The number of shares of Common Stock of the Registrant, par value $0.01 per share, outstanding as of August 12, 2016 was  13,586,722. 

 

---

- 2 -

---

The financial information set forth below with respect to the financial statements as of June 30, 2016 and 2015 and for the three-month and six-month periods ended June 30, 2016 and 2015 is unaudited. This financial information, in the opinion of our management, includes all adjustments consisting of normal recurring entries necessary for the fair presentation of such data. The results of operations for the three-month and six-month periods ended June 30, 2016 are not necessarily indicative of results to be expected for any subsequent period. Our fiscal year end is December 31.

- 3 -

---

- 4 -

---

- 5 -

---

- 6 -

---

 

 

Bellsoft, Inc. ("Bellsoft") is a consulting company based in Lawrenceville, Georgia with over 175 consultants specialized in the areas of SAP software, business intelligence, data warehousing and other enterprise resource planning services.  Bellsoft has operations in the United States and in India. On November 20, 2015, the Company completed the acquisition of Bellsoft for the consideration listed below.  For financial accounting purposes, the Company recognized September 1, 2015 as the effective date of the acquisition.  The consideration payable for the acquisition of Bellsoft includes:

 

1.	A cash payment in the amount of $3,000,000 at closing,

2.	235,295 shares of AMERI's common stock issued at closing,

3.	$250,000 quarterly cash payments to be paid on the last day of each calendar quarter of 2016,

4.	A $1,000,000 cash reimbursement to be paid 5 days following closing to compensate Bellsoft for a portion of its approximate cash balance as of September 1, 2015,

5.	Approximately $2,500,000 to be paid within 30 days of closing in connection with the excess of Bellsoft's accounts receivable over its accounts payable as of September 1, 2015, and

6.

Earn-out payments of approximately $500,000 a year for 2016 and 2017, if earned through the achievement of annual revenue and EBITDA targets specified in the Bellsoft purchase agreement, subject to downward or upward adjustment depending on actual results.  In the first quarter of 2016, the Company adjusted the estimate for the earn-out to be paid from $400,000 to $500,000 a year for each of 2016 and 2017.

 

As of June 30, 2016, earn-out payments of $500,000 for each of 2016 and 2017 and an aggregate of $556,609 in respect of the 2016 quarterly cash payments remain due to Bellsoft's former shareholders.

Entry into Agreement to Acquire Bigtech Software Private Limited. 

 

On June 23, 2016 the Company entered into a definitive agreement to purchase Bigtech Software Private Limited ("Bigtech"), a pure-play SAP services company providing a complete range of SAP services including turnkey implementations, application management, training and basis ABAP support. Bigtech has been in operation since 2000. Based in Bangalore, India, Bigtech offers SAP services to bring effectiveness in business operations to companies of all sizes and verticals. As of June 30, 2016 the closing date for the Bigtech transaction has yet to be determined. The consideration to be paid for the acquisition of Bigtech will be:

 

1.

$340,000, to be paid at closing;

2.

Warrants for the purchase of 51,000 shares of the Company's common stock, with such warrants exercisable for two years from the date of closing; and

3.

$255,000, which may become payable as a commission to the sellers of Bigtech if Bigtech achieves certain revenue targets within the two years following closing.

- 7 -

---

The Company recognizes revenue primarily through the provision of consulting services. We generate revenue by providing consulting services under written service contracts with our customers. The service contracts we enter into generally fall into two specific categories: time and materials and fixed-price.

We consider amounts to be earned once evidence of an arrangement has been obtained, services are delivered, fees are fixed or determinable, and collectability is reasonably assured. We establish billing terms at the time at which the project deliverables and milestones are agreed. Our standard payment terms are 60 days from invoice date.

When a customer enters into a time and materials, fixed-price, or a periodic retainer-based contract, the Company recognizes revenue in accordance with its evaluation of the deliverables in each contract. If the deliverables represent separate units of accounting, the Company then measures and allocates the consideration from the arrangement to the separate units, based on vendor specific objective evidence of the value for each deliverable.

The revenue under time and materials contracts is recognized as services are rendered and performed at contractually agreed upon rates. Revenue pursuant to fixed-price contracts is recognized under the proportional performance method of accounting. We routinely evaluate whether revenue and profitability should be recognized in the current period. We estimate the proportional performance on our fixed-price contracts on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project. This method is used because reasonably dependable estimates of costs and revenue earned can be made, based on historical experience and milestones identified in any particular contract. If we do not have a sufficient basis to measure progress toward completion, revenue is recognized upon completion of performance, subject to any warranty provisions or other project management assessments as to the status of work performed.

Estimates of total project costs are continuously monitored during the term of an engagement. There are situations where the number of hours to complete projects may exceed our original estimate, as a result of an increase in project scope, unforeseen events that arise, or the inability of the client or the delivery team to fulfill their responsibilities. Accordingly, recorded revenues and costs are subject to revision throughout the life of a project based on current information and historical trends. Such revisions may result in increases or decreases to revenue and income and are reflected in the consolidated financial statements in the periods in which they are first identified.

If our initial estimates of the resources required or the scope of work to be performed on a contract are inaccurate, or we do not manage the project properly within the planned time period, a provision for estimated losses on incomplete projects may be made. Any known or probable losses on projects are charged to operations in the period in which such losses are determined. A formal project review process takes place quarterly, although projects are continuously evaluated throughout the period. Management reviews the estimated total direct costs on each contract to determine if the estimated amounts are accurate, and estimates are adjusted as needed in the period identified. No losses were recognized on contracts during the period ended June 30, 2016.

 

- 8 -

---

- 9 -

---

 

A reconciliation of net income and weighted average shares used in computing basic and diluted net income per share is as follows:

 

Share-based awards, inclusive of all grants made under the Company's equity plans, for which either the stock option exercise price or the fair value of the restricted share award exceeds the average market price over the period, have an anti-dilutive effect on earnings per share, and accordingly, are excluded from the diluted computations for all periods presented.

As of June 30, 2016, there were approximately 1,446,369 share-based awards outstanding, respectively, under the Company's equity plans leaving 553,631 share-based units available under the Plan.  During the six months ended June 30, 2016, we granted our employees options to purchase 755,500 shares of our common stock and restricted stock units to purchase 507,680 shares of our common stock.

 

Due to the Company's net loss, potential dilutive shares were not included in the calculation of diluted EPS on June 30, 2016, as it will have an antidilutive effect.

- 10 -

---

The Company's principal facility is located in Princeton, New Jersey. The Company also leases office space in various locations with expiration dates between 2016 and 2018.  The lease agreements often include leasehold improvement incentives, escalating lease payments, renewal provisions, and other provisions which require the Company to pay taxes, insurance, maintenance costs, or defined rent increases. All of the Company's leases are accounted for as operating leases.  Rent expense is recorded over the lease terms on a straight-line basis.  Rent expense was $57,434 and $10,812 for the six months ended June 30, 2016 and June 30, 2015, respectively.  The increase during these periods is due to new office space that was leased by the Company in Princeton, New Jersey on July 1, 2015 and the addition of office space through the acquisition of Bellsoft.

The Company has entered into an operating lease for its primary office facility in Princeton, New Jersey, which expires in July 2017. The future minimum rental payments under these lease agreements are as follows:

 

 

 

As of June 30, 2016 and June 30, 2015, the Company had issued and outstanding options to purchase 855,500 and 0 shares of our common stock, respectively.

On May 10, 2016, the Company issued an option to purchase 630,500 shares of common stock. This option grant vests over 3 years at an exercise price of $7.00 and expire on May 10, 2021. The option is valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected term of 4 years, expected volatility of 50%, date of issue risk free interest rate of 0.52%, and expected dividend yield of 0%. The value on the grant date of the options was $1,718,367 and the option expense for June 31, 2016 and 2015 was determined to be $80,031 and $0, respectively. As of June 30, 2016, no options have been exercised.

On June 28, 2016, the Company issued an option to purchase 25,000 shares of common stock. This option grant vests over 3 years at an exercise price of $6.51 and expires on June 28, 2021. The option is valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected term of 3.25 years, expected volatility of 50%, date of issue risk free interest rate of 0.45%, and expected dividend yield of 0%. The value on the grant date of the options was $55,251 and the option expense for June 31, 2016 and 2015 was determined to be $151 and $0, respectively. As of March 31, 2016, no options have been exercised.

 

 

 

 

 

 

 

 

As of June 30, 2016 and June 30, 2015 the outstanding options had a weighted average remaining term and intrinsic value of 4.19 and 0 years and $451,000 and $0, respectively.

Outstanding and Exercisable Options

The options are valued using the Black-Scholes pricing model. The expensed amount for options for June 30, 2016 and 2015 was determined to be $133,667 and $0, respectively.

 

 

On May 26, 2015, the Company issued a warrant for the purchase of 2,777,777 shares of its common stock to Lone Star Value, which vested immediately, has an exercise price of $1.80 and expires on May 26, 2020 (the "Original Warrant"). The Original Warrant is valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include stock price on the measurement date of $1.50, expected term of 2.5 years, expected volatility of 50%, risk free interest rate of 1.53%, and expected dividend yield of 0%. The value on the grant date of the Original Warrant was $1,078,523 and the expense for each of March 31, 2016 and March 31, 2015 was determined to be $0. As of June 30, 2016, the Company had outstanding warrants for the purchase of 1,666,666 shares of its common stock.

On May 10, 2016, the Company issued a warrant to an individual for the purchase of 7,000 shares of common stock. This warrant grant vests over 3 years at an exercise price of $7.00 and expire on May 10, 2021. The warrant is valued using the Black-Scholes pricing model. Significant assumptions used in the valuation include expected term of 4 years, expected volatility of 50%, date of issue risk free interest rate of 0.52%, and expected dividend yield of 0%. The value on the grant date of the warrant was $19,078 and the warrant expense for June 31, 2016 and 2015 was determined to be $889 and $0, respectively. As of June 30, 2016, no options have been exercised.

On May 13, 2016, Lone Star Value completed an early partial exercise of its Original Warrant for 1,111,111 shares the Company's common stock at a price of $1.80 per share, for total consideration to the Company of $2,000,000, and Lone Star Value was issued a replacement warrant for the remaining 1,166,666 shares under the Original Warrant on the same terms as the Original Warrant.  Lone Star Value also agreed to an amendment of its 5% Convertible Note, issued by the Company on May 26, 2015, to extend the maturity of the Note for two years in exchange for (i) the right to request that the Board of Directors of the Company (the "Board") expand the size of the Board to nine directors from the current eight, with Lone Star Value having the right to designate up to four of the nine directors, and (ii) the issuance of a new five-year warrant (the "New Warrant") for the purchase of 1,000,000 shares of the Company's common stock at a price of $6.00 per share, on substantively the same terms as the Original Warrant.  Lone Star Value's Registration Rights Agreement, dated May 26, 2015, with us was also amended and restated to include the shares of common stock issuable under the New Warrant.  

 There was no warrant activity in 2015. Below is a table summarizing the Company's outstanding warrants as of June 30, 2016:

 

 

For the six months ended June 30, 2016 and June 30, 2015, the Company incurred $889 and $-0- warrants based expense.

 

 

 

 

 

 

 

 

On August 4, 2015, the Company issued restricted stock units for the right to receive, at settlement, 83,189 shares of common stock. Prior to this issuance there had been no restricted stock unit grants. This tranche of restricted stock units is valued at $3.51 or market value on the date of the grant and vest over 1 year. The value on the grant date of the restricted stock units was $291,994 and the restricted stock units expense for June 30, 2016 and June 30, 2015 was determined to be $309,149 and $0, respectively. As of June 30, 2016, no restricted stock units were vested.

On May 10, 2016, the Company issued restricted stock units for the right to receive, at settlement, 500,000 shares of common stock. This tranche of restricted stock units is valued at $7.00 or market value on the date of the grant and vest over 3 years. The value on the grant date of the restricted stock units was $3.5 million and the restricted stock units expense for June 30, 2016 and June 30, 2015 was determined to be $163,014 and $0, respectively. As of June 30, 2016, no restricted stock units were vested.

On June 28, 2016, the Company issued restricted stock units for the right to receive, at settlement, 7,680 shares of common stock. Prior to this issuance there had been no restricted stock unit grants. This tranche of restricted stock units is valued at $6.51 or market value on the date of the grant and vest over 1 year. The value on the grant date of the restricted stock units was $49,997 and the restricted stock units expense for June 30, 2016 and June 30, 2015 was determined to be $137 and $0, respectively. As of June 30, 2016, no restricted stock units were vested.

 

Loan Agreement with Sterling National Bank

On July 1, 2016, the Company entered into that certain Loan and Security Agreement (the "Loan Agreement"), with its wholly-owned subsidiaries Ameri and Partners Inc and BellSoft. as borrowers (the "Borrowers"), the Company and its wholly-owned subsidiaries Linear Logics Corp. and Winhire Inc serving as guarantors (the "Guarantors"), the Company's Chief Executive Officer, Giri Devanur, serving as a validity guarantor, and Sterling National Bank, N.A. (as lender and as agent, "Sterling").

(a)

in the case of Revolving Loans, a rate per annum equal to the sum of (i) the Wall Street Journal Prime Rate plus (ii) 2.00%;

(b)

in the case of the Term Loan, a rate per annum equal to the sum of (i) the Wall Street Journal Prime Rate plus (ii) 3.75%; and

(c)

in the case of other obligations of the Borrowers, a rate per annum equal to the sum of (i) the greater of (A) 3.25% or (B) Wall Street Journal Prime Rate plus (ii) 3.75%.

Acquisition of Virtuoso

Acquisition of DC&M

On July 29, 2016, the Company acquired 100% of the membership interests of DC&M Partners, L.L.C. ("DCM"), an Arizona limited liability company, pursuant to the terms of a Membership Interest Purchase Agreement (the "MIPA") among the Company, DCM, all of the members of DCM (the "Members"), Giri Devanur and Srinidhi "Dev" Devanur. DCM is a provider of information technology development, consulting and management services and is located in Chandler, Arizona.

The purchase price for the acquisition of DCM consisted of: (a) a cash payment in the amount of $3,000,000 at closing, (b) 1,600,000 shares of the Company's common stock (the "DCM Shares"), which are to be issued on July 29, 2018 or upon a change of control of the Company (whichever occurs earlier), and (c) earn-out payments to be paid, if earned, in 2017 and 2018.

- 14 -

---

Company History

 

We were incorporated under the laws of the State of Delaware in February 1994 as Spatializer Audio Laboratories, Inc., which had been a shell company until May of 2015.  On May 26, 2015, we completed a "reverse merger" transaction, in which we caused Ameri100 Acquisition, Inc., a Delaware corporation and our newly created, wholly owned subsidiary, to be merged with and into Ameri and Partners (dba Ameri100), a Delaware corporation (the "Merger"). As a result of the Merger, Ameri and Partners became our wholly owned subsidiary with Ameri and Partners' former stockholders acquiring a majority of the outstanding shares of our common stock. The Merger was consummated under Delaware law, pursuant to an Agreement of Merger and Plan of Reorganization, dated as of May 26, 2015.  Since the Merger, we have been an active holding company headquartered in Princeton, New Jersey.

Overview

We are a next generation technology-management solutions firm.  We have built products and services to assist global 2000 companies by architecting and delivering the best technology solutions enabling customers to transform their business processes.  We have built a new method of measuring the effectiveness of technology deployments across large and medium size companies. Through acquisitions, we have built deep consulting expertise in business process management, robotic process automation, digital transformation services and enterprise resource planning particularly surrounding SAP software and technology.

 

We generate revenue primarily through the provision of consulting services. We generate revenue by providing consulting services under written service contracts with our customers. The service contracts we enter into generally fall into two specific categories: time and materials and fixed-price.

When a customer enters into a time and materials, fixed-price, or a periodic retainer-based contract, we recognize revenue in accordance with its evaluation of the deliverables in each contract. If the deliverables represent separate units of accounting, we then measure and allocate the consideration from the arrangement to the separate units, based on vendor specific objective evidence of the value for each deliverable.

The revenue under time and materials contracts is recognized as services are rendered and performed at contractually agreed upon rates. Revenue pursuant to fixed-price contracts is recognized under the proportional performance method of accounting. We routinely evaluate whether revenue and profitability should be recognized in the current period. We estimate the proportional performance on our fixed-price contracts on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project.

 

 

 

 

 

Result of Operations

Results of Operations for the Three Months Ended June 30, 2016 Compared to the Three Months Ended June 30, 2015

 

 

Revenues

Revenues for the three months ended June 30, 2016 increased $2.756 million or 70.1% from the three months ended June 30, 2015.  The increase in revenue is directly attributable to our acquisition of Bellsoft, Inc. We derived 100% of our revenues from our customers located in North America for the three months ended June 30, 2016.

  

Gross margin

Our gross margin percentage (gross margin as percentage of revenues) was 22.7% for the three months ended June 30, 2016 as compared to 25.0% for the three months ended June 30, 2015 as a result of lower margins for professional services in 2016 than the project revenues for 2015.

Selling, general and administrative expenses

Selling, general and administrative expenses ("SG&A") include all costs, including rent costs, which are not directly associated with revenue-generating activities.  These include employee costs, corporate costs and facilities costs.  Employee costs include selling, marketing and administrative salaries and related employee benefits, travel, recruiting and training costs.  Corporate costs include costs such as reorganization costs, legal, accounting and outside consulting fees.  Facilities costs primarily include rent and communications costs.

SG&A for the three months ended June 30, 2016 increased to $2,112,839 from $489,719 and for the three months ended June 30, 2015. The increase in SG&A is directly attributable to our acquisition of Bellsoft and increased corporate overhead.

Nonrecurring expenses

Nonrecurring expenditures of $239,815 were incurred during the three months ended June 30, 2016 and were primarily costs and expenses that are unlikely to occur again in the normal course of business. These expenditures included an increase in the previously calculated earn-out estimate, restructuring costs and legal fees.

 

 

 

 

Depreciation and amortization costs

Depreciation and amortization expense amounted to $101,385 for the three months ended June 30, 2016, as compared to $8,048 for the period ended June 30, 2015.  The increase in depreciation and amortization costs was primarily due to addition of assets and acquisition of Bellsoft Inc. customer lists.

Operating income

Our operating income percentage was (14.0)% for the three months ended June 30, 2016, as compared to 4.6% for the three months ended June 30, 2015. This change was mainly due to an increase in SG&A expenses and nonrecurring expenditures.

Income taxes

Our provision for income taxes for the three months ended June 30, 2016 and the three month period ended June 30, 2015, amounted to approximately $2,020 and ($43,489), respectively and declined as a result of our first and second quarter losses.

Result of Operations

 

Results of Operations for the Six Months Ended June 30, 2016 Compared to the Six Months Ended June 30, 2015

 

 

Revenues

Revenues for the six months ended June 30, 2016 increased from $8,215,688 to $13,699,902, or 66.8%, for the six months ended June 30, 2015.  The increase in revenue is directly attributable to our acquisition of Bellsoft. We derived 100% of our revenues from our North American customers for the six months ended June 30, 2016.

  

Gross margin

 

 

 

Selling, general and administrative expenses

Selling, general and administrative expenses ("SG&A") include all costs, including rent costs, which are not directly associated with revenue-generating activities.  These include employee costs, corporate costs and facilities costs.  Employee costs include selling, marketing and administrative salaries and related employee benefits, travel, recruiting and training costs.  Corporate costs include costs such as reorganization costs, legal, accounting and outside consulting fees.  Facilities costs primarily include rent and communications costs.

SG&A for the six months ended June 30, 2016 increased to $3,862,779 from $523,439 and for the six months ended June 30, 2015. The increase in SG&A is directly attributable to our acquisition of Bellsoft and increased corporate overhead.

Nonrecurring expenses

Nonrecurring expenditures of $615,220 and $304,924 occurred during the six months ended June 30, 2016 and 2015 and were primarily costs and expenses that are unlikely to occur again in the normal course of business. These expenditures included an increase in the estimated earn out, restructuring costs and legal fees.

Depreciation and amortization costs

Depreciation and amortization expense amounted to $213,013 for the six months ended June 30, 2016, as compared to $16,315 for the six month period ended June 30, 2015.  The increase in depreciation and amortization costs was primarily due to addition of assets and acquisition of Bellsoft Inc. customer lists.

Operating income

Our operating income percentage was (14.0)% for the six months ended June 30, 2016, as compared to 15.3% for the six months ended June 30, 2015. This change was mainly due to an increase in SG&A expenses and nonrecurring expenditures.

Income taxes

Our provision for income taxes for the six months ended June 30, 2016 and six months ended June 30, 2015, amounted to approximately $-0- and $(43,489), respectively.

Liquidity and Capital Resources

Our cash position was $3,603,663 as of June 30, 2016 as compared to $1,878,034 as of December 31, 2015, a change of $1,725,629 primarily as a result of financing activities, including the sale of our common stock and the partial exercise of an outstanding warrant.  

Cash used by operating activities was $166,151 during the six months ended June 30, 2016 and was primarily a result of remittances towards accounts receivables and increased accounts payables. Cash used in investing activities was $3,279,654 during the six months ended June 30, 2016 was primarily due to acquisitions and assets purchased for the purpose of providing future revenues.  Cash provided by financing activities was $5,171,434 during the six months ended June 30, 2016 and was attributable to additional stock issuances.

Operating Activities

Our largest source of operating cash flows is cash collections from our customers for different information technology services we render under various statements of work. Our primary uses of cash from operating activities are for personnel-related expenditures, leased facilities and taxes.

 

 

 

Critical Accounting Policies

Purchase Price Allocation.  We allocate the purchase price of our acquisitions to the assets and liabilities acquired, including identifiable intangible assets, based on their respective fair values at the date of acquisition. Some of the items, including accounts receivable, property and equipment, other intangible assets, certain accrued liabilities and other reserves require a degree of management judgment. Certain estimates may change as additional information becomes available. Goodwill is assigned at the enterprise level and is deductible for tax purposes for certain types of acquisitions. Management finalizes the purchase price allocation within the defined measurement period of the acquisition date as certain initial accounting estimates are resolved.

Valuation of Contingent Earn-out Consideration. Acquisitions may include contingent consideration payments based on the achievement of certain future financial performance measures of the acquired company. Contingent consideration is required to be recognized at fair value as of the acquisition date. We estimate the fair value of these liabilities based on financial projections of the acquired companies and estimated probabilities of achievement. We believe our estimates and assumptions are reasonable, however, there is significant judgment involved. We evaluate, on a routine, periodic basis, the estimated fair value of the contingent consideration and changes in estimated fair value, subsequent to the initial fair value estimate at the time of the acquisition, will be reflected in income or expense in the consolidated statements of operations. Changes in the fair value of contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of revenue and/or earnings estimates and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria. Any changes in the estimated fair value of contingent consideration may have a material impact on our operating results.

Revenue Recognition. We recognize revenue in accordance with the Accounting Standard Codification 605 "Revenue Recognition." Revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller's price to buyer is fixed and determinable, and (4) collectability is reasonably assured. We recognize revenue from information technology services as the services are provided. Service revenues are recognized based on contracted hourly rates, as services are rendered or upon completion of specified contracted services and acceptance by the customer.

 

Accounts Receivable.   We extend credit to clients based upon management's assessment of their credit-worthiness on an unsecured basis. We provide an allowance for uncollectible accounts based on historical experience and management evaluation of trend analysis. We include any balances that are determined to be uncollectible in allowance for doubtful accounts. The allowances for uncollectible accounts as of June 30, 2016 and June 30, 2015 was $0.  Based on the information available, management believes our accounts receivable, net of allowance for doubtful accounts, are collectible.

 

Property and Equipment. Property and equipment is stated at cost. We provide for depreciation of property and equipment using the straight-line method over the estimated useful lives of the related assets ranging from 3 to 7 years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease terms or the useful lives of the improvements. We charge repairs and maintenance costs that do not extend the lives of the assets to expenses as incurred.

We account for computer software costs developed for internal use in accordance with accounting principles generally accepted in the Unites States, which require companies to capitalize certain qualifying costs during the application development stage of the related software development project and to exclude the initial planning phase that determines performance requirements, most data conversion, general and administrative costs related to payroll and training costs incurred. Whenever a software program is considered operational, we consider the project to be completed, place it into service, and commence amortization of the development cost in the succeeding month.

Recent Accounting Pronouncements

The Company is reviewing the effects of following recent updates.  The Company has no expectation that any of these items will have a material effect upon the financial statements.

 

·

Update 2015-16 - Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments

·

Update 2015-15 – Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting  (SEC Update)

·

Update 2015-14 - Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date

·

Update 2015-11 - Inventory (Topic 330): Simplifying the Measurement of Inventory

·

Update 2015-08 - Business Combinations (Topic 805): Pushdown Accounting - Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115  (SEC Update)

·

Update No. 2015-03 – Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs

·

Update 2015-17 - Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes

·

Update 2016-01 - Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

·

Update No. 2015-02 - Consolidation (Topic 810): Amendments to the Consolidation Analysis

·

Update 2016-09 - Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting

Special Note Regarding Forward-Looking Information

Some of the statements in this Quarterly Report on Form 10-Q and elsewhere constitute forward-looking statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements involve known and unknown risks, uncertainties and other factors that may cause results, levels of activity, growth, performance, tax consequences or achievements to be materially different from any future results, levels of activity, growth, performance, tax consequences or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, those listed below.

The forward-looking statements included in this Form 10-Q and referred to elsewhere are related to future events or our strategies or future financial performance, including statements concerning our 2016 outlook, future revenue and growth, customer spending outlook, general economic trends, IT service demand, future revenue and revenue mix, utilization, new service offerings, significant customers, competitive and strategic initiatives, growth plans, potential stock repurchases, future results, tax consequences and liquidity needs. In some cases, you can identify forward-looking statements by terminology such as "may," "should," "believe," "anticipate," "anticipated," "expectation," "continued," "future," "forward," "potential," "estimate," "estimated," "forecast," "project," "encourage," "opportunity," "goal," "objective," "could," "expect," "expected," "intend," "plan," "planned," or the negative of such terms or comparable terminology. These forward-looking statements inherently involve certain risks and uncertainties, although they are based on our current plans or assessments which are believed to be reasonable as of the date of this Form 10-Q. Factors that may cause actual results, goals, targets or objectives to differ materially from those contemplated, projected, forecasted, estimated, anticipated, planned or budgeted in such forward-looking statements include, among others, the following possibilities: (1) failure to obtain new customers or retain significant existing customers; (2) the loss of one or more key executives and/or employees; (3) changes in industry trends, such as a decline in the demand for Enterprise Resource Planning and Enterprise Performance Management solutions, custom development and system integration services and/or declines in industry-wide information technology spending, whether on a temporary or permanent basis and/or delays by customers in initiating new projects or existing project milestones; (4) inability to execute upon growth objectives, including new services and growth in entities acquired by our Company; (5) adverse developments and volatility involving geopolitical or technology market conditions; (6) unanticipated events or the occurrence of fluctuations or variability in the matters identified as delays in, or the failure of, our sales pipeline being converted to billable work and recorded as revenue; (8) termination by clients of their contracts with us or inability or unwillingness of clients to pay for our services, which may impact our accounting assumptions; (9) inability to recruit and retain professionals with the high level of information technology skills and experience needed to provide our services; (10) failure to expand outsourcing services to generate additional revenue; (11) any changes in ownership of the Company or otherwise that would result in a limitation of the net operating loss carry forward under applicable tax laws; (12) the failure of the marketplace to embrace advisory and product-based consulting services; and (13) changes in our utilization levels. In evaluating these statements, you should specifically consider various factors described above. These factors may cause our actual results to differ materially from those contemplated, projected, anticipated, planned or budgeted in any such forward-looking statements.

 

 

 

Although we believe that the expectations in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, growth, earnings per share or achievements. However, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Except as otherwise required, we undertake no obligation to update any of the forward-looking statements after the date of this Form 10-Q to conform such statements to actual results.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable. 

ITEM 4.

CONTROLS AND PROCEDURES

Management's Report on Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this quarterly report, being June 30, 2016, we have carried out an evaluation of the effectiveness of the design and operation of our Company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our Company's management, including our Company's Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our company's Chief Executive Officer and Chief Financial Officer concluded that our company's disclosure controls and procedures are not effective as at the end of the period covered by this report as noted below in management's report on internal control over financial reporting, but have been corrected. There have been changes in our internal controls over financial reporting to resolve certain internal control inadequacies, due to the privately held nature of acquired subsidiaries that were corrected that occurred during the period covered by this report that have not materially affected, or are not reasonably likely to materially affect our internal controls over financial reporting.

Disclosure controls and procedures and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time period specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

 

 

 

Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. Our management has assessed the effectiveness of our internal control over financial reporting as of June 30, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with generally accepted accounting principles; providing reasonable assurance that receipts and expenditures are made in accordance with authorizations of management and our directors; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. As a result of this assessment, our management concluded that, as of June 30, 2016, our internal control over financial reporting was not effective in providing reasonable assurance, due to certain internal control inadequacies, due to the privately held nature of acquired subsidiaries that were corrected, regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Inherent Limitations on Effectiveness of Controls

Internal control over financial reporting has inherent limitations which include but is not limited to the use of independent professionals for advice and guidance, interpretation of existing and/or changing rules and principles, segregation of management duties, scale of organization, and personnel factors. Internal control over financial reporting is a process, which involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis, however these inherent limitations are known features of the financial reporting process and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control over Financial Reporting

There were changes to correct certain internal control inadequacies, due to the privately held nature of acquired subsidiaries in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the period covered by this report that have not materially affected, or are not reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

PART II – OTHER INFORMATION

 

 

None.

  

In evaluating us and our common stock, we urge you to carefully consider the risks and other information in this Quarterly Report on Form 10-Q, as well as the risk factors disclosed in Item 1A of the Annual Report on Form 10-KT, which we filed with the SEC on March 15, 2016. There have been no material changes to the risk factors previously disclosed in our 2015 Annual Report on Form 10-KT.

On April 20, 2016, we entered into a Stock Purchase Agreement with Dhruwa N. Rai, pursuant to which Mr. Rai purchased 500,000 unregistered shares of our common stock, par value $0.01 per share, from us at a price per share of $6.00 for aggregate consideration to us of $3,000,000.

On May 13, 2016, Lone Star Value completed an early partial exercise of its Original Warrant for 1,111,111 shares of our common stock at a price of $1.80 per share, for total consideration to us of $2,000,000, and Lone Star Value was issued a replacement warrant for the remaining 1,166,666 shares under the Original Warrant on the same terms as the Original Warrant.  Lone Star Value also agreed to an amendment of its Note to extend the maturity of the Note for two years in exchange for (i) the right to request that the Board expand the size of the Board to nine directors from the current eight, with Lone Star Value having the right to designate up to four of the nine directors, and (ii) the issuance of a new five-year warrant for the purchase of 1,000,000 shares of the Company's common stock at a price of $6.00 per share, on substantively the same terms as the Original Warrant, except the New Warrant may only be exercised for cash.  Lone Star Value's Registration Rights Agreement, dated May 26, 2015, with the Company was also amended and restated to include the shares of common stock issuable under the New Warrant.

 

The issuances of the shares of common stock to Mr. Rai, the New Warrant and the shares of the Company's common stock exercisable for thereunder were made in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), provided by Section 4(a)(2) of the Securities Act as a private offering.  Such issuances of the shares to Mr. Rai and the New Warrant did not, and the issuance of any shares of common stock exercisable under the New Warrant will not, involve a public offering, and was made and will be made without general solicitation or advertising.

 

None.

 

 

Not applicable.

None.

 

_________________

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.