
The warrants have a life of 10 years and, an exercise price of $ 1.40 per share and were fully exercisable upon the date of issuance.
The Company recorded $11,238 in other expense during the year ended December 31, 2015, which represents the fair value of the
warrants as determined using the Black-Scholes option pricing model.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In
February 2015, the Company issued a five-year warrant for the purchase up to 407,614 shares of common stock at $1.15 per share
to a director of the Company in consideration for the director leasing certain IT equipment to the Company. The total fair value
of the warrant as determined using the Black-Scholes option pricing model totaled $76,489. This amount is being expensed over
the three year lease term. In June 2015, the exercise price of the warrant was reduced to $0.4816 (since adjusted to $0.329) and
modified to the same terms provided to the warrants issued in the Series C Preferred Stock offering. The incremental fair value
of the modification totaled $28,578 and is being amortized over the remainder of the three year lease term. Also in June 2015,
the Company provided the director a five-year warrant to purchase 241,900 shares of common stock at a price of $0.44 as consideration
for providing his guarantee on a lease. The fair value of the warrant on the date of issuance totaled approximately $22,000 and
is being amortized over the two year lease term.
In
connection with the private placement of the securities of the Company during the year ended December 31, 2014, the Company issued
the placement agent five-year warrants for the purchase of up to 100,224 shares of common stock at $2.00 per share. In connection
with the private placement of securities of the Company during the year ended December 31, 2015, the Company issued its placement
agents five-year warrants for the purchase of a total of 270 shares of common stock at $2.00 per share, 109,931 shares of common
stock at $1.15 (73,940 since adjusted to $0.4816) per share, 703,997 at $0.4816 per share (243,617 since adjusted to $0.329 prior
to exercise) and 241,746 shares of common stock at $0.5254 per share.
A
former senior lender received a warrant to purchase 76,228 shares of Company common stock at $9.00 per share. The warrant expires
in October 2017. The exercise price of the warrant is subject to downward adjustment in the event of the subsequent sale of common
stock or convertible debt at a lower price, as defined, prior to exercise of the warrant. As a result of this provision, the Company
determined that the warrant should be accounted for as a liability carried at fair value. In December 2015, the exercise price
was adjusted to $0.26 and the number of shares of Company common stock to be acquired was increased to 2,638,653 based on the
sales price of shares sold in December 2015. The Company determined the value of the warrant to be $537,000 and $146,000 at December
31, 2015 and December 31, 2014, respectively.
As
mentioned above, in October 2015, the Company entered into an Equity Exchange Agreement with Michael J. Hanson, one of the Company’s
directors and a large shareholder of the Company, to exchange 382,809 shares of common stock previously issued to Hanson for a
five year, fully vested warrant to purchase 756,618 shares of common stock at an exercise price of $1.35 per share.
From
October 2015 through December 2015, the Company completed the sale of 2,605,000 shares of its common stock, pursuant to warrant
exercises for total proceeds of approximately $1,171,000. As consideration for the warrants being exercised on a cash basis, the
Company agreed to issue five-year replacement warrants, covering 110% of the number of shares purchased upon exercise of the existing
warrants. Accordingly, replacement warrants covering a total of 2,865,500 shares of the Company’s common stock have been
issued through December 31, 2015, including a total of 231,000 warrants which have anti-dilution exercise price protection. The
fair value of those warrants with anti-dilutive exercise price protection, as of December 31, 2015, was approximately $43,000.
The fair value of the remaining warrants, as determined using the Black-Scholes option pricing model on the date of grant, totaled
approximately $568,000. In addition, warrants to purchase 243,617 shares of common stock were re-priced from $0.4816 per share
to $0.329 on December 30, 2015, at a fair value expense of approximately $9,000, prior to the exercise of those warrants on December
30, 2015 for proceeds of $80,150. In relation to the warrants exercised during the year ended December 31, 2015, $931,577 of warrant
liability was reclassified to Additional Paid in Capital related to warrants exercised with anti-dilutive exercise price protection.
On
November 25, 2015, the Company issued an investor a five-year warrant to purchase 168,117 shares of common stock at $0.4816 per
share, with a fair value of approximately $30,000, in consideration for the investor providing the Company sales referrals to
various banks and credit unions.
On
December 24, 2015, the Company re-priced certain of the aforementioned replacement warrants for the purchase of 467,500 shares
of common stock from $0.4816 per share to $0.329 per share at a fair value expense of approximately $24,000.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In
February 2016, the Company entered into a thirty-day note payable with James L. Davis for $150,000 and Michael J. Hanson for $75,000.
Under the note agreements, in lieu of interest, the Company agreed to issue five-year cashless warrants to purchase 250,000 and
125,000 shares of common stock at $0.329 per share to Messrs. Davis and Hanson, respectively. Additionally, for each 30 days the
principal amount is outstanding, the Company will issue the note holders an additional 250,000 and 125,000 warrants, respectively,
with the same terms as described above. On March 29, 2016, both notes were amended to change the due dates of the principal amounts
owed to January 11 and January 31, 2017, under Messrs. Hanson’s and Davis’ notes, respectively. Messrs. Davis and
Hanson will continue to earn the warrants on a 30-day basis until the principal is repaid.
The
following is a summary of warrant activity for 2015 and 2014:
|
|
Number of
|
|
|
|
|
|
Weighted
|
|
|
|
Shares Issuable
|
|
|
Weighted Avg.
|
|
|
Remaining
|
|
|
|
Under Warrants
|
|
|
Exercise Price
|
|
|
Life (Years)
|
|
Balance, December 31, 2013
|
|
|
407,904
|
|
|
$
|
3.35
|
|
|
|
|
|
Issued
|
|
|
8,495,444
|
|
|
|
2.05
|
|
|
|
|
|
Balance, December 31, 2014
|
|
|
8,903,348
|
|
|
|
2.06
|
|
|
|
4.57
|
|
Issued
|
|
|
19,799,649
|
|
|
|
0.40
|
|
|
|
|
|
Exercised
|
|
|
(2,848,617
|
)
|
|
|
0.44
|
|
|
|
|
|
Balance, December 31, 2015
|
|
|
25,854,380
|
|
|
|
0.73
|
|
|
|
3.98
|
|
The
fair value of the warrants was determined using the Black-Scholes option pricing model and the following assumptions for the years
ended December 31, 2015 and 2014:
|
|
Year Ended
|
|
|
|
December 31, 2015
|
|
December 31, 2014
|
|
Expected term
|
|
1 to 5 Years
|
|
1.5 to 2.5 Years
|
|
Expected dividend
|
|
0%
|
|
0%
|
|
Volatility
|
|
27% to 96
%
|
|
26% to 29
%
|
|
Risk-free interest rate
|
|
0.25% to 1.37%
|
|
0.22% to 1.1
%
|
|
13.
Stock-Based Compensation and Benefit Plans
Stock
Options, Restricted Stock Awards and Performance Awards
On
February 9, 2010, the board of directors adopted the 2010 Equity Incentive Plan (2010 EIP). The plan was approved by its shareholders.
Participants in the plan include its employees, officers, directors, consultants, or independent contractors. On February 12,
2014, the Board of Directors approved the assumption of the 2010 EIP as part of the reverse merger transaction with DE2; however,
it was agreed that no new grants would be made from this plan. As of December 31, 2015, the number of common stock reserved for
issuance under the 2010 EIP was 119,417 shares. On February 12, 2014, the board of directors also adopted the 2014 Stock Incentive
Plan (2014 SIP) with an aggregate of 1,521,621 shares of common stock, $0.0001 par value per share. The plan will be administered
by the Company’s Board of Directors or an authorized committee. 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 100,000 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; (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 plan that exceed, in the aggregate, 400,000
shares of common stock in any one year. The term of each stock option shall be determined by the board or committee, but shall
not exceed ten years. Vested stock options may be exercised in whole or part by the holder giving notice to the Company. Options
under the plan may provide for the holder of the option to make payment of the exercise price by surrender of shares equal in
value to the exercise price. Options granted to employees generally vest over two to three years. Stock awards granted to non-employee
directors generally vest 50% on the grant date and 50% on the first anniversary of the date of the grant. Options expire five
years from the date of grant.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In
December 2014, the Board of Directors approved an adjustment to the exercise price of options to purchase 455,000 shares with
an exercise price of $4.00 per share to $1.50 per share. The vesting for these options was unchanged. The aggregate excess of
fair value of the $1.50 options over the $4.00 options on the date of the modification was approximately $42,000. As a result
of this modification the Company recorded additional share-based compensation expense of approximately $36,000 for the vested
portion of those options immediately, and the remaining $6,000 will be recognized over the remaining vesting term through March
2016.
During
the year ended December 31, 2014, the Company issued options to purchase 2,004,420 shares to its directors, executives and associates
of the Company at a weighted average exercise price of $1.50. The Company determined the fair value of the options granted to
be $339,671 for the fiscal year ended December 31, 2014 using the Black-Scholes option pricing model. Of the stock options granted,
options with respect to 337,750 shares are being expensed one third on date of grant and the other two thirds over the two anniversary
periods and options with respect to 1,665,670 shares were expensed 50% on date of grant and 50% on a straight-line basis over
a one year period.
During
the year ended December 31, 2015, the Company issued options to purchase 1,727,250 shares, with exercise prices ranging from $0.55
to $1.50 per share. The aggregate fair value of options granted totaled approximately $395,000 for the year ended December 31,
2015. Of those options, options issued to executive management and directors outside of the 2014 SIP plan covered 1,273,750 shares
and vest 1/3
rd
on date of grant and 1/3
rd
each of the first two anniversary dates thereafter. A total of
40,000 options issued to a director vested 100% on the grant date in January 2015.
In
July 2015, the Company issued each non-executive Associate (employee) 2,000 restricted shares which cliff vested on December 31,
2015. Restricted stock awards are subject to forfeiture if employment terminates prior to the release of the restrictions. During
the vesting period, ownership of the shares cannot be transferred. Restricted stock is considered issued and outstanding at the
grant date and has the same voting rights as other common stock. The total aggregate restricted shares issued totaled 102,000,
of which 18,000 were forfeited. The fair value of approximately $31,000 was recognized on a straight line basis through the end
of 2015.
In
November 2015, the Company issued certain non-executive Associates (employees) common stock under the 2014 Equity Incentive Plan
as part of the Company’s quarterly Performance Bonus Plan. Cachet’s performance bonus plan is 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. The performance awards issued totaled 72,044 shares. The fair value of approximately $41,000 was recognized
in 2015.
As
of December 31, 2015, the Company had outstanding stock options totaling 725,500 shares granted under the 2014 SIP. As of this
date, the 2010 EIP had outstanding stock options of 119,417 shares. The Company has also issued stock options outside of the SIP
plan. As of December 31, 2015, the Company had outstanding stock options totaling 2,903,750 shares issued outside of the SIP plan.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock
Compensation Expense Information
FASB
ASC 718-10 requires measurement and recognition of compensation expense for all stock-based payments including warrants, stock
options, restricted stock grants and stock bonuses based on estimated fair values. Compensation expense recognized for the issuance
of warrants, stock options, restricted stock grants and stock bonuses for the years ended December 31, 2015 and 2014 was as follows:
|
|
Year Ended
|
|
|
|
December
31, 2015
|
|
|
December 31, 2014
|
|
Stock-based compensation costs included in:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
55,774
|
|
|
$
|
21,753
|
|
Sales and marketing expenses
|
|
|
91,009
|
|
|
|
51,803
|
|
Research and development expenses
|
|
|
104,851
|
|
|
|
41,365
|
|
General and administrative expenses
|
|
|
191,924
|
|
|
|
201,255
|
|
Total stock-based compensation expense
|
|
$
|
443,558
|
|
|
$
|
316,176
|
|
As
of December 31, 2015 the total compensation cost related to unvested options awards not yet recognized was $211,499. That cost
will be recognized over a weighted average period of 1.5 years. There were no options exercised during the years ended December
31, 2015 and 2014.
The
estimated fair values of stock options granted and assumptions used for the Black-Scholes option pricing model were as follows:
|
|
Year Ended
|
|
|
|
December
31, 2015
|
|
|
December 31, 2014
|
|
Estimated Fair Value
|
|
$
|
395,252
|
|
|
$
|
339,671
|
|
Shares Issuable Under Options Granted
|
|
|
1,727,250
|
|
|
|
2,004,420
|
|
Expected Term
|
|
|
2
to 3 Years
|
|
|
|
2
to 3 Years
|
|
Expected Dividend
|
|
|
0%
|
|
|
|
0%
|
|
Volatility
|
|
|
26%
to 48
%
|
|
|
|
27%
to 29
%
|
|
Risk Free Interest Rate
|
|
|
0.22%
to 1.08
%
|
|
|
|
0.22% to 1.00%
|
|
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Following
is a summary of stock option activity in 2015 and 2014:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
Shares Issuable
|
|
|
Weighted Avg.
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Under Options
|
|
|
Exercise Price
|
|
|
Life (Years)
|
|
|
Value
|
|
Balance, December 31, 2013
|
|
|
827,543
|
|
|
$
|
3.49
|
*
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,004,420
|
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
(127,376
|
)
|
|
|
3.69
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014
|
|
|
2,704,587
|
|
|
|
2.01
|
*
|
|
|
4.05
|
|
|
$
|
61,875
|
|
Granted
|
|
|
1,727,250
|
|
|
|
0.92
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
(683,170
|
)
|
|
|
1.76
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
|
3,748,667
|
|
|
|
1.32
|
|
|
|
3.95
|
|
|
$
|
-
|
|
Exercisable at December 31, 2015
|
|
|
2,634,371
|
|
|
|
1.48
|
|
|
|
3.72
|
|
|
$
|
-
|
|
*
Reflects the February 2014 and December 2014 exercise price adjustment.
Information
with respect to common stock options outstanding and exercisable at December 31, 2015:
|
|
|
Stock
Options Outstanding
|
|
|
Options
Exercisable
|
|
Range of
Exercise Price
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual Life
|
|
|
Weighted
Average
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
$0.55
to $1.15
|
|
|
|
1,428,583
|
|
|
|
4.50
|
|
|
$
|
0.83
|
|
|
$
|
—
|
|
|
|
518,211
|
|
|
$
|
0.84
|
|
|
$
|
—
|
|
|
$
1.35
to $1.50
|
|
|
|
2,200,667
|
|
|
|
3.62
|
|
|
|
1.50
|
|
|
|
—
|
|
|
|
2,004,660
|
|
|
|
1.50
|
|
|
|
—
|
|
|
$4.00
|
|
|
|
119,417
|
|
|
|
3.37
|
|
|
|
4.00
|
|
|
|
—
|
|
|
|
111,500
|
|
|
|
4.00
|
|
|
|
—
|
|
|
|
|
|
|
3,748,667
|
|
|
|
3.95
|
|
|
$
|
1.32
|
|
|
$
|
—
|
|
|
|
2,634,371
|
|
|
$
|
1.48
|
|
|
$
|
—
|
|
The
Company calculates the estimated expected life based upon historical exercise data. The risk-free interest rate assumption is
based on observed interest rates appropriate for the term of the Company’s stock options. The Company estimates the volatility
of its common stock at the date of grant based on the volatility of comparable peer companies that are publicly traded for periods
prior to its public offering, and the Company includes its actual common stock trading to compute volatility for later periods.
The dividend yield assumption is based on the Company’s history and expectation of no future dividend payouts.
The
Company has used an expected life of two to three years for the term of the options. As only a minimal number of options have
been exercised, management has made an estimate of an average life that is slightly longer than the vesting period. 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 also impacts
the amount of unamortized compensation expense to be recognized in future periods.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2014
Associate Stock Purchase Plan
In
September 2014 and August 2015, the Company’s Board of Directors and stockholders, respectively, approved the 2014 Associate
Stock Purchase Plan, under which 500,000 shares were reserved for purchase by the Company’s associates (employees). The
purchase price of the shares under the plan is the lesser of 85% of the fair market value on the first or last day of the offering
period. Offering periods are every six months ending on June 30 and December 31. Associates may designate up to ten percent of
their compensation for the purchase of shares under the plan. Total shares purchased by associates under the plan were 165,992
and 40,560 in the years ended December 31, 2015 and 2014, respectively.
14.
Related Party Transactions
Balances
with related parties consisting of members of the Board of Directors (collectively Affiliates) for borrowings and warrants were
as follows:
|
|
As of
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Debt held by related parties
|
|
$
|
1,748,000
|
|
|
$
|
1,350,000
|
|
Warrants held by related parties
|
|
|
10,365,466
|
|
|
|
4,265,009
|
|
|
|
Year Ended
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Interest paid to related parties
|
|
$
|
3,945
|
|
|
$
|
237,596
|
|
Related party interest expense
|
|
$
|
153,926
|
|
|
$
|
1,608,372
|
|
15.
Concentrations
The
Company continues to rely on vendors to provide technology and licensing components that are critical to its solutions. In addition,
the Company engaged a development firm located in Toronto, Canada beginning in March 2014 to augment its software development
efforts. During the year ended December 31, 2015 and December 31, 2014, the Company expensed a total of $836,626 and $679,481,
respectively, representing 12.5% and 10.1%, respectively, of its total supplier expenditures to this vendor. As of December 31,
2015, the Company had payables of $341,994 owed to a law firm for legal services, representing 30.8% of its accounts payable balance.
As of December 31, 2014, the Company had total payables of $98,384 owed to the Toronto development firm, representing 13.2% of
its accounts payable balance.
No
customer accounted for more than 10% of the Company’s revenue for the years ended December 31, 2015 or 2014. As of December
31, 2015, the Company had receivables due from three customers of approximately $121,000, $113,000 and $95,000 representing 17.0%,
15.8% and 13.3%, respectively, of its gross accounts receivable balance. No customer accounted for more than 10% of its outstanding
accounts receivable balance at December 31, 2014.
CACHET
FINANCIAL SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16.
Subsequent Events
Addendum
to Financing Commitment Letter and Revolving Line of Credit Note
In
February 2016, the Company entered into an addendum to the financing commitment letter dated July 30, 2014 to extend the maturity
date to January 31, 2017 and maintain the interest rate at 10%. Cachet also agreed to make interest only payments on June 30,
September 30 and December 31, 2016. The interest only payments are for interest accrued on the principal balance from February
1, 2016 to the date of payment. The outstanding principal ($598,000) and accrued interest balance is due in full on January 31,
2017. In addition, the Company entered into an addendum to the line of credit agreement dated as of May 7, 2014 with Mr. Hanson,
where Mr. Hanson agreed to extend the maturity date for the repayment of principal outstanding of $1,000,000 from January 31,
2016 to January 31, 2017. Cachet also agreed to make interest only payments on June 30, September 30 and December 31, 2016. The
interest only payments are for interest accrued on the principal balance from February 1, 2016 to the date of payment. The outstanding
principal and accrued interest balance is due in full on January 31, 2017.
Financial
Service Agreements
In
January 2016, the Company entered into an agreement with an independent contractor to provide investor relations, capital raising
services and other consulting duties. The agreement requires annual compensation for services of $100,000 as well as discretionary
bonuses paid in cash or stock based on the consultant’s ability to complete particular projects for the Company. The term
of this agreement is for 12 months from January 1, 2016. The agreement is cancelable by either party with a 30-day notice.
Demand
Promissory Notes
In
February 2016, the Company entered into a thirty-day note payable with James L. Davis for $150,000 and Michael J. Hanson for $75,000.
Under the note agreements, in lieu of interest, the Company agreed to issue five-year cashless warrants to purchase 250,000 and
125,000 shares of common stock at $0.329 per share to Messrs. Davis and Hanson, respectively. Additionally, for each 30 days the
principal amount is outstanding, the Company will issue the note holders an additional 250,000 and 125,000 warrants, respectively,
with the same terms as described above. On March 29, 2016, both notes were amended to change the due dates of the principal amounts
owed to January 11 and January 31, 2017, under Messrs. Hanson’s and Davis’ notes, respectively. Messrs. Davis and
Hanson will continue to earn the warrants on a 30-day basis until the principal is repaid.
March
2016 Offering
From
February 25, 2016 through the date hereof, the Company sold 3,678,378 shares of common stock in a private placement to accredited
investors at a price of $0.37 per share together with five-year warrants to purchase 1,839,189 shares of common stock with an
exercise price of $0.46 per share. The aggregate gross proceeds were $1,361,000.
Under
the terms of the offering, for a period of 18 months, if the Company sells common stock or common stock equivalents at a per share
purchase, exercise or conversion price (the “Adjusted Purchase Price”) less than $0.37 for a share of common stock,
then the Company will issue additional shares of common stock to each purchaser in the offering. The amount of additional common
stock so issued to each purchaser shall be equal to such purchasers (i) subscription amount divided by the Adjusted Purchase Price
less (ii) all shares of common stock previously issued to such purchaser under this private placement. No additional warrants
will be issued. The Adjusted Purchase Price shall not be less than $0.30 per share of common stock. Amounts and shares issued
under the private placement shall be appropriately adjusted for combinations and subdivisions of the common stock.
In
addition, if the Company, at any time during the first 18 months of the exercise period of the warrants and prior to the issuance
of all of the shares under the warrants, shall issue any common stock or common stock equivalents entitling any person to acquire
shares of common stock (other than certain exempt issuances) at an effective price per share less than the then-current exercise
price (any such issuance being referred to as a “Dilutive Issuance”), then the exercise price shall be adjusted to
match the lowest price per share at which such common stock was issued or may be acquired pursuant to such common stock equivalents
in the Dilutive Issuance. The exercise price shall not be reduced below $0.375 per share (other than as may be adjusted for subdivisions,
stock splits, stock dividends and combinations of our common stock).
Warrant
Activity
The
Company completed sales of shares of its common stock, pursuant to warrant exercises notices, for total proceeds of approximately
$807,000 subsequent to year end 2015. As consideration for the 2,453,168 warrants being exercised on a cash basis, the Company
agreed to issue five-year replacement warrants to purchase a total of 2,398,486 shares of its common stock with an exercise price
of $0.329 per share.