Attached files
Exhibit 99.1
CACHET FINANCIAL SOLUTIONS INC.
FINANCIAL STATEMENTS
December 31, 2012 and 2011
C O N T E N T S
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Page(s)
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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F-1 | ||
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FINANCIAL STATEMENTS
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Balance Sheets
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F-2 | ||
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Statements of Operations
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F-3 | ||
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Statements of Shareholders’ Equity (Deficit)
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F-4 | ||
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Statements of Cash Flows
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F-5 | ||
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Notes to Financial Statements
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F-6 – F-17 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Cachet Financial Solutions Inc.
Minneapolis, Minnesota
We have audited the accompanying balance sheets of Cachet Financial Solutions Inc. as of December 31, 2012 and 2011, and the related statements of operations, shareholders’ equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cachet Financial Solutions Inc. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has limited revenues, suffered recurring losses from operations and has a shareholders’ deficit. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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Lurie Besikof Lapidus & Company, LLP
Minneapolis, Minnesota
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September 4, 2013, except for Note 2, as to which the date is December 31, 2013.
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F-1
CACHET FINANCIAL SOLUTIONS INC.
BALANCE SHEETS
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December 31,
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2012
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2011
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ASSETS
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CURRENT ASSETS
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Cash and cash equivalents
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$ | 82,969 | $ | 76,081 | ||||
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Accounts receivable, net
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159,826 | 41,692 | ||||||
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Deferred commissions
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43,013 | 15,486 | ||||||
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Prepaid expenses
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565,400 | 525,240 | ||||||
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TOTAL CURRENT ASSETS
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851,208 | 658,499 | ||||||
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PROPERTY AND EQUIPMENT, net
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618,923 | 503,985 | ||||||
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LICENSES
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20,836 | 41,668 | ||||||
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DEFERRED COMMISSIONS
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10,929 | - | ||||||
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DEFERRED FINANCING COSTS
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157,150 | 1,085,436 | ||||||
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TOTAL ASSETS
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$ | 1,659,046 | $ | 2,289,588 | ||||
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LIABILITIES AND SHAREHOLDERS' DEFICIT
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CURRENT LIABILITIES
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Accounts payable
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$ | 786,311 | $ | 418,021 | ||||
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Accrued compensation
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101,104 | 84,014 | ||||||
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Accrued interest
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1,090,219 | 55,556 | ||||||
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Accrued rent
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4,482 | - | ||||||
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Deferred revenue
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161,853 | 59,124 | ||||||
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Current portion of long-term debt
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10,527,825 | 3,276,031 | ||||||
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TOTAL CURRENT LIABILITIES
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12,671,794 | 3,892,746 | ||||||
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LONG-TERM DEBT, net of current portion
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1,098,845 | 289,866 | ||||||
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WARRANT LIABILITY
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256,000 | - | ||||||
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DEFERRED REVENUE
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63,084 | 2,828 | ||||||
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ACCRUED RENT
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54,331 | - | ||||||
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TOTAL LIABILITIES
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14,144,054 | 4,185,440 | ||||||
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COMMITMENTS AND CONTINGENCIES
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SHAREHOLDERS' DEFICIT
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Capital stock, $.01 par value, 25,000,000 shares authorized
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Preferred shares - 2,500,000 shares authorized,
None Issued and Outstanding
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- | - | ||||||
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Common shares - 22,500,000 shares authorized
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15,250 | 15,250 | ||||||
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1,524,991 issued and outstanding
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ADDITIONAL PAID-IN-CAPITAL
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10,135,786 | 7,822,767 | ||||||
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ACCUMULATED DEFICIT
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(22,636,044 | ) | (9,733,869 | ) | ||||
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TOTAL SHAREHOLDERS' DEFICIT
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(12,485,008 | ) | (1,895,852 | ) | ||||
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT
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$ | 1,659,046 | $ | 2,289,588 | ||||
The accompanying notes are an integral part of these financial statements.
F-2
CACHET FINANCIAL SOLUTIONS INC.
STATEMENTS OF OPERATIONS
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Years Ended December 31,
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2012
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2011
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REVENUE
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$ | 373,231 | $ | 83,143 | ||||
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COST OF REVENUE
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2,048,325 | 1,228,078 | ||||||
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GROSS LOSS
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(1,675,094 | ) | (1,144,935 | ) | ||||
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OPERATING EXPENSES
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Sales and marketing
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2,899,903 | 2,235,232 | ||||||
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General and administrative
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2,901,000 | 2,158,801 | ||||||
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Research and development
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467,210 | 262,134 | ||||||
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TOTAL OPERATING EXPENSES
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6,268,113 | 4,656,167 | ||||||
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OPERATING LOSS
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(7,943,207 | ) | (5,801,102 | ) | ||||
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INTEREST EXPENSE
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(4,379,468 | ) | (1,747,138 | ) | ||||
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OTHER EXPENSE
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(579,500 | ) | (1,042 | ) | ||||
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NET LOSS
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$ | (12,902,175 | ) | $ | (7,549,282 | ) | ||
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
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Basic and fully diluted
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1,524,991 | 1,396,591 | ||||||
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Net loss per common share - basic and fully diluted
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$ | (8.46 | ) | $ | (5.41 | ) | ||
The accompanying notes are an integral part of these financial statements.
F-3
CACHET FINANCIAL SOLUTIONS INC.
STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
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Common Stock
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Additional
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Accumulated
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Total Shareholders'
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Shares
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Amount
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Paid-In-Capital | Deficit | Equity (Deficit) | ||||||||||||||||
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BALANCE, DECEMBER 31, 2010
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1,331,049 | $ | 13,310 | $ | 3,426,885 | $ | (2,184,587 | ) | $ | 1,255,608 | ||||||||||
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Issuance of shares, net of $8,777 related expenses
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124,442 | 1,245 | 1,109,978 | - | 1,111,223 | |||||||||||||||
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Proceeds from exercise of warrants
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57,500 | 575 | 229,425 | - | 230,000 | |||||||||||||||
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Issuance of warrants
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- | - | 2,645,113 | - | 2,645,113 | |||||||||||||||
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Issuance of shares for debt guarantee
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12,000 | 120 | 107,880 | - | 108,000 | |||||||||||||||
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Stock compensation expense
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- | - | 303,486 | - | 303,486 | |||||||||||||||
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Net Loss
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- | - | - | (7,549,282 | ) | (7,549,282 | ) | |||||||||||||
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BALANCE, DECEMBER 31, 2011
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1,524,991 | 15,250 | 7,822,767 | (9,733,869 | ) | (1,895,852 | ) | |||||||||||||
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Issuance of warrants
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- | - | 2,001,808 | - | 2,001,808 | |||||||||||||||
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Stock compensation expense
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- | - | 311,211 | - | 311,211 | |||||||||||||||
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Net loss
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- | - | - | (12,902,175 | ) | (12,902,175 | ) | |||||||||||||
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BALANCE, DECEMBER 31, 2012
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1,524,991 | $ | 15,250 | $ | 10,135,786 | $ | (22,636,044 | ) | $ | (12,485,008 | ) | |||||||||
The accompanying notes are an integral part of these financial statements.
F-4
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CACHET FINANCIAL SOLUTIONS INC.
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STATEMENTS OF CASH FLOWS
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Years Ended December 31,
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2012
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2011
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OPERATING ACTIVITIES
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Net loss
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$ | (12,902,175 | ) | $ | (7,549,282 | ) | ||
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Adjustments to reconcile net loss to net cash used in operating activities:
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Accretion of discount/amortization of financing costs
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3,268,717 | 1,637,824 | ||||||
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Depreciation and amortization
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332,742 | 227,046 | ||||||
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Stock compensation
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311,211 | 303,486 | ||||||
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Amortization of deferred commissions
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45,503 | 12,007 | ||||||
| (8,944,002 | ) | (5,368,919 | ) | |||||
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Changes in operating assets and liabilities:
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Accounts receivable
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(118,134 | ) | (41,692 | ) | ||||
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Deferred commissions
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(83,958 | ) | (27,494 | ) | ||||
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Prepaid expenses
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(40,160 | ) | (470,805 | ) | ||||
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Accounts payable
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368,290 | 397,862 | ||||||
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Accrued compensation
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17,090 | 19,014 | ||||||
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Accrued interest
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1,034,664 | 55,104 | ||||||
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Deferred revenue
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162,985 | 61,952 | ||||||
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Accrued rent
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58,813 | - | ||||||
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Net cash used in operating activities
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(7,544,412 | ) | (5,374,978 | ) | ||||
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INVESTING ACTIVITIES
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Purchase of fixed assets
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(426,848 | ) | (397,424 | ) | ||||
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Net cash used in investing actvities
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(426,848 | ) | (397,424 | ) | ||||
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FINANCING ACTIVITIES
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Proceeds from bank borrowing
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153,085 | 1,188,188 | ||||||
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Repayment of bank borrowings
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(147,367 | ) | (81,294 | ) | ||||
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Proceeds from issuance of notes and warrants
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8,200,980 | 3,697,570 | ||||||
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Repayment of notes
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- | (524,554 | ) | |||||
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Payment of debt issuance costs
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(228,550 | ) | (74,500 | ) | ||||
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Issuance of common stock, net of costs
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- | 221,223 | ||||||
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Net cash provided by financing activities
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7,978,148 | 4,426,633 | ||||||
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
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6,888 | (1,345,769 | ) | |||||
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CASH AND CASH EQUIVALENTS
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Beginning of year
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76,081 | 1,421,850 | ||||||
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End of year
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$ | 82,969 | $ | 76,081 | ||||
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
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Cash paid for interest
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$ | 65,037 | $ | 50,914 | ||||
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NONCASH FINANCING TRANSACTION
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Conversion of debt to equity
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- | 1,120,000 | ||||||
The accompanying notes are an integral part of these financial statements.
F-5
CACHET FINANCIAL SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Business and Operations
Overview
Cachet Financial Solutions Inc. “The Company” is a provider of remote deposit capture (RDC) solutions to financial institutions and their customers. Remote deposit capture is a service that allows customers of a financial institution to use their mobile phone or other scanning device to capture images of checks and transmit the images to accomplish the bank deposit transaction. The Company offers its services to financial institutions in the United States and Canada.
Basis of Presentation
The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern. From its inception to December 31, 2012, the Company has cumulative operating losses of $22.6 million, and as of December 31, 2012, its current liabilities exceed its current assets by $11.8 million. Through June 2013, the Company has significantly reduced its outstanding debt and accrued interest by converting it to common stock (Note 14). The Company has also raised an additional $1.4 million in equity and borrowed $2.8 million to support operations. In 2013, the Company expects to continue to grow its client base and increase its revenues through higher RDC transaction volumes. However, the Company is expected to continue to incur significant operating losses through 2013. As such, its ability to continue as a going concern through 2013 is dependent on raising additional capital and there is no assurance the Company will be successful in raising such capital. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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) fees related to the implementation of RDC software for clients, and (4) professional services such as client specific software customization and other products and services.
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery or performance of services has occurred, the price is fixed and determinable and collection is reasonably assured. The following is the Company’s revenue recognition policy for each source of revenue:
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Subscription and support fees are recognized over the contract period. |
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Transactional volume fees are recognized as transactions are processed and monthly services performed.
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·
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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.
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·
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Professional fees and other revenues include fees from consultation services to support the business process mapping, configuration, integration and training and are recognized when the service is performed.
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F-6
CACHET FINANCIAL SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
Deferred revenue represents amounts billed to, or paid by clients, in advance of meeting the revenue recognition criteria.
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 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 $0 as of December 31, 2012 and 2011, 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 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.
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.
F-7
CACHET FINANCIAL SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
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. Amortization of deferred commissions was $45,503 and $12,007 during the years ended December 31, 2012, and 2011, respectively.
Licenses
Licenses consist of a block purchase of certain software licenses for $62,500 in 2010. These costs are amortized on a straight-line basis over the estimated useful life of 3 years. As of December 31, 2012, future amortization of license agreements is expected to be $20,836 for 2013.
Advertising
Advertising costs are expensed as incurred. Advertising costs were approximately $22,550 and $24,100 for the years ended December 31, 2012 and 2011, respectively, and are included in sales and marketing expense on the accompanying statements of operations.
Net Loss Per Common Share
Basic and diluted net loss per common share for all periods presented is computed by dividing the net loss available to common shareholders by the weighted average common shares outstanding and common stock equivalents, when dilutive. Potentially dilutive common stock equivalents include common shares issued pursuant to stock warrants, stock options and convertible note agreements. Common stock equivalents were not included in determining the fully diluted loss per share as they were antidilutive.
The following table reflects the amounts used in determining loss per share:
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2012
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2011
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Net Loss
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$
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(12,902,175
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)
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$
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(7,549,282
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)
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Weighted average common shares outstanding
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1,524,991
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1,396,591
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Net Loss Per Common Share – basic and diluted
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$
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(8.46
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)
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$
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(5.41)
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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.
The warrants that are carried at fair value are valued using level 3 inputs utilizing a Black-Scholes-Merton option pricing model under probability weighted estimated outcomes.
F-8
CACHET FINANCIAL SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
Use of Estimates
The preparation of 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 financial statements. 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, and the value of shares of common stock issued for services. Actual results could differ from those estimates.
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-Merton option pricing model. The Company estimates the volatility of its common stock at the date of grant based on the volatility of comparable peer companies which are publicly traded. 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
The Company’s management has reviewed and considered all recent accounting pronouncements and believe there are none that could potentially have a material impact on the Company’s financial condition, results of operations, or disclosures.
2. Reverse Stock Split
On December 31, 2013, every four shares of issued and outstanding common stock were exchanged for one share of issued and outstanding stock, without any change in the par value, and our authorized common shares were proportionally reduced from 90,000,000 to 22,500,000 shares. Authorized preferred shares were reduced from 10,000,000 to 2,500,000. All amounts in the accompanying financial statements and notes related to shares, share prices and loss per share have been restated to give retrospective presentation of the reverse split.
3. Note Receivable
At December 31, 2012, 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 $501,000 and is due in October 2013. The collectability of this note is uncertain and the Company has established a reserve for 100% of the balance owed. The resulting charge is included in other expense in 2012.
F-9
CACHET FINANCIAL SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
4. Prepaid Expenses
Prepaid expenses primarily consist of prepayment of licenses, or deposits with, the providers of RDC software capabilities to the Company.
5. Property and Equipment
Property and equipment consists of the following at December 31:
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2012
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2011
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Computer equipment
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$
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211,539
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$
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132,521
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Data center equipment
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325,075
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223,256
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Purchased software
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568,170
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405,992
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Furniture and fixtures
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59,236
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20,282
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Leasehold improvements
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53,465
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8,587
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Total property and equipment
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1,217,485
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790,638
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Less: accumulated depreciation
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(598,562
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)
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(286,653
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)
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Net property and equipment
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$
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618,923
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$
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503,985
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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 detachable warrants that permit the investor to acquire shares of the Company’s common stock at prices as specified in the individual agreements.
Following is a summary of debt outstanding as of the December 31:
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2012
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2011
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Senior Secured Note Payable, due April 2013.
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$
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1,500,000
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$
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-
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Notes Payable to Directors and Affiliates.
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2,326,991
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197,819
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Note Payable – Bank.
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-
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1,100,000
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Convertible, Subordinated Notes, due March 2012
Stated interest of 6%; effective interest of 49%.
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312,561
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312,561
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Convertible Series Notes, due September 2014.
Stated interest at 12%; effective interest of 27%.
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575,000
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-
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Series Subordinated Notes, due from December 2011 through
March 2015. Stated interest ranges from 9-25%; effective
interest ranges from 28% to 261%.
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7,066,808
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1,965,000
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Installment Note Payable – Bank.
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228,920
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228,200
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Long-Term Debt, gross
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12,010,280
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3,803,580
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Unamortized Discount
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(383,610
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)
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(237,683
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)
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Long-Term Debt, net
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$
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11,626,670
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$
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3,565,897
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F-10
CACHET FINANCIAL SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
Future maturities of long-term debt is as follows:
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2013
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$
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10,527,825
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||
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2014
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1,098,845
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$
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11,626,670
|
Senior Secured Note Payable
In October 2012, the Company entered into a Loan and Security agreement (the “Secured Loan Agreement”) 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. Outstanding borrowings bear interest at 16%, with provisions for increases in the event of default. The Secured Loan Agreement’s stated expiration date was April 23, 2013. In addition, the agreement contains certain covenants, some of with which the Company was not in compliance. The note was amended in February 2013 and an additional $1,000,000 was borrowed bearing interest at 10% and due August 2013. Further, as part of the amendment the lender will receive a payoff premium ranging from $300,000 to $750,000 depending on the date the loan is repaid. The Company anticipates paying the maximum prepayment premium and will accrue that as interest in 2013.
The 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 is 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 option price was adjusted to $2.88 and the shares of Company common stock to be acquired were increased to 238,212 based on a qualifying transaction. The Company determined the value of the warrant to be $250,000 and $256,000 at the date of grant and December 31, 2012, respectively.
Notes Payable to Directors and Affiliates
During 2012, the Company borrowed $1,000,000 in unsecured notes from certain current or former directors or their affiliates. These notes have a stated effective annual interest rate of 24% for the first 60 days and 40% thereafter until paid. The notes are due August – December 2012, and are past due.
In October 2012, a director of the Company issued a loan to the Company for $1,105,000, replacing the note payable – bank of $1,105,000. The loan to director is due in November 2013 and has an interest rate equal to the prime rate plus 1.25%, but not less than 4.5%. The loan is guaranteed by the president of the Company. Concurrent with that loan, the director received a warrant to purchase 50,000 shares of Company common stock at $4.00 per share. This warrant expires in November 2017. This note is secured by the pledge of 86,875 shares of Company stock and 136,250 options owned by the President/CEO of the Company. The loan is subordinate to the senior secured note payable until such time as that note is repaid; afterwards the loan becomes senior to all other debt.
In November 2010, the Company borrowed $300,000 from a director. The loan is unsecured, has a stated interest rate of 6% and is due in equal monthly installments of $9,127 until fully amortized in November 2013. The loan provides for acceleration of the remaining principal under certain conditions. At December 31, 2012, the Note is past due. In conjunction with the loan agreement, the director received 17,484 shares of Company common stock with an aggregate value of $69,937.
F-11
CACHET FINANCIAL SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
Note Payable – Bank
Prior to its assumption by a director in October 2012, the Company had a credit facility with a bank which provided for borrowings up to $2,500,000. Borrowings under the line had an interest rate equal to the prime rate plus 1.25%, but not less than 4.5%. This loan was secured by certain securities of a director on deposit with the bank as well as guarantees of three directors. Borrowings under this facility were replaced by the October 2012 note payable to director described above.
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 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.
Convertible Series Notes, due September 2014
The Company issued $575,000 in convertible notes (the “Convertible Series Notes”) that allows the holders to convert debt into Company common stock at any time prior to maturity at a conversion rate equal to the lesser of $10.00 per share or 20% below the offering price in the sale of securities in a qualified sale of securities in excess of $10 million, as defined. In addition, these notes automatically convert to Company common stock at the conversion rate in the event of an equity financing in excess of $5 million or a change in control, as defined. These notes also contain a liquidation preference that could result in an amount due upon liquidation equal to 1.5 times the outstanding principal balance. In addition, these notes contain provisions for acceleration in the event of certain equity offerings, as defined.
The note agreement contains a provision that restricts payment to the note holders unless an amount is simultaneously paid to the holders of existing debt. In addition, the notes are subordinated to all future debt.
The notes were issued with warrants to purchase 35,938 shares of Company common stock at a price based upon future equity sales, as specified in the warrant. Based on recent equity sales the exercise price was fixed at $4.40 per share. The warrants expire in September 2017.
Series Subordinated Notes
Between June 2011 and December 2012, the Company borrowed approximately $7,800,000 utilizing a series of notes the “Series 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. Certain Series Notes contained a Company option to extend the due dates by up to 90 days, as well as provisions for acceleration upon completion of certain financings. The maturity dates range from December 31, 2011 through March 15, 2015.
As of December 31, 2012, $5,383,000 of this debt has reached or is past its stated maturity dates. In connection with these Series Notes, the Company issued warrants to purchase an aggregate of 780,000 shares of Company common stock at $4.00 per share. These warrants expire in November 2015.
F-12
CACHET FINANCIAL SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
Installment Note Payable – Bank
In April 2010, the Company borrowed $280,045 from a bank and the note was renewed in May 2011 and 2012. The note bears interest at the prime rate plus 1%, but not less than 5%. Beginning in June 2011, the note required monthly payments of $8,403. Upon renewal in May 2012, the note is due on demand, if no demand is made then the note is due in monthly payments of $8,403 from June 30, 2012 through April 2015 with a final payment of $8,389 due in May 2015. Borrowings are secured by substantially all of the Company property and are guaranteed by three of the Company’s directors.
Other Information Regarding Debt
The prime interest rate was 3.25% at December 31, 2012 and 2011.
7. Employee Benefit Plan
The Company has defined contribution 401(k) saving plan covering all employees satisfying certain eligibility requirements. The plan provides for Company contributions; the Company did not make any contributions for the years ended December 31, 2012 or 2011.
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. Prior to May 1, 2012 the Company leased office space under a lease agreement commencing in December 2010 and expiring on April 30, 2012. In addition to the office space, the Company leases certain office furniture and equipment under operating leases expiring in May 2015. Rent expense under all leases was $254,272 in 2012 and $166,125 in 2011.
The Company’s 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.
Total future minimum contractual lease payments for all operating leases are as follows:
|
Minimum Lease Commitments
|
||||
|
2013
|
$
|
227,400
|
||
|
2014
|
291,200
|
|||
|
2015
|
247,200
|
|||
|
2016
|
142,500
|
|||
Litigation
In December 2010, the Company received notice from a party claiming that one of its trademarks employing the word “Cachet” may infringe that party’s trademarks. We are presently reviewing the matter and expect to engage in discussions with the party. Based on current information and belief we believe there are substantial and meaningful differences between the relevant trademarks that would in our reasonable judgment preclude a finding of infringement, or that would adversely affect the trademark in question. In the event we are unable to reach an agreement with that third party, we intend to vigorously contest its claims and protect our rights.
F-13
CACHET FINANCIAL SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
Financial Service Agreements
The Company has agreements with financial advisory services companies. These agreements contain various provisions including assisting the company in identifying potential investors. The agreements may require the Company to pay the advisor a monthly fee or cash, warrants or combination thereof, based upon certain defined events including the closing of financing transactions. Some of these agreements contain termination provisions and may require the Company to pay the advisor for transactions closing subsequent to the agreement termination.
9. Income Taxes
The shareholders of the Company elected to be taxed as an S corporation under the provisions of the Internal Revenue Code and related Minnesota statutes. Under these provisions, the Company does not pay corporate income taxes on its taxable income. Instead, the shareholders are liable for income taxes on their respective share of the Company’s taxable income.
Accounting principles generally accepted in the United States of America require management to evaluate tax positions taken by the Company and recognize a tax liability (or asset) if the Company has taken an uncertain position that more likely than not would not be sustained upon examination by the Internal Revenue Service. Management has analyzed the tax positions taken by the Company, and has concluded that as of December 31, 2012, there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements. The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. Management believes the Company is subject to income tax examinations since its inception in 2010.
10. Shareholders’ Equity
The Company’s authorized capital consists of 22,500,000 shares of $.01 par value common stock and 2,500,000 shares of $.01 par value preferred stock.
Common Stock
The estimated fair value assigned to shares issued for other than cash was based upon recent cash sales transactions.
In May 2011, following their guarantee of bank related financing, three directors each received 4,000 shares that had an estimated fair value at the time of issuance of $9.00 per share.
In July and August 2011, the Company issued 124,442 shares of Company common stock at $9.00 per shares for an aggregate purchase price of approximately $1,120,000 in conjunction with the prepayment of the Convertible, Subordinated Notes, due March 2012.
In December 2011, warrant holders exercised warrants to purchase 57,500 shares of Company common stock at a price of $4.00 per share for an aggregate purchase price of $230,000. Included in this exercise was 50,000 warrants exercised by a director.
F-14
CACHET FINANCIAL SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
Warrants
In addition to warrants issued in connection with debt described above, the following are transactions involving issuance of warrants in September 2011 at $4.00 per share and expiring November 1, 2015:
Three directors guaranteed the note payable – bank each providing a guarantee of up to $1,041,000. Each director received warrants with an aggregate fair value of approximately $1,191,000 to purchase 78,125 shares of Company common stock for providing their guarantees.
In addition, a director received a warrant with a fair value of approximately $389,000 to purchase 76,560 shares of Company common stock in exchange for his pledge of certain personal assets to secure the $1,105,000 loan provided under the bank credit facility. In consideration for his incremental guarantee of that asset pledge, another director received a warrant with a fair value of approximately $42,100 to purchase 8,291 shares.
The following is a summary of warrants issued in 2012:
|
Number of
Warrants
|
Weighted Avg.
Exercise Price
|
Weighted
Remaining
Life (Years)
|
||||||||||
|
Balance, December 31, 2011
|
541,442
|
$
|
4.00
|
|||||||||
|
Issued with debt
|
697,290
|
4.56
|
||||||||||
|
Issued for guarantees
|
319,248
|
4.00
|
||||||||||
|
Balance, December 31, 2012
|
1,557,980
|
4.16
|
2.99
|
|||||||||
The fair value of the warrants was determined using the Black-Scholes-Merton option pricing model and the following assumptions.
|
All Periods
|
||||
|
Expected term
|
1.5 – 2.5 Years
|
|||
|
Expected dividend
|
0 | % | ||
|
Volatility
|
31% – 36 | % | ||
|
Risk-free interest rate
|
0.31% – 1.36 | % | ||
The Company had warrants outstanding representing the right to purchase 1,557,980 shares of Company common stock at a weighted average exercise price of $4.25 at December 31, 2012.
11. Equity Incentive Plan
On February 9, 2010, the Board of Directors adopted the 2010 Equity Incentive Plan (EIP). The plan has been approved by our shareholders. Participants in the plan may include our employees, officers, directors, consultants, or independent contractors who our compensation committee determines shall receive awards under the plan. The number of shares of common stock reserved for issuance under the plan is 337,500 shares. The plan authorizes the grant of options to purchase common stock intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code (the "Code"). The EIP also permits the grant of options that do not qualify as incentive stock options, restricted stock, restricted stock units, stock bonuses, cash bonuses, stock appreciation rights, performance awards, dividend equivalents, warrants and other equity-based awards. The plan expires on February 12, 2020. Options granted to employees generally vest over 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.
F-15
CACHET FINANCIAL SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
In addition to options issued under the EIP, as of December 31, 2012 the Company had issued options to purchase 336,500 shares of Company common stock to directors, certain officers and business consultants.
The Company has used an expected life of three years for the term of the options. As no options have been exercised, management has made an estimate of an average life that is slightly longer than the vesting period.
The estimated fair values of stock options granted and assumptions used for the Black-Scholes-Merton option pricing model were as follows:
|
2012
|
2011
|
|||||||
|
Estimated Fair Value
|
$ | 158,265 | $ | 999,117 | ||||
|
Options Granted
|
67,000 | 363,168 | ||||||
|
Expected Term
|
3 Years
|
3 Years
|
||||||
|
Expected Dividend
|
0 | % | 0 | % | ||||
|
Volatility
|
32 – 39 | % | 39 – 45 | % | ||||
|
Risk Free Interest Rate
|
0.3 – 0.4 | % | 0.4 – 1.41 | % | ||||
Following is a summary of stock option activity in 2012:
|
Number of Options
|
Weighted Avg. Exercise Price
|
Weighted Remaining Contractual Life (Years)
|
Intrinsic Value
|
|||||||||||||
|
Balance, December 31, 2011
|
602,292 | $ | 6.00 | |||||||||||||
|
Granted
|
67,000 | 8.48 | ||||||||||||||
|
Exercised
|
- | |||||||||||||||
|
Forfeited or Expired
|
(55,250 | ) | 7.76 | |||||||||||||
|
Balance, December 31, 2012
|
614,042 | 6.00 | 3.02 | $ | 1,836,250 | |||||||||||
|
Exercisable at December 31, 2012
|
377,376 | 4.16 | 2.73 | 1,818,250 | ||||||||||||
The following is a summary of nonvested stock options:
|
Number of Options
|
Weighted Avg. Fair Value
|
|||||||
|
Balance, December 31, 2011
|
377,704
|
$
|
2.52
|
|||||
|
Granted
|
67,000
|
2.36
|
||||||
|
Vested
|
(153,621
|
)
|
2.08
|
|||||
|
Forfeited
|
(54,417
|
)
|
2.48
|
|||||
|
Balance, December 31, 2012
|
236,666
|
|||||||
F-16
CACHET FINANCIAL SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
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 impact the amount of unamortized compensation expense to be recognized in future periods.
Total stock compensation expense was $311,211 in 2012 and $303,486 in 2011. As of December 31, 2012 the total compensation cost related to nonvested awards not yet recognized was $398,000. That cost will be recognized over a weighted average period of nine months.
12. Related Party Transactions
Balances with related parties consisting of members of the Board of Directors (collectively Affiliates) for borrowings and warrants as of the end of each year were as follows:
|
2012
|
2011
|
|||||||
|
Debt held by related parties
|
$
|
4,869,551
|
$
|
1,345,803
|
||||
|
Total Interest paid to related parties
|
9,393
|
16,815
|
||||||
|
Warrants held by related parties
|
791,998
|
618,060
|
||||||
13. Concentrations
The Company relies on two vendors to provide technology and licensing components that are critical to its RDC solution.
14. Subsequent Events
In addition to the February 2013 amendment to borrow an additional $1,000,000 on the Senior Secured Note Payable (Note 5), the following transactions have occurred subsequent to December 31, 2012:
In February 2013, the Company offered to convert debt, plus accumulated interest, into shares of the Company’s common stock. As a result, $6,757,876 of debt and accumulated interest was converted into 1,858,417 shares of common stock based on an exchange rate at $3.64 per share. Included in this amount is $1.1 million of conversions by a former director. The Company was recently made aware that the former director is disputing the conversion. The Company believes this dispute is without merit. Concurrent with the conversion of the those notes, the Board of Directors determined that it was in the best interest of the Company to adjust the conversion rates for former noteholders that had previously converted or purchased shares at $9.00 per share. An adjustment was made to reduce their conversion rate or purchase price, as applicable, to $4.00 per share. As a result, the Company issued an additional 427,619 shares with a fair value of $1,710,475 which was recorded as an expense in 2013.
In February 2013 the Board of Directors approved an adjustment to the exercise price of all outstanding employee stock options that had been issued at a price greater than $4.00 per share. The vesting period for these options was unchanged. The aggregate excess of the fair value of the $4.00 options over the $9.00 options on the date of modification was $236,000. As a result of this modification the company recorded additional share-based compensation of $119,000 in February 2013, for the vested portion, and the remaining $117,000 will be recognized over the remaining vesting term.
In February 2013, the Company issued warrants with a fair value of approximately $205,000 to purchase 281,250 shares of the Company’s common stock at $4.00 per share and expiring November 2017 to a director for the director guaranteeing the Senior Secured Note Payable.
Additionally, from January 2013 through June 12, 2013, the Company issued warrants with a fair value of approximately $227,000 to purchase 252,438 shares of the Company’s common stock at a price ranging from $4.00 to $5.00 per share to various individuals and directors and expiring through November 2017.
The Board of Directors also increased the authorized number of shares under the EIP to 625,000.
F-17