Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2015, for AMERI Holdings, Inc. (formerly Spatializer Audio Laboratories, Inc.). The company is a strategic consulting firm providing technology and business process solutions, primarily in North America. During the quarter, the company completed a reverse merger with Ameri & Partners Inc. on May 26, 2015, and acquired Linear Logics Corp. on April 1, 2015. The company is classified as a smaller reporting company.
Key Financial Metrics
| Metric | Q2 2015 | Q2 2014 |
|---|---|---|
| Net Revenue | $3,930,938 | $3,993,326 |
| Gross Profit | $982,663 | $1,079,978 |
| Gross Margin | 25.0% | 27.0% |
| Operating Income | $188,020 | $575,173 |
| Net Income | $110,969 | $408,365 |
| Diluted EPS | $0.01 | $0.04 |
| Cash and Equivalents (End of Period) | $4,377,590 | $572,060 |
| Total Assets | $10,436,569 | $4,461,473 (Mar 31, 2015) |
| Total Liabilities | $9,318,159 | $3,488,617 (Mar 31, 2015) |
| Convertible Notes (Long Term) | $5,000,000 | $0 |
Cash Flow Summary (Three Months Ended June 30, 2015):
- Net cash used in operating activities: $(842,024)
- Net cash used in investing activities: $(640,528)
- Net cash provided by financing activities: $5,034,521
- Net increase in cash: $3,551,969
Material Changes vs. Prior Period
- Revenue: Decreased marginally by $62,388 (1.6%) compared to Q2 2014. The mix shifted significantly, with time and materials contracts rising from 37.5% to 72.2% of revenue.
- Profitability: Net income decreased by 72.8% to $110,969. This decline is primarily attributed to $304,924 in merger and acquisition costs not present in the prior year.
- Liquidity: Cash balances increased significantly from $825,621 at March 31, 2015, to $4,377,590 at June 30, 2015, driven by financing activities.
- Debt: The company issued a $5,000,000 convertible note in May 2015, resulting in a new long-term liability line item.
- Assets: Intangible assets increased from $100,000 to $1,072,165 due to the acquisition of Linear Logics Corp., which included $814,522 in acquired products.
Guidance, Outlook, and Risks
Management Commentary: Management notes a healthy revenue pipeline entering the third quarter of 2015. The acquisition of Linear Logics added three new customers and expanded capabilities in Supply Chain Management and SAP solutions. The company expects to continue expanding sales across service offerings.
Contingencies and Commitments:
- Earnout: The Linear Logics acquisition includes an earnout agreement where former shareholders may receive additional consideration based on performance measures over two consecutive twelve-month periods ending April 1, 2017.
- Convertible Note: A $5,000,000, 5% unsecured convertible note was issued to Lone Star Value Investors, LP, due May 26, 2017. It includes a warrant to purchase up to 2,777,777 shares at $1.80 per share.
Risks: Key risks include the failure to retain significant customers, loss of key executives, declines in IT spending, and the inability to execute growth objectives. The company also faces risks related to the valuation of contingent earnout consideration and the integration of acquired entities.
Investor Verification Checklist
- Debt Terms: Verify the specific conversion terms and interest obligations of the $5,000,000 convertible note issued to Lone Star Value Investors.
- Earnout Liability: Monitor the fair value adjustments of the contingent earnout liability related to the Linear Logics acquisition, as changes can materially impact operating results.
- Revenue Mix: Assess the sustainability of the shift toward time and materials contracts (72.2% of revenue) versus fixed-price contracts.
- Operating Cash Flow: Review the negative operating cash flow of $(842,024) and the company's ability to fund operations without further financing.
- Intangible Assets: Confirm the amortization schedule for the $814,522 in acquired products, which is currently deferred until the products are ready for use.