Exhibit 99.2

 

 

 

Clear Link  Holdings, LLC and  Subsidiaries

Consolidated Financial Statements as of March 31, 2016 and December 31, 2015, and for the Three-Month Periods Ended March 31, 2016 and 2015

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CLEAR LINK HOLDINGS, LLC AND SUBSIDIARIES

TABLE OF CONTENTS

 

 

		Page
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
Balance Sheets as of March 31, 2016 and December 31, 2015		1
Statements of Operations for the Three-Month Periods Ended March 31, 2016 and 2015		2
Statements of Members’ Equity for the Three Month Period Ended March 31, 2016		3
Statements of Cash Flows for the Three-Month Periods Ended March 31, 2016 and 2015		4–5
Notes to Consolidated Financial Statements as of March 31, 2016 and December 31, 2015, and for the Three-Month Periods Ended March 31, 2016 and 2015		6–18

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CLEAR LINK HOLDINGS, LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2016 AND DECEMBER 31, 2015

(Unaudited)

 

 

		March 31, 2016					December 31, 2015
ASSETS
CURRENT ASSETS:
Cash			$	2,584,131				$	3,575,855
Accounts receivable—net				16,507,817					15,087,662
Prepaid expenses				1,649,865					1,497,815
Other current assets				293,188					878,222
Total current assets				21,035,001					21,039,554
PROPERTY AND EQUIPMENT—Net				5,836,083					5,560,498
INTANGIBLE ASSETS—Net				39,675,149					34,731,964
GOODWILL				33,873,987					33,873,987
OTHER ASSETS				325,000					325,000
TOTAL ASSETS			$	100,745,220				$	95,531,003
LIABILITIES AND MEMBERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable			$	2,711,145				$	2,835,176
Accrued liabilities				9,807,565					7,381,649
Accrued chargebacks				3,970,418					3,866,782
Revolving line of credit				3,500,000					-
Notes payable—current portion				2,925,084					2,924,162
Other current liabilities				2,869,811					1,665,847
Total current liabilities				25,784,023					18,673,616
COMMITMENTS AND CONTINGENCIES (Notes 5, 6, and 7)
NOTES PAYABLE—Net of current portion				20,946,874					21,679,297
OTHER NON-CURRENT LIABILITIES				2,920,766					2,127,816
Total liabilities				49,651,663					42,480,729
MEMBERS’ EQUITY				51,093,557					53,050,274
TOTAL LIABILITIES AND MEMBERS’ EQUITY			$	100,745,220				$	95,531,003

See notes to consolidated financial statements.

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CLEAR LINK HOLDINGS, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

(Unaudited)

 

 

		Three Months Ended         March 31,
		2016					2015
REVENUES—Net			$	33,828,814				$	28,555,156
OPERATING EXPENSES:
Selling, general and administrative				22,955,727					17,821,302
Advertising and marketing				7,626,891					6,970,489
Depreciation and amortization				1,642,950					1,170,812
Total operating expenses				32,225,568					25,962,603
INCOME FROM OPERATIONS				1,603,246					2,592,553
OTHER INCOME (EXPENSE):
Interest income				-					176
Interest expense				(483,039	)				(446,709	)
Total other expense—net				(483,039	)				(446,533	)
NET EARNINGS			$	1,120,207				$	2,146,020

See notes to consolidated financial statements.

 

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CLEAR LINK HOLDINGS, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY

FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2016

(Unaudited)

 

 

		Members’ Equity
BALANCE—January 1, 2016		$	53,050,274
Cash distributions paid to members			(3,095,551	)
Stock-based compensation related to Class B units			18,627
Net earnings			1,120,207
BALANCE—March 31, 2016		$	51,093,557

See notes to consolidated financial statements.

 

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CLEAR LINK HOLDINGS, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

(Unaudited)

 

 

		Three Months Ended         March 31,
		2016					2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings			$	1,120,207				$	2,146,020
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization				1,642,951					1,170,812
Gain on disposal of fixed asset				(404	)				-
Stock-based compensation related to Class B units				18,627					26,880
Amortization of deferred financing fees				83,898					82,977
Earn-out provision				98,211					-
Changes in operating assets and liabilities (net of effects of acquisition of business):
Accounts receivable				(1,420,155	)				(3,171	)
Prepaid expenses and other current assets				452,689					1,036,905
Other assets				-					143,236
Accounts payable				(230,812	)				734,432
Accrued liabilities				2,432,580					(833,766	)
Accrued chargebacks				103,636					166,405
Other current and non-current liabilities				(132,007	)				(179,532	)
Net cash provided by operating activities				4,169,421					4,491,198
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment				(674,880	)				(352,978	)
Proceeds from sale of property and equipment				750					-
Purchase of intangible assets				(78,563	)				-
Acquisition of businesses				(3,997,501	)				(552,460	)
Net cash used in investing activities				(4,750,194	)				(905,438	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit				3,500,000					-
Principal payments on notes payable and earn-out liability				(815,400	)				(869,578	)
Distributions paid to members				(3,095,551	)				(2,819,311	)
Net cash used in financing activities				(410,951	)				(3,688,889	)
NET DECREASE IN CASH				(991,724	)				(103,129	)
CASH—Beginning of year				3,575,855					12,677,682
CASH—End of year			$	2,584,131				$	12,574,553

 

(Continued)        

 

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CLEAR LINK HOLDINGS, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

 

 

		Three Months Ended         March 31,
		2016					2015
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION—Cash paid for interest			$	315,695				$	330,285
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment purchases included in accounts payable and accrued liabilities			$	167,645				$	22,075
Purchase price for acquisition of business included in other current liabilities			$	2,030,710				$

 

See notes to consolidated financial statements.		(Concluded)

 

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CLEAR LINK HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2016 AND DECEMBER 31, 2015, AND FOR THE THREE-MONTH

PERIODS ENDED MARCH 31, 2016 AND 2015 (UNAUDITED)

 

 

1.	NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations—Clear Link Holdings, LLC and subsidiaries (“Clear Link” or the “Company”) is a marketing and sales company that secures new customers for large-brand parties. The Company markets to customers located throughout the United States. The Company is registered as a limited liability company (LLC) in the State of Delaware. The Company’s operations commenced effective January 1, 2011.

Effective January 28, 2013, a change in reporting entity structure occurred with the formation of Clear Link Holdings, LLC. On that date, all Class A, Class B, and Class C members relinquished their outstanding membership interests in Clear Link Technologies, LLC in exchange for identical membership interests in Clear Link Holdings, LLC. The change had no effect on the ongoing operations of the Company.

Principles of Consolidation—The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions are eliminated in consolidation. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals), considered necessary for a fair presentation of the Company’s financial information as of March 31, 2016 and December 31, 2015, and for the three-month periods ended March 31, 2016 and 2015. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the fiscal year ending December 31, 2016.

Cash—The Company reflects cash on hand and demand deposits as cash. At March 31, 2016 and December 31, 2015, the Company did not have any cash equivalents. The Company’s cash deposits are held at institutions insured by the Federal Deposit Insurance Corporation (FDIC). At times, such deposits may be in excess of the FDIC insurance limit of $250,000.

Use of Estimates—In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates included in the Company’s consolidated financial statements include estimating accrued revenue, accrued chargebacks and evaluating potential impairments of intangible assets and goodwill.

Accounts Receivable—The Company’s accounts receivable are related to sales that were made prior to period-end for which payment from the brand partners has not yet been received. These receivables are generally collected within one to three months from the date the sale occurred. For amounts not collected during this time period, the Company considers whether such amounts are uncollectible based on specific identification and historical experience. Accounts outstanding longer than the contractual payment terms are considered past due. Accounts are written off when deemed uncollectible. At both

 

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March 31, 2016 and December 31, 2015, based on the current status of the receivables and prior collection experience with the Company’s brand partners, the Company estimated the allowance for doubtful accounts to be $78,775.

Revenue Recognition—The Company recognizes revenue when 1) persuasive evidence of an arrangement exists, 2) delivery of product has occurred or services have been rendered, 3) the price to the customer is fixed or determinable, and 4) collectability is reasonably assured. Generally, for the Company’s sales, these criteria are met when a sales call results in an order and the installation for the product or service has occurred or been provided. The process for recognizing revenue for each of the Company’s revenue streams is outlined below. In accordance with the provisions of Accounting Standards Codification (ASC) Topic 605-45, Principal Agent Considerations, the Company recognizes revenue on a net basis for the commissions earned on each sales transaction. A summary of the Company’s significant revenue streams is as follows:

Commissions on New Customer Acquisitions—Certain of the Company’s brand partners have the right to chargeback accounts that do not meet certain requirements for specified periods after a sale has occurred. The Company accounts for sales with chargeback provisions in accordance with ASC Topic 605, Revenue Recognition. Under the provisions of Topic 605, revenue is recognized when all appropriate requirements are met, including the ability to reasonably estimate future chargebacks. For brand partners where the Company has sufficient historical data to support chargeback percentages, the Company recognizes revenue at the date of installation. Revenue is then reduced by an allowance for chargebacks for the estimated amount of future chargebacks. The allowance for chargebacks is recorded as a current liability on the consolidated balance sheets as these expected future chargebacks relate to sales for which the Company has already received payment. For brand partners where sufficient chargeback history does not exist, the Company defers all revenue until the chargeback term has ended. During 2016 and 2015, the Company determined it had sufficient chargeback history to estimate future chargebacks for all existing brand partners and recorded a chargeback allowance.

Commissions on Overflow Call Sales—The Company also receives revenue for sales made by other companies. In these instances, the Company generally transfers overflow calls to a third-party call center. The third-party call center makes the sale and sets up the installation date for the respective brand partner. The Company then earns a set commission from these other companies based upon a contractual amount. The Company does not record revenue associated with certain of these other companies until cash has been received due to the uncertainties inherent in these transactions. Revenue is recorded on an accrual basis for transactions with certain other companies for which reliable financial data exists.

Property and Equipment—Property and equipment, including leasehold improvements, are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the remaining lease term. Rental expense on leased office space, property and equipment is recorded on a straight-line basis.

Maintenance, repairs, and renewals that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. The cost and accumulated depreciation of property and equipment sold or otherwise retired are removed from the accounts, and the gain or loss on disposition is reflected in the statement of operations.

Impairment of Long-Lived Assets—The Company reviews its long-lived tangible assets for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company evaluates, at each year-end balance sheet date, whether events and

 

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circumstances have occurred that indicate possible impairment. The Company uses an estimate of undiscounted net cash flows from the related asset or group of assets over their remaining life in measuring whether the assets are recoverable. As of March 31, 2016 and December 31, 2015, the Company does not consider any of its long-lived tangible assets to be impaired.

Goodwill and Intangible Assets—The Company does not amortize goodwill. Goodwill is tested annually for impairment as of December 31, or more frequently if events or changes in circumstances indicate that the asset may be impaired. In step 1, the Company uses the income approach to test for impairment of goodwill based on estimated discounted future cash flows. Cash flow assumptions consider historical and forecasted revenue, operating costs and other relevant factors. If the carrying value exceeds the estimated fair value, the Company moves to step 2 and prepares an analysis to estimate the implied fair value of goodwill. An impairment charge is recognized in an amount equal to the excess carrying amount, if any, over the implied fair value of goodwill.

The Company amortizes its intangible assets over periods generally ranging from 2 to 15 years (see Note 4). Amortization is based on the pattern in which the estimated economic benefits of the intangible asset will be consumed. The Company evaluates the recoverability of intangible assets periodically and takes into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.

There were no impairments of goodwill or intangible assets as of March 31, 2016.

Other Current and Non-Current Liabilities—Other current and non-current liabilities consist principally of deferred lease incentives and earnout liabilities. Deferred lease incentives are amortized over the term of the lease to provide a straight-line rent expense on the lease. Earnout liabilities are remeasured to fair value each period, and an adjustment is made if needed.

Advertising and Marketing—Costs of direct-response advertising (a) whose primary purpose is to elicit sales to customers who could be shown to have responded specifically to the advertising and (b) that results in probable future benefits are reported as assets net of accumulated amortization. These costs are expensed over the period, generally 12 months, that revenues are generated as a result of the direct-response advertising efforts. All other advertising is expensed as incurred. Expenditures paid in advance for advertising are capitalized as prepaid advertising expenses and expensed in the period the advertising is first run or aired. As of March 31, 2016 and December 31, 2015, the Company had $41,860 and $46,362, respectively, of prepaid advertising deferred in the consolidated financial statements, which was included in prepaid expenses. Total advertising and marketing expense for the three months ended March 31, 2016 and 2015 was $7,718,658 and $6,970,489, respectively.

Incentive Unit Compensation—The Company authorized Class B units for issuance to provide incentives to employees and service providers through the grant of these membership units.

The Class B units granted represent equity awards for which the Company recognizes compensation expense based on the estimated fair value of the award on the date of grant. The Company estimates the fair value of the Class B equity units granted, and the value is based on probability weighting a series of holding period scenarios that use the Black-Scholes pricing method. The compensation cost of these units is recognized over the requisite vesting period (see Note 8).

Comprehensive Income—There were no components of comprehensive income other than net earnings for the three months ended March 31, 2016 and 2015.

 

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Concentration of Credit Risk—Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash. Risks associated with cash are mitigated by banking with creditworthy institutions; however, deposits with such institutions may exceed FDIC insurance limits. The Company has not experienced any losses in such accounts. The Company’s accounts receivable do not have significant exposure to credit risk as substantially all accounts receivable are collected within a short period after year-end.

Taxes—As an LLC, the Company and its subsidiaries have elected to be taxed as a partnership under the provisions of the Internal Revenue Code. Members are liable for applicable taxes on their proportionate share of the Company’s taxable income. Tax distributions to members may be made in accordance with the Company’s Limited Liability Company Agreement (the “LLC Agreement”). The amounts to be distributed are determined by taking into account the maximum United States Federal, state, and local tax rates of each member.

Adoption of New Accounting Pronouncements—In January of 2016, the FASB issued ASU 2016-01, “Recognition and Mesaurement of Financial Assets and Financial Liabilities”, which states that non-public entities are not required to apply the fair value of financial instruments disclosure guidance. Certain provisions of this ASU were available for early adoption. The remainder of the ASU is effective for fiscal years and interim periods beginning after December 15, 2017. The Company has elected to early adopt the provisions available for early adoption for the year ended December 31, 2015 and the three months ended March 31, 2016. The adoption of the available provisions did not have a material impact on the Company’s consolidated financial statements.

New Accounting Pronouncements—In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This update requires an entity to recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. As such, this update affects an entity that either enters into contracts with customers or transfers goods and services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. This update will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers—Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which further clarifies the implementation guidance on principal versus agent considerations contained in ASU 2014-09. In April 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers—Identifying Performance Obligations and Licensing, which further clarifies the implementation guidance relating to identifying performance obligations and the licensing implementation guidance. The amendments in these updates are effective for nonpublic entities in annual periods beginning after December 15, 2018. However, nonpublic entities may elect to early adopt the update in annual periods beginning after December 15, 2017. The Company is currently evaluating the effect of adoption on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) Accounting for Leases. This update specifies that lessees should recognize assets and liabilities arising from all leases, except for leases with a lease term of 12 months or less. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will largely remain unchanged and continue to depend on its classification as a finance or operating lease. For nonpublic entities, the ASU will be effective for annual periods beginning after December 15, 2019 with early adoption permitted. The adoption of this ASU is not expected to have a material impact on the Company’s results of operations or footnote disclosures; however, it is expected to result in the recognition of a lease asset and related liability in the consolidated balance sheets.

 

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In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805)—Simplifying the Accounting for Measurement-Period Adjustments. The standard eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. The standard is effective for annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the effect of adoption on the Company’s consolidated financial statements.

 

2.	BUSINESS COMBINATIONS

Effective July 28, 2015, the Company acquired 100% of ASecureLife.com in exchange for cash consideration of $6,750,000, paid at close. Additionally, the total purchase price is subject to earnouts which are calculated based on gross revenue originating from the ASecureLife domain name: up to $1,000,000 to be paid after July 31, 2016, and up to $1,000,000 to be paid after July 31, 2017. The Company estimates that it will be required to pay the full $2,000,000 in earnouts, which had a fair value of $1,675,015 as of the purchase date. The acquisition was completed to provide increased leads for home security sales.

The acquisition was accounted for using the purchase method of accounting; accordingly, the purchase price has been allocated to the assets and liabilities acquired based on their estimated fair values at the date of acquisition. The total purchase price at fair value of $8,425,015 was allocated to the ASecureLife.com domain based on the Company’s analysis that no other assets were acquired and no liabilities were assumed.

On January 4, 2016, the Company acquired 100% of BuyCalls, LLC in exchange for cash consideration of $3,500,000 (including $2,950,000 paid at close, $150,000 to be paid upon assignment or renegotion in the Company’s name of a certain contract, and $400,000 to be paid after June 30, 2017). Additionally, the total purchase price is subject to earnouts: $1,250,000 potential to be paid after September 30, 2016, and another $1,250,000 potential to be paid after July 31, 2017. The Company estimates that it will be required to pay $1,140,000 in earnouts, which had a fair value of $997,000 as of the purchase date. The acquisition was completed to provide increased leads for the Company.

The acquisition was accounted for using the purchase method of accounting. The total purchase price at fair value of $4,497,000 was allocated to the BuyCalls domain based on the Company’s analysis that no other assets were acquired and no liabilities were assumed.

On January 5, 2016, the Company purchased 100% of SecurityGem.com for $750,000 cash and up to $750,000 paid at a later date as part of an earnout. The Company estimates that it will be required to pay $500,000 in earnouts, which had a fair value of $443,725 as of the purchase date. The acquisition was completed to provide increased leads for the Company. The acquisition was accounted for using the purchase method of accounting. The total purchase price at fair value of $1,193,725 was allocated to the SecurityGem.com domain based on the Company’s analysis that no other assets were acquired and no liabilities were assumed.

On January 6, 2016, the Company purchased 100% of MedicareHealthPlans.com for $337,500 cash and up to $87,500 paid at a later date as part of an earnout. The Company estimates that it will be required to pay $43,750 in earnouts, which had a fair value of $39,850 as of the purchase date. The acquisition was completed to provide increased leads for the Company. The acquisition was accounted for using the purchase method of accounting. The total purchase price at fair value of $414,850 was allocated to the MedicareHealthPlans.com domain based on the Company’s analysis that no other assets were acquired and no liabilities were assumed.

 

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3.	PROPERTY AND EQUIPMENT

The Company’s property and equipment at March 31, 2016 and December 31, 2015, consist of the following:

 

Depreciation expense on property and equipment totaled $479,363 and $399,066 for the three months ended March 31, 2016 and 2015, respectively.

 

4.	INTANGIBLE ASSETS

The carrying value of the Company’s intangible assets as of March 31, 2016 and December 31, 2015, is as follows:

 

 

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Intangible asset amortization expense totaled $1,163,588 and $771,746 for the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, the Company expects amortization expense in future years to be as follows:

 

Years Ending December 31
2016		$	3,510,114
2017			4,659,304
2018			4,506,047
2019			4,316,709
2020			4,304,255
Thereafter			18,378,720
Total		$	39,675,149

 

5.	ACCRUED LIABILITIES

The Company’s accrued liabilities at March 31, 2016 and December 31, 2015, consist of the following:

 

 

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6.	LINE OF CREDIT AND NOTES PAYABLE

The Company has a borrowing arrangement that includes a senior term loan of $42,000,000 and a revolving line of credit with a maximum borrowing limit of $10,000,000. Any outstanding principal on the senior term loan and the revolving line of credit is due on December 28, 2017.

Draws on the term loan and revolving line of credit also bear interest at one of two variable rate options selected by the Company. The base rate option is equal to a specified margin determined by the Company’s leverage ratio (which starts at 4.00% and declines to 3.25% depending on the leverage ratio) plus the greater of the Prime Rate, the Federal Funds Effective Rate plus 0.5%, or 1-month LIBOR plus 1.0%.

The LIBOR rate option is equal to a specified margin (which starts at 5.00% and declines to 4.25% depending on the leverage ratio) plus the applicable LIBOR rate for an interest period of 1, 3, 6, 9, or 12 months as selected by the Company. Accrued interest is payable at the end of each fiscal quarter.

At March 31, 2016 and December 31, 2015, $6,500,000 and $10,000,000 was available under the revolving line of credit for additional borrowing, with $3,500,000 and $0 outstanding, respectively.

Notes payable consist of the following as of March 31, 2016 and December 31, 2015:

 

 

Future maturities of notes payable are as follows at March 31, 2016:

 

Years Ending December 31
2016			$  2,446,202
2017			22,015,822
Total			$24,462,024

Borrowings under the credit agreement described above are secured by substantially all of the Company’s assets. The credit agreement contains certain covenants and restrictions that require the Company to maintain compliance with maximum leverage and minimum fixed charge coverage ratios on a quarterly basis, as defined in the agreements. The covenants also include restrictions limiting the incurrence of liens, debt, and the sale of assets.

 

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The credit agreement also requires the Company to remit a percentage of all cash flows over a certain threshold defined in the credit agreement to the lender. The percentage required to be remitted varies based on the Company’s leverage ratio. Under these provisions, the Company expects to remit $0 to the lender in 2016 in addition to the minimum scheduled payments.

Subsequent to period end, the notes payable balance was paid off in full as part of the Company’s acquisition by Sykes Enterprises, Incorporated. (See Note 11).

Management believes the Company was in compliance with all debt covenants at March 31, 2016.

 

7.	COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments—The Company has non-cancelable long-term operating lease commitments that expire commencing in 2017 through 2026 for various office facilities. The operating lease agreements are subject to predetermined rate increases in accordance with the signed rental agreements. Rent is charged to operating expense on a straight-line basis over the term of leases where contractual increases affect rent payments. Rent expense under operating leases for the three months ended March 31, 2016 and 2015, was $113,880 and $92,431, respectively.

Future minimum lease payments under non-cancelable operating leases consist of the following as of March 31, 2016:

 

Years Ending December 31
2016		$	2,775,689
2017			3,127,034
2018			3,081,274
2019			3,713,713
2020			3,268,924
Thereafter			19,474,205
Total future minimum lease payments		$	35,440,839

The Company received lease incentives from property owners to build tenant improvements as part of two operating lease agreements. The lease incentive liability at March 31, 2016 and December 31, 2015, totaled $1,849,923 and $2,033,205, respectively. Such amounts are deferred and amortized over the life of the related leases.

In 2015, the Company amended one of its lease agreements, expanding office space, extending the lease term another 8 years, through 2026, and adding $900,000 to the lease incentive liability.

 

8.	INCENTIVE UNIT COMPENSATION

The Company has authorized a total of 1,373,450 Class B units, which are available to provide incentives to employees and service providers by granting rights to benefit from the success of the Company through the grant or issuance of membership units in the Company. At both March 31, 2016 and December 31, 2015, a total of 1,138,461 Class B units were outstanding.

 

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Of the Class B units granted to employees, 773,429 units have a term of four years with 25% cliff vesting on the first anniversary from the grant date and 75% vesting ratably on a monthly basis over the next three years such that all units are vested by the end of four years. The remaining 365,032 units have a performance-vesting feature and will fully vest on the effective date of the consummation of a sale transaction and the achievement of a target return defined in the Company’s LLC Agreement. There is no exercise price, and the plan has a provision that in the event of a change in control, all time-vesting units vest 100%.

Time-vesting unit-based compensation cost is measured at the grant date based on the fair value of the award granted and is recognized as expense over the period in which the award is expected to vest. Time-vesting unit-based compensation expense recognized during a period is based on the value of the awards that are ultimately expected to vest. As such, it has been reduced for estimated forfeitures, which were estimated to be zero in both 2016 and 2015.

During the three months ended March 31, 2016 and 2015, the Company recorded compensation expense related to the Class B time-vesting units totaling $18,627 and $26,880, respectively. Compensation expense is included within the selling, general, and administrative expense line item of the consolidated statements of operations. No compensation expense was recognized for the performance-vesting units, as the consummation of a sale transaction has not yet occurred.

At March 31, 2016 and December 31, 2015, the total vested Class B units had a total fair value of $821,249 and $794,719, respectively, and had no intrinsic value. As of March 31, 2016 and December 31, 2015, the total remaining unrecognized compensation cost related to the Class B time-vesting units was approximately $122,333 and $138,780, respectively. As of both March 31, 2016 and December 31, 2015, the total remaining unrecognized compensation cost related to the Class B performance-vesting units was approximately $445,340. The estimated fair value of the Class B units granted during 2016 and 2015 is based on probability weighting a series of holding period scenarios that use the Black-Scholes pricing method. The following assumptions were used for grants of Class B units (both time and performance-vesting) issued during 2016 and 2015:

 

The risk-free interest rates are based on the U.S. Treasury constant maturity rates for the respective holding periods. The expected unit lives are based on similar portfolio companies held by the private equity investor. The expected price volatility rates are based on a group of guideline public companies.

 

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The following table summarizes Class B unit activity for the three months ended March 31, 2016:

 

		Class B Units
				Time- Vesting Units						Performance- Vesting Units
Outstanding—December 31, 2015					773,428					365,033
Granted
Forfeited
Outstanding—March 31, 2016					773,428					365,033
Vested					(673,155	)
Expected to vest					100,273					365,033

The following table summarizes non-vested Class B unit activity during the three months ended March 31, 2016:

 

 

During 2014, the Company’s board of directors authorized a long-term incentive compensation plan to issue phantom units to certain employees. These units (referred to as “LTIP units”) reduce the available pool of Class B units as they are issued and have a performance-vesting feature whereby they only vest upon the employee being employed with the Company on the effective date of the consummation of a sale transaction. A sale transaction is defined as the first occurrence of a sale of all or substantially all of the assets of the Company that results in a change in control of more than sixty-seven percent (67%) of the equity interests of the Company. Upon completion of a sale transaction, holders of LTIP units are entitled to a cash payment equal to the distribution they would have received if they had held actual Class B units at the transaction date as determined by the Company’s board of directors at its reasonable discretion. If the length of time between the grant date and a consummated sale transaction is less than 24 months, 50% of the payment due will be held back and paid to the LTIP holder one year from the sale date provided the LTIP holder remains employed with the Company.

For the three months ended March 31, 2016, the Company granted 11,000 LTIP units, 1,000 LTIP units were forfeited, and 151,250 LTIP units were outstanding at March 31, 2016. The fair value of units granted and outstanding is equal to the fair value assigned to the Class B units disclosed above.

 

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Although all LTIP units are expected to vest, no compensation expense has been recognized for these LTIP units as the consummation of a sale transaction has not yet occurred.

 

9.	MEMBERS’ EQUITY

The Company’s LLC Agreement provides for the issuance of Class A, Class B, and Class C units as ownership units in the Company as follows:

 

●

Class A units are entitled to priority distributions and other rights. During 2011, Class A units totaling 7,782,885 units were granted to the private equity firm and certain members of the acquired company. These units represent the total Class A units authorized under the LLC Agreement, and no Class A units were issued during the three months ended March 31, 2016 or the year ended December 31, 2015.

 

●

Class B units are authorized for issuance to provide incentives to certain employees and service providers through the grant of these membership interests. A pool of 1,373,450 Class B units has been authorized under the LLC Agreement. During the three months ended March 31, 2016, the Company issued no Class B units to employees. Additionally, during the three months ended March 31, 2016, employees forfeited no Class B units. During the year ended December 31, 2015, the Company issued 77,829 Class B Units to employees and employees forfeited 9,156 Class B Units.

 

●

During 2011, Class C units totaling 272,401 units were granted to certain members of the acquired company. These units represent the total Class C units authorized under the LLC Agreement, and no Class C units were issued during the three months ended March 31, 2016 or the year ended December 31, 2015.

Per the LLC Agreement, tax distributions are made to members on a quarterly basis to pay quarterly estimated tax payments. Any non-tax distributions made by the Company are made subject to a waterfall as follows:

 

●

First, to Class A unit holders until they receive their initial capital back with a specified annual return of 8%.

 

●

Second, proportionately to Class A and B unit holders until a target return is achieved as defined in the Agreement.

 

●

Third, to Class C unit holders only until a second target return is achieved as defined in the Agreement.

 

●

After the second target return is achieved, proportionately to all Class A, B, and C unit holders, except that the number of Class A units held by the private equity investor is reduced by the number of Class C units outstanding.

During the three months ended March 31, 2016 and 2015, the Company paid cash distributions for taxes to or on behalf of its current Class A unit holders of $2,986,937 and $2,525,834, respectively. Additionally, during the three months ended March 31, 2016 and 2015, the Company paid cash distributions for taxes to its current Class B unit holders of $108,614 and $293,477. Class C unit holders did not qualify for any distributions during the three months ended March 31, 2016 and 2015 under the terms of the prescribed waterfall requirements.

 

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10.	CONCENTRATIONS

The following customers accounted for a significant portion of the Company’s business in the periods below. The Company’s operations could be significantly impacted if one or more of these brand partners terminated its agreement with the Company. The Company’s customer concentrations with its largest customers are as follows:

 

* This customer did not meet the 10% threshold for disclosure for the respective year.

 

11.	SUBSEQUENT EVENTS

The Company has evaluated subsequent events through May 16, 2016, the date on which the consolidated financial statements were available to be issued. The following subsequent events have occurred.

On April 1, 2016, Sykes Enterprises, Incorporated (“Sykes”) (NASDAQ: SYKE) acquired 100% of ClearLink Holdings, LLC and its subsidiaries pursuant to the terms of the Merger Agreement, with Clear Link becoming a wholly-owned subsidiary of Sykes (the “Merger”).

In the Merger, each outstanding membership unit of Clear Link has the right to receive an amount in cash as set forth in the Merger Agreement. The aggregate cash consideration payable in the Merger was approximately $207.0 million, subject to certain adjustments at the closing of the Merger.

In addition, as part of the Merger, substantially all of Clear Link’s notes payable were paid in full.

* * * * * *

 

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