0001193125-11-286514.txt : 20111028 0001193125-11-286514.hdr.sgml : 20111028 20111028172323 ACCESSION NUMBER: 0001193125-11-286514 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20110815 ITEM INFORMATION: Completion of Acquisition or Disposition of Assets ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20111028 DATE AS OF CHANGE: 20111028 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELLIE MAE INC CENTRAL INDEX KEY: 0001122388 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-35140 FILM NUMBER: 111166119 BUSINESS ADDRESS: STREET 1: 4155 HOPYARD ROAD, SUITE 200 CITY: PLEASANTON STATE: CA ZIP: 94588 BUSINESS PHONE: 925-227-2082 MAIL ADDRESS: STREET 1: 4155 HOPYARD ROAD, SUITE 200 CITY: PLEASANTON STATE: CA ZIP: 94588 8-K/A 1 d248571d8ka.htm FORM 8-K AMENDMENT Form 8-K Amendment

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 8-K/A

 

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported): August 15, 2011

 

 

ELLIE MAE, INC.

(Exact name of Registrant as Specified in its Charter)

 

 

 

Delaware    001-35140    94-3288780

(State or other jurisdiction

of incorporation)

  

(Commission

File Number)

  

(I.R.S. Employer

Identification No.)

4155 Hopyard Road, Suite 200,

Pleasanton, California

   94588
(Address of Principal Executive Offices)    (Zip Code)

Registrant’s telephone number, including area code 925-227-7000

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 


ITEM 2.01 Completion of Acquisition or Disposition of Assets.

As previously reported, on August 15, 2011, Ellie Mae, Inc., a Delaware corporation (“Ellie Mae” or the “Company”), consummated the acquisition of Del Mar Datatrac, Inc., a California corporation (“DMD”), pursuant to a Stock Purchase Agreement, dated as of August 15, 2011, by and among the Company, Northgate Private Equity Partners III, L.P., NPEP III-Q, L.L.C., TVC Capital L.P., TVC Capital 12-4-0 Fund L.P., TVC Capital Partners L.P., TVC Capital, LLC , as Sellers’ Representative, and certain listed management employees of DMD.

 

Item 9.01 Financial Statements and Exhibits

(a) Financial Statements of Business Acquired.

 

   

Audited Consolidated Financial Statements of DMD as of and for the years ended December 31, 2010 and 2009, filed as Exhibit 99.1.

 

   

Unaudited Condensed Consolidated Financial Statements of DMD as of June 30, 2011 and December 31, 2010 and for the six months ended June 30, 2011 and 2010, filed as Exhibit 99.2.

(b) Pro Forma Financial Information

 

   

Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2011 and Unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 2010 and for the six months ended June 30, 2011, filed as Exhibit 99.3.


(d) Exhibits.

 

Exhibit

Number

  

Exhibit

23.1    Consent of SingerLewak LLP.
99.1    Audited Consolidated Financial Statements of DMD as of and for the years ended December 31, 2010 and 2009.
99.2    Unaudited Condensed Consolidated Financial Statements of DMD as of June 30, 2011 and December 31, 2010 and for the six months ended June 30, 2011 and 2010.
99.3    Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2011 and Unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 2010 and for the six months ended June 30, 2011.


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 hereunto duly authorized.

 

Ellie Mae, Inc.
By:  

/s/ Edgar A. Luce

  Edgar A. Luce
  Chief Financial Officer

Date: October 28, 2011


EXHIBIT INDEX

 

Exhibit

Number

  

Exhibit

23.1    Consent of SingerLewak LLP.
99.1    Audited Consolidated Financial Statements of DMD as of and for the years ended December 31, 2010 and 2009.
99.2    Unaudited Condensed Financial Statements of DMD as of June 30, 2011 and December 31, 2010 and for the six months ended June 30, 2011 and 2010.
99.3    Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2011 and Unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 2010 and for the six months ended June 30, 2011.
EX-23.1 2 d248571dex231.htm CONSENT OF SINGERLEWAK LLP Consent of SingerLewak LLP

Exhibit 23.1

Consent of Independent Auditor

We consent to the incorporation by reference in the Registration Statement (No. 333-174460) on Form S-8 of Ellie Mae, Inc. of our reports dated July 15, 2011 and November 3, 2010, relating to our audit of the financial statements of Del Mar DataTrac, Inc. as of and for the two years then ended December 31, 2010 and 2009, included in this Current Report on Form 8-K/A.

/s/ SingerLewak LLP

SingerLewak LLP

Irvine, California

October 28, 2011

EX-99.1 3 d248571dex991.htm AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF DMD Audited Consolidated Financial Statements of DMD

Exhibit 99.1

DEL MAR DATATRAC, INC.

FINANCIAL STATEMENTS

FOR THE YEAR ENDED

DECEMBER 31, 2010


DEL MAR DATATRAC, INC.

CONTENTS

December 31, 2010

 

 

 

     Page

INDEPENDENT AUDITOR’S REPORT

   1

FINANCIAL STATEMENTS

  

Balance Sheet

   2 - 3

Statement of Operations

   4

Statement of Shareholders’ Equity

   5

Statement of Cash Flows

   6 - 7

Notes to Financial Statements

   8 - 25


LOGO

INDEPENDENT AUDITOR’S REPORT

To the Board of Directors

Del Mar DataTrac, Inc.

San Diego, California

We have audited the accompanying balance sheet of Del Mar DataTrac, Inc. (the “Company”) as of December 31, 2010, and the related statements of operations, shareholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

/s/ SingerLewak LLP

SingerLewak LLP

Irvine, California

July 15, 2011

LOGO


DEL MAR DATATRAC, INC.

BALANCE SHEET

December 31, 2010

 

 

ASSETS

 

Current assets

  

Cash and cash equivalents

   $ 1,437,349   

Accounts receivable, net of allowance for doubtful accounts of $13,497

     475,708   

Prepaid expenses and other current assets

     47,842   
  

 

 

 

Total current assets

     1,960,899   

Property and equipment, net

     116,383   

Computer software, net

     59,494   

Goodwill

     2,774,463   

Intangible asset, net

     770,650   

Deposits

     26,112   
  

 

 

 

Total assets

   $ 5,708,001   
  

 

 

 

The accompanying notes are an integral part of these financial statements.

 

2


DEL MAR DATATRAC, INC.

BALANCE SHEET

December 31, 2010

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

Current liabilities

  

Accounts payable

   $ 112,486   

Accrued expenses and other current liabilities

     378,055   

Income tax payable

     7,600   

Deferred revenue

     1,793,410   

Current portion of capital lease obligations

     5,603   
  

 

 

 

Total current liabilities

     2,297,154   

Capital lease obligations, net of current portion

     9,869   
  

 

 

 

Total liabilities

     2,307,023   
  

 

 

 

Commitments and contingencies (Note 10)

  

Shareholders’ equity

  

Common stock, no par value 13,000,000 shares authorized 8,999,995 shares issued and outstanding

     5,000,000   

Additional paid-in capital

     92,139   

Accumulated deficit

     (1,691,161
  

 

 

 

Total shareholders’ equity

     3,400,978   
  

 

 

 

Total liabilities and shareholders’ equity

   $ 5,708,001   
  

 

 

 

The accompanying notes are an integral part of these financial statements.

 

3


DEL MAR DATATRAC, INC.

STATEMENT OF OPERATIONS

For the Year Ended December 31, 2010

 

 

 

     Amount     % of
Net Sales
 

Revenues

    

Licenses

   $ 3,087,742        39.7   

Services and other

     4,695,737        60.3   
  

 

 

   

 

 

 

Total revenue

     7,783,479        100.0   

Cost of sales

     671,926        8.6   
  

 

 

   

 

 

 

Gross profit

     7,111,553        91.4   
  

 

 

   

 

 

 

Operating expenses

    

Sales and marketing expenses

     1,674,868        21.5   

Research and development expenses

     3,481,045        44.7   

General and administrative expenses

     2,279,553        29.3   
  

 

 

   

 

 

 

Total operating expenses

     7,435,466        95.5   
  

 

 

   

 

 

 

Loss from operations

     (323,913     (4.1
  

 

 

   

 

 

 

Other income (expense)

    

Interest income

     34        0.0   

Interest expense

     (1,091     (0.0
  

 

 

   

 

 

 

Total other income (expense)

     (1,057     (0.0
  

 

 

   

 

 

 

Loss before provision for income taxes

     (324,970     (4.1

Provision for income taxes

     16,751        0.2   
  

 

 

   

 

 

 

Net loss

   $ (341,721     (4.3
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

4


DEL MAR DATATRAC, INC.

STATEMENT OF SHAREHOLDERS’ EQUITY

For the Year Ended December 31, 2010

 

 

 

     Common Stock                      
     Shares      Amount      Additional
Paid-in Capital
     Accumulated
Deficit
    Total  

Balance, December 31, 2009

     8,999,995       $ 5,000,000       $ 28,382       $ (1,349,440   $ 3,678,942   

Stock-based compensation

     —           —           63,757         —          63,757   

Net loss

     —           —           —           (341,721     (341,721
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance, December 31, 2010

     8,999,995       $ 5,000,000       $ 92,139       $ (1,691,161   $ 3,400,978   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

5


DEL MAR DATATRAC, INC.

STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2010

 

 

 

Cash flows from operating activities

  

Net loss

   $ (341,721

Adjustments to reconcile net loss to net cash provided by operating activities

  

Stock-based compensation

     63,757   

Bad debt expense

     7,693   

Depreciation and amortization

     424,187   

Decrease (increase) in
Accounts receivable

     (87,799

Prepaid expenses and other current assets

     24,465   

Increase (decrease) in
Accounts payable

     26,792   

Accrued expenses and other current liabilities

     66,038   

Accrued income tax payable

     4,400   

Deferred revenue

     181,534   
  

 

 

 

Net cash flows provided by operating activities

     369,346   
  

 

 

 

Cash flows from investing activities

  

Purchase of property and equipment

     (46,043

Purchase of computer software

     (13,881
  

 

 

 

Net cash flows used in investing activities

     (59,924
  

 

 

 

Cash flows from financing activities

  

Principal payments on capital lease

     (2,544
  

 

 

 

Net cash flows used in financing activities

     (2,544
  

 

 

 

Net increase in cash and cash equivalents

     306,878   

Cash and cash equivalents, beginning of year

     1,130,471   
  

 

 

 

Cash and cash equivalents, end of year

   $ 1,437,349   
  

 

 

 

The accompanying notes are an integral part of these financial statements.

 

6


DEL MAR DATATRAC, INC.

STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2010

 

 

(Continued)

 

Supplemental disclosures of cash flow information

  

Interest paid

   $ 1,091   
  

 

 

 

Income taxes paid

   $ 13,586   
  

 

 

 

Supplemental schedule of non-cash investing and financing activities

  

In connection with the purchase of certain property and equipment under capital lease

   $ 18,016   
  

 

 

 

The accompanying notes are an integral part of these financial statements.

 

7


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2010

 

 

 

NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS

Del Mar DataTrac, Inc. (the “Company”) is based in San Diego, California and was founded in 1991. The Company provides software for mortgage lending solutions. The Company offers a suite of software products including DataTrac, WebTrac, DocumentTrac, BusinessTrac, CommissionTrac and InTrac. The Company serves businesses in the mortgage and lending industry including credit unions, banks and mortgage brokers.

On January 24, 2008, the Company was acquired from its former parent company, Fiserv, Inc. (NYSE: FISV).

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The summary of significant accounting policies presented below is designed to assist in understanding the Company’s financial statements. The financial statements and accompanying notes are the representations of the Company’s management, who is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) in all material respects.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

The Company recognizes software license and third party product revenues upon shipment or download of the product, when no significant vendor obligations remain and collection is probable. In cases where a significant vendor obligation exists, revenue recognition is delayed until such obligation has been satisfied. For new software products where a historical record has not yet been demonstrated that acceptance is perfunctory, the Company defers recognition of revenue until acceptance has occurred. If an undelivered element of the arrangement exists under the license arrangement, a portion of revenue is deferred based on vendor-specific objective evidence (“VSOE”) of the fair value of the undelivered element until delivery occurs. If VSOE does not exist for all undelivered elements, all revenue is deferred until sufficient evidence exists or all elements have been delivered.

 

8


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2010

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Revenue Recognition (Continued)

Annual maintenance revenues, which consist of ongoing support and product updates, are recognized on a straight-line basis over the term of the contract. Payments received in advance of performance of the related service for maintenance contracts are recorded as deferred revenue. Revenues from training and consulting services are recognized when the services are performed and adequate evidence of providing such services is available. The Company’s deferred revenue is recognized as revenues between 1 to 12 months. The Company considers many factors when applying accounting principles generally accepted in the United States of America related to revenue recognition. These factors include, but are not limited to:

 

   

The actual contractual terms, such as payment terms, delivery / download dates, and pricing of the various product and service elements of a contract.

 

   

Availability of products to be delivered / downloaded.

 

   

Time period over which services are to be performed.

 

   

Creditworthiness of the customer.

 

   

The complexity of customizations to the Company’s software required by service contracts.

 

   

The sales channel through which the sale is made (direct, VAR, distributor, etc.).

 

   

Discounts, if any, given for each element of a contract.

 

   

Any commitments made as to installation or implementation of “go live” dates.

Each of the relevant factors is analyzed to determine its impact, individually and collectively with other factors, on the revenue to be recognized for any particular contract with a customer. Management is required to make judgments regarding the significance of each factor in applying the revenue recognition standards, as well as whether or not each factor complies with such standards. Any misjudgment or error by management in its evaluation of the factors and the application of the standards, especially with respect to complex or new types of transactions, could have a material adverse effect on the Company’s future operating results.

Cash and Cash Equivalents

For purposes of reporting the statement of cash flows, the Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

Fair Value of Financial Instruments

The estimated fair values of the Company’s short-term financial instruments, including cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, deferred revenue and other current liabilities arising from the ordinary course of business, approximate their individual carrying amounts due to the relatively short period of time between their origination and expected realization.

 

9


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2010

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Accounts Receivable

The Company extends credit to its customers. Collateral is generally not required. Credit losses are provided for in the financial statements based on management’s evaluation of historical and current industry trends. Although the Company expects to fully collect amounts due, actual collections may differ from estimated amounts, and the Company provides for an allowance for doubtful accounts as necessary.

Property and Equipment

Property and equipment are stated at cost. The Company provides for depreciation and amortization using the straight-line method over the estimated useful lives of the various classes of property, as follows:

 

Computers

   3 years

Furniture and fixtures

   5 years

Office equipment

   3 years

Leasehold improvements

   Lesser of useful life
   or term of lease

Equipment acquired under capital leases are amortized on a straight-line basis over the estimated useful life of the equipment or the term of the related lease based on Accounting Standards Codification Topic No. 840, Accounting for Leases (“ASC 840”). Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. At the time of retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the results of operations. Depreciation expense for the year ended December 31, 2010 was $60,902.

Capitalization of Software

Software development costs are capitalized when technological feasibility and marketability of the related product have been established. Software development costs incurred solely in connection with a specific contract are charged to cost of revenues. Capitalized software costs are amortized on a product-by-product basis, beginning when the product is available for general release to customers.

For the year ended December 31, 2010, the Company capitalized $13,881 of software costs. Annual amortization expense is calculated using the greater of the ratio of each product’s current gross revenues to the total of current and expected gross revenues, or the straight-line method over the estimated useful life of three years. Accumulated amortization of capitalized software was $585,964. The related amortization expense was $211,682 for the year ended December 31, 2010. The Company has determined that none of its capitalized development costs have been impaired as of December 31, 2010 in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification No. 985-20.

 

10


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2010

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Accounting for the Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets in question may not be recoverable. An impairment would be recorded in circumstances where the fair value of an asset is less than the carrying value of that asset. The Company assesses the fair value of the asset using the undiscounted cash flows expected to be generated by the asset. As of December 31, 2010, management believes no indicators existed which would require an impairment to be recorded.

Intangible Assets

Intangible assets were obtained from the acquisition of the Company from Fiserv, Inc. on January 24, 2008. These assets consist of customer lists with definite lives. The Company provides for amortization using the straight-line method over the estimated useful lives of the assets, which is 8 years. For the year ended December 31, 2010, amortization expense was $151,603.

The Company reviews intangible assets for impairment when indicators arise. Due to the Company’s net loss during the period, an evaluation for impairment was performed; however, there was no impairment loss considered necessary related to intangible assets for the year ended December 31, 2010.

Goodwill

Goodwill is the excess of the acquisition cost of an acquired entity over the fair value of identifiable net assets acquired. The Company accounts for its goodwill and other intangibles in accordance with generally accepted accounting principles. Goodwill is not amortized, but is subject to an impairment test annually, or earlier if certain events occur indicating that the carrying value of goodwill may be impaired. If the fair value of the goodwill or intangible is less than its carrying value, an impairment loss is recorded. To determine the fair value of the intangible, the Company uses a discounted cash flow present value model. Based on the Company’s evaluation, there was no impairment of goodwill at December 31, 2010.

Product Warranty

The Company provides a warranty for the replacement or repair of certain defective units. The standard warranty requires the Company to repair certain defective units at no cost to the customer during the warranty period, which is typically 90 days. Warranty costs are accrued for in the financial statements based on management’s evaluation of historical and current industry trends and warranty costs. As of December 31, 2010, the Company does not believe an accrual is necessary.

Advertising

Advertising expenses are charged to expense as incurred. For the year ended December 31, 2010, advertising expense was $16,740.

 

11


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2010

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Research and Development

Research and development costs are charged to expense as incurred. These costs consist primarily of salaries, outside consultant fees and related expenses involved in the development of new software. For the year ended December 31, 2010, research and development costs were $3,481,045.

Leases

The Company accounts for its lease agreements pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification No. 840, Accounting for Leases, which categorizes leases at their inception as either operating or capital leases depending on certain defined criteria. On certain lease agreements, the Company receives rent holidays and other incentives. The Company recognizes lease costs on a straight-line basis without regard to the deferred payment terms and the difference between rent expense and amounts paid under the lease agreements are recorded.

Share-Based Compensation

The Company recognizes compensation expense in accordance with the FASB Accounting Standards Codification. As a result, the Company recognizes compensation expense in an amount equal to the estimated fair value of stock-based awards and issuances, such as stock options granted to employees. This estimation of the fair value of each stock-based grant on the date of grant involves numerous assumptions by management. Although the Company calculates the fair value of each stock option under the Black-Scholes Option Pricing Model, which is a standard option pricing model, this model still requires the use of numerous assumptions. Assumptions used in this model include, among others, the expected life (turnover), volatility of the underlying equity security, and expected dividends.

Options or stock awards issued to non-employees who are not directors are recorded at their estimated fair value at the measurement date and are periodically revalued as the options vest and are recognized as expense over the related service period on a graded vesting method. Stock options issued to consultants with performance conditions are measured and recognized when the performance is complete.

Income Taxes

Income taxes are accounted for under FASB Accounting Standards Codification No. 740, Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

12


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2010

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes (Continued)

 

The Company will recognize the impact of tax positions in the financial statements if that position is more likely than not to be sustained on audit by the Internal Revenue Service, based on the technical merits of the position. To date, the Company has not recorded any uncertain tax positions.

The Company recognizes potential accrued interest and penalties related to uncertain tax positions in income tax expense. During the year ended December 31, 2010, the Company did not recognize any amount in potential interest and penalties associated with uncertain tax positions.

The following table summarizes the open tax years for each major jurisdiction:

 

Jurisdiction

   Open Tax Years  

Federal

     2007 – 2010   

State

     2006 – 2010   

Sales Tax

The Company records taxes collected from customers on a net basis.

Recently Adopted Accounting Pronouncements

In June 2009, the FASB issued new rules related to accounting for transfers of financial assets. These new rules were incorporated into the Accounting Standards Codification in December 2009 as discussed in FASB Accounting Standards Update No. 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets. The new rules amend various provisions related to accounting for transfers and servicing of financial assets and extinguishments of liabilities, by removing the concept of a qualifying special-purpose entity and removes the exception from applying FASB rules related to variable interest entities that are qualifying special-purpose entities; limits the circumstances in which a transferor derecognizes a portion or component of a financial asset; defines a participating interest; requires a transferor to recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer accounted for as a sale; and requires enhanced disclosure; among others. The rules are effective for fiscal years and interim periods beginning after November 15, 2009. The adoption of these rules did not have a material impact on the Company’s financial statements.

 

13


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2010

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Adopted Accounting Pronouncements (Continued)

 

In June 2009, the FASB issued new rules to amend certain accounting for variable interest entities (“VIE”). These new rules were incorporated into the Accounting Standards Codification in December 2009 as discussed in FASB Accounting Standards Update No. 2009-17, Consolidation (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. The new rules require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE, to require ongoing reassessments of whether an enterprise is the primary beneficiary of a VIE, to eliminate the quantitative approach previously required for determining the primary beneficiary of a VIE, to add an additional reconsideration event for determining whether an entity is a VIE when any changes in facts and circumstances occur such that holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance, and to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a VIE. The new rules become effective as of the beginning of each reporting period that begins after November 15, 2009. The adoption of these rules did not have a material impact on the Company’s financial statements.

Recently Issued Accounting Pronouncements

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (“ASU 2009-13”). ASU 2009-13 amends accounting for revenue arrangements with multiple deliverables, to eliminate the requirement that all undelivered elements have Vendor-Specific Objective Evidence (“VSOE”) or Third-Party Evidence (“TPE”) before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. The overall arrangement fee will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. Application of the “residual method” of allocating an overall arrangement fee between delivered and undelivered elements will no longer be permitted upon adoption of ASU 2009-13. Additionally, the new guidance will require entities to disclose more information about their multiple-element revenue arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity will be required to apply the amendments retrospectively from the beginning of the entity’s fiscal year.

 

14


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2010

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Issued Accounting Pronouncements (Continued)

 

In addition, vendors electing early adoption of these rules will be required to disclose the following information at a minimum for all previously reported interim periods in the fiscal year of adoption: revenue, income before income taxes, net income, earnings per share and the effect of the change for the appropriate captions presented. Management does not expect the adoption of these rules to have a material impact on the Company’s financial statements.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 requires new disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation of disclosed assets and liabilities, and about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. Management does not expect the adoption of these rules to have a material impact on the Company’s financial statements.

In April 2010, the FASB issued Accounting Standards Update No. 2010-13, Compensation – Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades (“ASU 2010-13”). ASU 2010-13 clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. ASU 2010-13 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Management does not expect the adoption of these rules to have a material impact on the Company’s financial statements.

In July 2010, the FASB issued Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU 2010-20”). ASU 2010-20 is intended to provide additional information to assist financial statement users in assessing an entity’s risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures are effective for annual reporting periods ending on or after December 15, 2011. The amendments in ASU 2010-20 encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption. Management does not expect the adoption of these rules to have a material impact on the Company’s financial statements.

 

15


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2010

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Issued Accounting Pronouncements (Continued)

 

In December 2010, the FASB issued Accounting Standards Update No. 2010-28, Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts - a consensus of the FASB Emerging Issues Task Force (“ASU 2010-28”). ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Management does not expect the adoption of these rules to have a material impact on the Company’s financial statements.

In December 2010, the FASB issued Accounting Standards Update No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations - a consensus of the FASB Emerging Issues Task Force (“ASU 2010-29”). ASU 2010-29 specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. ASU 2010-29 also expands the supplemental pro forma disclosures under Accounting Standards Codification Topic 805. The amendments are effective prospectively for business combinations for which the acquisition date is on or after December 15, 2010. Management does not expect the adoption of these rules to have a material impact on the Company’s financial statements.

NOTE 3 - CONCENTRATIONS OF RISKS

Cash

The Company maintains its cash balances at Wells Fargo Bank, N.A., which from time to time, exceed amounts insured by the Federal Deposit Insurance Corporation (“FDIC”). Effective December 31, 2010, as part of the Dodd-Frank Wall Street Reform and Consumer Protections Act, all funds in non-interest bearing accounts are fully insured and funds in interest bearing accounts are insured up to $250,000 by the FDIC. As of December 31, 2010, the Company’s deposits exceeded insured amounts by $62,586. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.

 

16


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2010

 

 

NOTE 3 - CONCENTRATIONS OF RISKS (Continued)

 

Customers

For the year ended December 31, 2010, no customer represented more than 10% of total revenue. As of December 31, 2010, three customers represented approximately 37% of accounts receivable.

Suppliers

For the year ended December 31, 2010, three suppliers represented approximately 97% of total purchases. As of December 31, 2010, two suppliers represented approximately 59% of accounts payable.

NOTE 4 - PROPERTY AND EQUIPMENT

As of December 31, 2010, property and equipment consisted of the following:

 

Computers

   $ 532,781   

Furniture and fixtures

     107,611   

Office equipments

     56,657   

Leasehold improvements

     56,308   
  

 

 

 
     753,357   

Less accumulated depreciation and amortization

     636,974   
  

 

 

 

Total property and equipment, net

   $ 116,383   
  

 

 

 

NOTE 5 - INTANGIBLE ASSET

As of December 31, 2010, intangible asset consisted of the following:

 

Intangible asset

  

Customer list

   $ 1,212,826   

Less accumulated amortization

     442,176   
  

 

 

 

Intangible asset, net

   $ 770,650   
  

 

 

 

For the year ended December 31, 2010, amortization expense was $151,603.

 

17


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2010

 

 

NOTE 5 - INTANGIBLE ASSET (Continued)

 

The following is a schedule of amortization expenses of intangible asset after December 31, 2010:

 

Year Ending       

December 31,

      

2011

   $ 151,603   

2012

     151,603   

2013

     151,603   

2014

     151,603   

2015

     151,603   

Thereafter

     12,635   
  

 

 

 

Total

   $ 770,650   
  

 

 

 

NOTE 6 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

As of December 31, 2010, accrued expenses consisted of the following:

 

Accrued vacation

   $ 178,780   

Sales tax payable

     80,209   

Accrued third party license fees

     15,413   

Other accrued expenses

     47,519   

Accrued payroll

     41,506   

Accrued 401(k) and employee benefits

     14,628   
  

 

 

 

Total

   $ 378,055   
  

 

 

 

NOTE 7 – CAPITAL LEASE OBLIGATIONS

As of December 31, 2010, capital lease obligations consisted of the following:

 

12.9% capital lease secured by computer servers. Payable in monthly installments of $606, maturing through June 2013

   $ 15,472   

Less current portion

     5,603   
  

 

 

 

Long-term

   $ 9,869   
  

 

 

 

 

18


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2010

 

 

NOTE 7 - CAPITAL LEASE OBLIGATIONS (Continued)

 

The following is a schedule by years of future minimum lease payments under the capital lease and the present value of net minimum lease payments:

 

Year ending       

December 31,

      

2011

   $ 7,269   

2012

     7,269   

2013

     3,634   
  

 

 

 

Total minimum lease payments

     18,172   

Less amount representing interest

     2,700   
  

 

 

 

Present value of future minimum lease payments

   $ 15,472   
  

 

 

 

The following is an analysis of the leased equipment under capital lease as of December 31, 2010, which is included in property and equipment:

 

Computers

   $ 18,016   

Less accumulated depreciation

     3,003   
  

 

 

 

Total

   $ 15,013   
  

 

 

 

NOTE 8 - SHAREHOLDERS’ EQUITY

Common and Preferred Stock

The Company reserves 1,000,000 shares of common stock for future issuance related to option exercises. The Company’s common shares have no par value.

The Company has 7,000,000 shares of preferred shares authorized. As of December 31, 2010, the Company has no preferred stock outstanding.

 

19


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2010

 

 

NOTE 8 - SHAREHOLDERS’ EQUITY (Continued)

 

Stock Option Plan

The Company adopted the 2008 Stock Plan (the “2008 Plan”), which provides for the granting of stock options for purchases up to 1,000,000 shares of the Company’s common stock. Under the terms of the 2008 Plan, options may be granted to employees, directors and consultants at prices not less than the fair market value at the date of grant. Options generally vest over four years, 25% after the first year and monthly over the remaining three years, and generally expire 10 years from the date of grant. For the year ended December 31, 2010, the Company granted approximately 188,000 options.

For purposes of computing the compensation expense, the fair value of each option granted to employees and directors is estimated using the Black-Scholes Option Pricing Model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its employee stock options.

In the absence of a public market for the Company’s shares, the expected volatility for the year ended December 31, 2010 was based on analysis of volatilities of comparable public companies. The expected term represents the period that the Company’s stock-based awards will be outstanding and is determined using the simplified method given that the Company does not have adequate history of exercises of its stock-based awards. The Company used 6.25 years as the expected term for options granted during 2010 with a vesting term of 4 years and a term to expiration of 10 years. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a term equal to the expected term of the option assumed at the date of grant. The Company estimated a 3% forfeiture rate for the year ended December 31, 2010 based on the Company’s historical forfeiture experience.

The weighted-average fair values of stock options granted have been estimated utilizing the following assumptions:

 

Risk-free interest rate

   2.43% - 3.32%

Expected term (in years)

   6.25

Dividend yield

   —  

Expected volatility

   76.4% - 80.0%

The weighted-average fair value of options granted during the year ended December 31, 2010 was $0.43.

 

20


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2010

 

 

NOTE 8 - SHAREHOLDERS’ EQUITY (Continued)

Stock Option Plan (Continued)

 

The following table summarizes the Company’s stock option activity:

 

     Number of
Shares
    Exercise Price
Per Share
     Weighted-
Average
Exercise Price
 

Outstanding at December 31, 2009

     576,159      $ 0.55       $ 0.55   

Granted

     187,975      $ 0.55       $ 0.55   

Exercised

     —        $ —         $ —     

Cancelled

     (44,092   $ 0.55       $ 0.55   
  

 

 

      

Outstanding at December 31, 2010

     720,042      $ 0.55       $ 0.55   
  

 

 

   

 

 

    

 

 

 

Shares vested and exercisable at December 31, 2010

     409,583      $ 0.55       $ 0.55   
  

 

 

   

 

 

    

 

 

 

There were no options exercised during the year ended December 31, 2010. For the year ended December 31, 2010, the total fair value of shares vested amounted to $84,586. The aggregate intrinsic value of options outstanding at December 31, 2010 was $0.

 

Options Outstanding     Options Exercisable  

Exercise Prices

    Number of
Shares
    Weighted-
Average
Exercise
Price
    Weighted-
Average
Remaining
Contractual
Life
    Number of
Shares
    Weighted-
Average
Exercise
Price
 
$ 0.55        720,042      $ 0.55        8.06        409,583      $ 0.55   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation expense related to stock options of $63,757 for the year ended December 31, 2010, was recorded in the financial statements as a component of general and administrative expenses.

As of December 31, 2010, there was $63,501 of total unrecognized compensation expense related to nonvested stock-based compensation awards. That expense will be recognized ratably over the remaining requisite service period of the award.

 

21


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2010

 

 

 

NOTE 9 - INCOME TAXES

The significant components of the income tax provision for the year ended December 31, 2010 were as follows:

 

     2010  

Current

  

Federal

   $ —     

State

     11,363   
  

 

 

 
     11,363   

Prior year under accrual

     5,388   
  

 

 

 

Total

   $ 16,751   
  

 

 

 

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are presented below:

 

Deferred tax assets

  

Net operating loss carryforward

   $ 1,120,000   

Accrued vacation

     76,600   

Accruals and allowances

     19,500   

Stock-based compensation

     36,200   

Depreciation and amortization

     19,100   
  

 

 

 

Total deferred tax assets

     1,271,400   

Deferred tax liabilities

  

Deferred state income tax

     (15,200

Valuation allowance

     (1,256,200
  

 

 

 

Net deferred income tax

   $ —     
  

 

 

 

The current and long-term portion of the deferred tax assets and liabilities were as follow:

 

     Current     Long-Term  

Deferred tax assets

   $ 95,100      $ 1,176,300   

Deferred tax liabilities

     (15,200     —     
  

 

 

   

 

 

 

Total

   $ 79,900      $ 1,176,300   
  

 

 

   

 

 

 

 

22


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2010

 

 

NOTE 9 - INCOME TAXES (Continued)

 

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance.

At December 31, 2010, the Company had federal and state net operating loss carryforwards of approximately $3,200,000 and $250,000, respectively. If not utilized, the carryforwards expire between the years 2019 and 2029 for federal income tax purposes and between the years 2011 and 2029 for California income tax purposes.

Utilization of the net operating losses and credits may be limited due to Internal Revenue Code Section 382 and 383.

NOTE 10 - COMMITMENTS AND CONTINGENCIES

Litigation

The Company, from time to time, is involved in certain legal matters which arise in the normal course of business. Management believes, based in part on the advice of legal counsel, that the resolution of such matters will not have a material adverse effect on the financial position of the Company.

Licensing Fees

The Company has entered into various reseller agreements whereby the Company sells specific software licenses and annual software maintenance to customers. Such reseller agreements call for licensing or maintenance fees to be based on a per customer sale or per individual user basis. The Company accrues such fees based on each sale to a customer.

For the year ended December 31, 2010, the Company recorded total related licensing and maintenance fee expenses of $671,926. As of December 31, 2010, related accrued licensing and maintenance fees amounted to $15,413.

 

23


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2010

 

 

NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)

 

Operating Leases

The Company leases its office for average monthly payments of $19,780. On December 19, 2008, the Company entered into the lease agreement effective March 1, 2009 which expires on May 31, 2012. The lease agreement provides an optional three year lease renewal option exercisable upon written notice. The written notice must be provided between 270 days to 180 days prior to the expiration of the lease. For the year ended December 31, 2010, total rental expense was $237,357. On March 17, 2011, the Company amended their current lease agreement effective May 1, 2011 to expand their office space into an adjacent suite and extend the lease term through May 31, 2014 with average monthly payments of $25,000.

The following is a schedule by years of future minimum lease payments on operating leases that have initial or remaining terms in excess of one year as of December 31, 2010:

 

Year Ending

December 31,

   Rental  

2011

   $ 261,984   

2012

     109,960   
  

 

 

 

Total

   $ 371,944   
  

 

 

 

Related Party Transaction

The Company receives management services from a related party and pays management fees of $30,000 per month. For the year ended December 31, 2010, management fee expenses to the related party amounted to $360,000.

NOTE 11 - 401(K) PLAN AND PROFIT SHARING

The Company has a qualified 401(k) plan (the “Plan”) covering substantially all eligible employees. Plan contributions include employer contribution matching and profit sharing. Plan contributions are at the discretion of the Company. For the period ended December 31, 2010, the Company did not elect to make 401(k) matching contributions or contributions to the profit sharing plan. For the year ended December 31, 2010, total 401(k) administrative expenses were $1,500. As of December 31, 2010, there was no accrued 401(k) employer contribution.

 

24


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2010

 

 

 

NOTE 12 - SUBSEQUENT EVENTS

On March 17, 2011, the Company amended their current lease agreement effective May 1, 2011 to expand their office space into an adjacent suite and extend the lease term through May 31, 2014 with average monthly payments of $25,000.

Management evaluated all activity through July 15, 2011 (the issue date of the financial statements) and concluded that the only subsequent event relates to the Company amending their current office lease.

 

25


DEL MAR DATATRAC, INC.

FINANCIAL STATEMENTS

FOR THE YEAR ENDED

DECEMBER 31, 2009


DEL MAR DATATRAC, INC.

CONTENTS

December 31, 2009

 

 

 

     Page

INDEPENDENT AUDITOR’S REPORT

   1

FINANCIAL STATEMENTS

  

Balance Sheet

   2 - 3

Statement of Operations

   4

Statement of Shareholders’ Equity

   5

Statement of Cash Flows

   6

Notes to Financial Statements

   7 - 23


LOGO

INDEPENDENT AUDITOR’S REPORT

To the Board of Directors

Del Mar DataTrac, Inc.

San Diego, California

We have audited the accompanying balance sheet of Del Mar DataTrac, Inc. (the “Company”) as of December 31, 2009, and the related statement of operations, shareholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2009, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

/s/ SingerLewak, LLP

SingerLewak LLP

La Jolla, California

November 3, 2010

LOGO


DEL MAR DATATRAC, INC.

BALANCE SHEET

December 31, 2009

 

 

 

ASSETS   

Current assets

  

Cash and cash equivalents

   $ 1,130,471   

Accounts receivable, net of allowance for doubtful accounts of $14,653

     395,602   

Prepaid expenses and other current assets

     72,307   
  

 

 

 

Total current assets

     1,598,380   

Property and equipment, net

     113,226   

Computer software, net

     257,295   

Goodwill

     2,774,463   

Intangible asset, net

     922,253   

Deposits

     26,112   
  

 

 

 

Total assets

   $ 5,691,729   
  

 

 

 

The accompanying notes are an integral part of these financial statements.

 

2


DEL MAR DATATRAC, INC.

BALANCE SHEET

December 31, 2009

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY   

Current liabilities

  

Accounts payable

   $ 85,694   

Accrued expenses and other current liabilities

     312,017   

Income tax payable

     3,200   

Deferred revenue

     1,611,876   
  

 

 

 

Total current liabilities

     2,012,787   
  

 

 

 

Commitments and contingencies (Note 9)

  

Shareholders’ equity

  

Common stock, no par value 13,000,000 shares authorized 8,999,995 shares issued and outstanding

     5,000,000   

Additional paid-in capital

     28,382   

Accumulated deficit

     (1,349,440
  

 

 

 

Total shareholders’ equity

     3,678,942   
  

 

 

 

Total liabilities and shareholders’ equity

   $ 5,691,729   
  

 

 

 

The accompanying notes are an integral part of these financial statements.

 

3


DEL MAR DATATRAC, INC.

STATEMENT OF OPERATIONS

For the Year Ended December 31, 2009

 

 

 

     Amount     % of
Net Sales
 

Revenues

    

Licenses

   $ 3,097,790        41.3   

Services and other

     4,408,868        58.7   
  

 

 

   

 

 

 

Total revenue

     7,506,658        100.0   

Cost of sales

     587,522        7.8   
  

 

 

   

 

 

 

Gross profit

     6,919,136        92.2   
  

 

 

   

 

 

 

Operating expenses

    

Sales and marketing expenses

     1,673,698        22.3   

Research and development expenses

     3,176,084        42.3   

General and administrative expenses

     2,333,970        31.1   
  

 

 

   

 

 

 

Total operating expenses

     7,183,752        95.7   
  

 

 

   

 

 

 

Loss from operations

     (264,616     (3.5
  

 

 

   

 

 

 

Other income (expense)

    

Interest income

     424        0.0   
  

 

 

   

 

 

 

Total other income (expense)

     424        0.0   
  

 

 

   

 

 

 

Loss before provision for income taxes

     (264,192     (3.5

Provision for income taxes

     12,182        0.2   
  

 

 

   

 

 

 

Net loss

   $ (276,374     (3.7
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

4


DEL MAR DATATRAC, INC.

STATEMENT OF SHAREHOLDERS’ EQUITY

For the Year Ended December 31, 2009

 

 

 

     Common Stock      Series A Preferred Stock                      
     Shares      Amount      Shares      Amount      Additional
Paid-in Capital
     Accumulated
Deficit
    Total  

Balance, December 31, 2008

     8,999,995       $ 5,000,000         —         $ —         $ 6,217       $ (1,073,066   $ 3,933,151   

Stock-based compensation

                 22,165         —          22,165   
                      —     

Net loss

     —           —           —           —           —           (276,374     (276,374
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance, December 31, 2009

     8,999,995       $ 5,000,000         —         $ —         $ 28,382       $ (1,349,440   $ 3,678,942   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

5


DEL MAR DATATRAC, INC.

STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2009

 

 

 

Cash flows from operating activities

  

Net loss

   $ (276,374

Adjustments to reconcile net loss to net cash used in operating activities

  

Stock-based compensation

     22,165   

Bad debt expense

     2,304   

Depreciation and amortization

     414,043   

Decrease (increase) in

  

Accounts receivable

     (219,994

Prepaid expenses and other current assets

     103,788   

Deposits

     32,586   

Increase (decrease) in

  

Accounts payable

     60,200   

Accrued expenses and other current liabilities

     (80,185

Accrued income tax payable

     300   

Deferred revenue

     422,400   
  

 

 

 

Net cash flows used in operating activities

     481,233   
  

 

 

 

Cash flows from investing activities

  

Purchase of property and equipment

     (125,206

Purchase of computer software

     (2,698
  

 

 

 

Net cash flows provided by investing activities

     (127,904
  

 

 

 

Net increase in cash and cash equivalents

     353,329   

Cash and cash equivalents, beginning of year

     777,142   
  

 

 

 

Cash and cash equivalents, end of year

   $ 1,130,471   
  

 

 

 

Supplemental disclosures of cash flow information

  

Income taxes paid

   $ 9,776   
  

 

 

 

The accompanying notes are an integral part of these financial statements.

 

6


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2009

 

 

 

NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS

Del Mar DataTrac, Inc. (the “Company”) is based in San Diego, California and was founded in 1991. The Company provides software for mortgage lending solutions. The Company offers a suite of software products including DataTrac, WebTrac, DocumentTrac, BusinessTrac, CommissionTrac and InTrac. The Company serves businesses in the mortgage and lending industry including credit unions, banks and mortgage brokers.

On January 24, 2008, the Company was acquired from its former parent company, Fiserv, Inc. (NYSE: FISV).

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The summary of significant accounting policies presented below is designed to assist in understanding the Company’s financial statements. The financial statements and accompanying notes are the representations of the Company’s management, who is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) in all material respects.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

The Company recognizes software license and third party product revenues upon shipment or download of the product, when no significant vendor obligations remain and collection is probable. In cases where a significant vendor obligation exists, revenue recognition is delayed until such obligation has been satisfied. For new software products where a historical record has not yet been demonstrated that acceptance is perfunctory, the Company defers recognition of revenue until acceptance has occurred. If an undelivered element of the arrangement exists under the license arrangement, a portion of revenue is deferred based on vendor-specific objective evidence (“VSOE”) of the fair value of the undelivered element until delivery occurs. If VSOE does not exist for all undelivered elements, all revenue is deferred until sufficient evidence exists or all elements have been delivered.

 

7


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2009

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition (Continued)

 

Annual maintenance revenues, which consist of ongoing support and product updates, are recognized on a straight-line basis over the term of the contract. Payments received in advance of performance of the related service for maintenance contracts are recorded as deferred revenue. Revenues from training and consulting services are recognized when the services are performed and adequate evidence of providing such services is available. The Company’s deferred revenue is recognized as revenues between 1 to 12 months. The Company considers many factors when applying accounting principles generally accepted in the United States of America related to revenue recognition. These factors include, but are not limited to:

 

   

The actual contractual terms, such as payment terms, delivery / download dates, and pricing of the various product and service elements of a contract

 

   

Availability of products to be delivered / downloaded

 

   

Time period over which services are to be performed

 

   

Creditworthiness of the customer

 

   

The complexity of customizations to the Company’s software required by service contracts

 

   

The sales channel through which the sale is made (direct, VAR, distributor, etc.)

 

   

Discounts, if any, given for each element of a contract

 

   

Any commitments made as to installation or implementation of “go live” dates

Each of the relevant factors is analyzed to determine its impact, individually and collectively with other factors, on the revenue to be recognized for any particular contract with a customer. Management is required to make judgments regarding the significance of each factor in applying the revenue recognition standards, as well as whether or not each factor complies with such standards. Any misjudgment or error by management in its evaluation of the factors and the application of the standards, especially with respect to complex or new types of transactions, could have a material adverse effect on the Company’s future operating results.

Cash and Cash Equivalents

For purposes of reporting the statement of cash flows, the Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

Fair Value of Financial Instruments

The estimated fair values of the Company’s short-term financial instruments, including cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, deferred revenue and other current liabilities arising from the ordinary course of business, approximate their individual carrying amounts due to the relatively short period of time between their origination and expected realization.

 

8


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2009

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Accounts Receivable

The Company extends credit to its customers. Collateral is generally not required. Credit losses are provided for in the financial statements based on management’s evaluation of historical and current industry trends. Although the Company expects to fully collect amounts due, actual collections may differ from estimated amounts, and the Company provides for an allowance for doubtful accounts as necessary.

Property and Equipment

Property and equipment are stated at cost. The Company provides for depreciation and amortization using the straight-line method over the estimated useful lives of the various classes of property, as follows:

 

Computers

   3 years

Furniture and fixtures

   5 years

Office equipment

   3 years

Leasehold improvements

   Lesser of useful life
   or term of lease

Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. At the time of retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the results of operations. Depreciation expense for the year ended December 31, 2009 was $52,664.

Capitalization of Software

Software development costs are capitalized when technological feasibility and marketability of the related product have been established. Software development costs incurred solely in connection with a specific contract are charged to cost of revenues. Capitalized software costs are amortized on a product-by-product basis, beginning when the product is available for general release to customers.

Annual amortization expense is calculated using the greater of the ratio of each product’s current gross revenues to the total of current and expected gross revenues or the straight-line method over the estimated useful life of three years. Accumulated amortization of capitalized software was $374,282. The related amortization expense was $209,776 for the year ended December 31, 2009. The Company has determined that none of its capitalized development costs have been impaired as of December 31, 2009.

 

9


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2009

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Accounting for the Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets in question may not be recoverable. An impairment would be recorded in circumstances where the fair value of an asset is less than the carrying value of that asset. The Company assesses the fair value of the asset using the undiscounted cash flows expected to be generated by the asset. As of December 31, 2009, management believes no indicators existed which would require an impairment to be recorded.

Intangible Assets

Intangible assets were obtained from the acquisition of the Company from Fiserv, Inc. on January 24, 2008. These assets consist of customer lists with definite lives. The Company provides for amortization using the straight-line method over the estimated useful lives of the assets, which is 8 years. For the year ended December 31, 2009, amortization expense was $151,603.

The Company reviews intangible assets for impairment when indicators arise. Due to the Company’s net loss during the period, an evaluation for impairment was performed; however, there was no impairment loss considered necessary related to intangible assets for the year ended December 31, 2009.

Goodwill

Goodwill is the excess of the acquisition cost of an acquired entity over the fair value of identifiable net assets acquired. The Company accounts for its goodwill and other intangibles in accordance with generally accepted accounting principles. Goodwill is not amortized, but is subject to an impairment test annually, or earlier if certain events occur indicating that the carrying value of goodwill may be impaired. If the fair value of the goodwill or intangible is less than its carrying value, an impairment loss is recorded. To determine the fair value of the intangible, the Company uses a discounted cash flow present value model. Based on the Company’s evaluation, there was no impairment of goodwill or other intangible assets at December 31, 2009.

Product Warranty

The Company provides a warranty for the replacement or repair of certain defective units. The standard warranty requires the Company to repair certain defective units at no cost to the customer during the warranty period, which is typically 90 days. Warranty costs are accrued for in the financial statements based on management’s evaluation of historical and current industry trends and warranty costs. As of December 31, 2009, the Company does not believe an accrual is necessary.

Advertising

Advertising expenses are charged to expense as incurred. For the year ended December 31, 2009, advertising expense was $39,245.

 

10


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2009

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Research and Development

Research and development costs are charged to expense as incurred. These costs consist primarily of salaries, outside consultant fees and related expenses involved in the development of new software. For the year ended December 31, 2009, research and development costs were $3,176,084.

Leases

The Company accounts for its lease agreements pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification No. 840, Accounting for Leases, which categorizes leases at their inception as either operating or capital leases depending on certain defined criteria. On certain lease agreements, the Company receives rent holidays and other incentives. The Company recognizes lease costs on a straight-line basis without regard to the deferred payment terms and the difference between rent expense and amounts paid under the lease agreements are recorded.

Share-Based Compensation

The Company recognizes compensation expense in accordance with the FASB Accounting Standards Codification. As a result, the Company recognizes compensation expense in an amount equal to the estimated fair value of stock-based awards and issuances, such as stock options granted to employees. This estimation of the fair value of each stock-based grant on the date of grant involves numerous assumptions by management. Although the Company calculates the fair value of each stock option under the Black-Scholes Option Pricing Model, which is a standard option pricing model, this model still requires the use of numerous assumptions. Assumptions used in this model include, among others, the expected life (turnover), volatility of the underlying equity security, and expected dividends.

Income Taxes

Income taxes are accounted for under FASB Accounting Standards Codification No. 740, Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

The Company will recognize the impact of tax positions in the financial statements if that position is more likely than not to be sustained on audit by the Internal Revenue Service, based on the technical merits of the position. To date, the Company has not recorded any uncertain tax positions.

 

11


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2009

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes (Continued)

 

The Company recognizes potential accrued interest and penalties related to uncertain tax positions in income tax expense. During the year ended December 31, 2009, the Company did not recognize any amount in potential interest and penalties associated with uncertain tax positions.

The following table summarizes the open tax years for each major jurisdiction:

 

Jurisdiction

  

Open Tax Years

Federal

   2006 – 2009

State

   2005 – 2009

Sales Tax

The Company records taxes collected from customers on a net basis.

Recently Adopted Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued new rules regarding fair value measurements and disclosure. These rules define fair value, establish a framework for consistently measuring fair value under generally accepted accounting principles, and expand disclosures about fair value measurements. The new rules do not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. In February 2008, the FASB deferred the effective date of the rules by one year for certain nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of these rules did not have a material effect on the Company’s financial statements.

In July 2006, the FASB issued a new accounting standard on accounting for uncertainty in income taxes. The standard clarifies the accounting for uncertainty in income taxes and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The standard also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of this standard did not have a material effect on the Company’s financial statements.

In December 2007, the FASB issued a new accounting standard which relates to non-controlling interests in financial statements. This standard establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The standard is effective for fiscal years beginning on or after December 15, 2008. The adoption of this standard did not have a material effect on the Company’s financial statements.

 

12


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2009

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Adopted Accounting Pronouncements (Continued)

 

In December 2007, the FASB issued new rules which relate to the accounting of business combinations. These rules retain the fundamental requirements in the Codification that the acquisition method of accounting called the “purchase method” be used for all business combinations and for an acquirer to be identified for each business combination. The new rules define the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. The rules are effective for the fiscal years beginning on or after January 1, 2009. The adoption of these rules did not have a material effect on the Company’s financial statements.

In March 2008, the FASB issued new rules related to disclosures about derivative instruments and hedging activities. The new rules amend and expand the disclosure requirements by providing additional disclosure on the use of derivative instruments including qualitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. The adoption of these rules did not have a material effect on the Company’s financial statements.

In May 2009, the FASB issued new rules related to subsequent events. The objective of the new rules is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Disclosures must include the effective date of management’s evaluation of subsequent events and the basis for that date, that is, where that date represents the date the financial statements were issued or available to be issued. The rules are effective for fiscal years and interim periods ending after June 15, 2009. The adoption of these rules did not have a material effect on the Company’s financial statements.

 

13


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2009

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Adopted Accounting Pronouncements (Continued)

 

In June 2009, the Company adopted FASB Accounting Standards Update No. 2009-1, (Topic 105): Generally Accepted Accounting Principles—amendments based on—Statement of Financial Accounting Standards No. 168—The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“ASU 2009-1”). ASU 2009-1 changes the authoritative hierarchy of GAAP. These changes establish the FASB Accounting Standards Codification™ (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates (“ASU”). ASUs will not be authoritative in their own right as they will only serve to update the Codification. These changes and the Codification itself do not change GAAP. Other than the manner in which new accounting guidance is referenced, the adoption of these changes did not have a material impact on the Company’s financial statements.

Recently Issued Accounting Pronouncement

In June 2009, the FASB issued new rules related to accounting for transfers of financial assets. These new rules were incorporated into the Accounting Standards Codification in December 2009 as discussed in FASB ASU No. 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets. The new rules amend various provisions related to accounting for transfers and servicing of financial assets and extinguishments of liabilities, by removing the concept of a qualifying special-purpose entity and removes the exception from applying FASB rules related to variable interest entities that are qualifying special-purpose entities; limits the circumstances in which a transferor derecognizes a portion or component of a financial asset; defines a participating interest; requires a transferor to recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer accounted for as a sale; and requires enhanced disclosure; among others. The rules are effective for fiscal years and interim periods beginning after November 15, 2009. Management does not expect the adoption of these rules to have a material impact on the Company’s financial statements.

 

14


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2009

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Issued Accounting Pronouncement (Continued)

 

In June 2009, the FASB issued new rules to amend certain accounting for variable interest entities (“VIE”). These new rules were incorporated into the Accounting Standards Codification in December 2009 as discussed in FASB ASU No. 2009-17, Consolidation (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. The new rules require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a VIE; to eliminate the quantitative approach previously required for determining the primary beneficiary of a VIE; to add an additional reconsideration event for determining whether an entity is a VIE when any changes in facts and circumstances occur such that holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance; and to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a VIE. The new rules become effective as of the beginning of each reporting period that begins after November 15, 2009. Management does not expect the adoption of these rules to have a material impact on the Company’s financial statements.

In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (“ASU 2009-13”). ASU 2009-13 amends accounting for revenue arrangements with multiple deliverables, to eliminate the requirement that all undelivered elements have Vendor-Specific Objective Evidence (“VSOE”) or Third-Party Evidence (“TPE”) before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. The overall arrangement fee will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. Application of the “residual method” of allocating an overall arrangement fee between delivered and undelivered elements will no longer be permitted upon adoption of ASU 2009-13. Additionally, the new guidance will require entities to disclose more information about their multiple-element revenue arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity will be required to apply the amendments retrospectively from the beginning of the entity’s fiscal year.

 

15


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2009

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Issued Accounting Pronouncement (Continued)

 

In addition, vendors electing early adoption of these rules will be required to disclose the following information at a minimum for all previously reported interim periods in the fiscal year of adoption: revenue, income before income taxes, net income, earnings per share and the effect of the change for the appropriate captions presented. Management does not expect the adoption of these rules to have a material impact on the Company’s financial statements.

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures About Fair Value Measurements. This ASU requires new disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation of disclosed assets and liabilities, and about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. Management does not expect the adoption of these rules to have a material impact on the Company’s financial statements.

NOTE 3 - CONCENTRATIONS OF RISKS

Cash

The Company maintains its cash balances in a bank that, from time to time, exceeds amounts insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per bank for interest bearing accounts. Non-interest bearing accounts are fully insured by the FDIC. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash. As of December 31, 2009, the amount in excess of federally insured amounts was approximately $462,600.

Customers

For the year ended December 31, 2009, no customer represented more than 10% of total revenue. As of December 31, 2009, two customers represented approximately 22% of accounts receivable.

Suppliers

For the year ended December 31, 2009, four suppliers represented approximately 96% of total purchases. As of December 31, 2009, one supplier represented approximately 24% of accounts payable.

 

16


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2009

 

 

 

NOTE 4 - PROPERTY AND EQUIPMENT

As of December 31, 2009, property and equipment consisted of the following:

 

Computers

   $ 471,986   

Furniture and fixtures

     104,347   

Office equipments

     56,657   

Leasehold improvements

     56,308   
  

 

 

 
     689,298   

Less accumulated depreciation and amortization

     576,072   
  

 

 

 

Total property and equipment, net

   $ 113,226   
  

 

 

 

NOTE 5 - INTANGIBLE ASSET

As of December 31, 2009, intangible asset consisted of the following:

 

Intangible asset

  

Customer list

   $ 1,212,826   

Less accumulated amortization

     290,573   
  

 

 

 

Intangible asset, net

   $ 922,253   
  

 

 

 

For the year ended December 31, 2009, amortization expense was $151,603.

The following is a schedule of amortization expenses of intangible asset after December 31, 2009:

 

Year Ending

December 31,

      

2010

   $ 151,603   

2011

     151,603   

2012

     151,603   

2013

     151,603   

2014

     151,603   

Thereafter

     164,238   
  

 

 

 

Total

   $ 922,253   
  

 

 

 

 

17


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2009

 

 

 

NOTE 6 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

As of December 31, 2009, accrued expenses consisted of the following:

 

Accrued vacation

   $ 159,836   

Sales tax payable

     49,702   

Accrued third party license fees

     40,213   

Other accrued expenses

     23,593   

Accrued payroll

     21,857   

Accrued 401(k) and employee benefits

     16,816   
  

 

 

 

Total

   $ 312,017   
  

 

 

 

NOTE 7 - SHAREHOLDERS’ EQUITY

Common and Preferred Stock

The Company reserves 1,000,000 shares of common stock for future issuance related to option exercises. The Company’s common shares have no par value.

The Company has 7,000,000 shares of preferred shares authorized. As of December 31, 2009, the Company has no preferred stock outstanding.

Stock Option Plan

The Company adopted the 2008 Stock Plan (the “2008 Plan”), which provides for the granting of stock options for purchases up to 1,000,000 shares of the Company’s common stock. Under the terms of the 2008 Plan, options may be granted to employees, directors and consultants at prices not less than the fair market value at the date of grant. Options generally vest over four years, 25% after the first year and monthly over the remaining three years, and generally expire 10 years from the date of grant. For the year ended December 31, 2009, the Company granted approximately 54,500 options.

For purposes of computing the compensation expense, the fair value of each option granted to employees and directors is estimated using the Black-Scholes Option Pricing Model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its employee stock options.

 

18


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2009

 

 

NOTE 7 - SHAREHOLDERS’ EQUITY (Continued)

Stock Option Plan (Continued)

 

In the absence of a public market for the Company’s shares, the expected volatility for the period ended December 31, 2009 was based on analysis of volatilities of comparable public companies. The expected term represents the period that the Company’s stock-based awards will be outstanding and is determined using the simplified method given that the Company does not have adequate history of exercises of its stock-based awards. The Company used 6.25 years as the expected term for options granted during 2009 with a vesting term of 4 years and a term to expiration of 10 years. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a term equal to the expected term of the option assumed at the date of grant. The Company estimated a 3% forfeiture rate for the period ended December 31, 2009 based on the Company’s historical forfeiture experience.

The weighted-average fair values of stock options granted have been estimated utilizing the following assumptions:

 

Risk-free interest rate

   2.07% - 3.44%

Expected term (in years)

   6.25

Dividend yield

   —  

Expected volatility

   55.3% - 59.5%

The weighted-average fair value of options granted during the year ended December 31, 2009 was $13,178.

The following table summarizes the Company’s stock option activity:

 

     Number of
Shares
    Exercise Price
Per Share
     Weighted-
Average
Exercise Price
 

Outstanding at December 31, 2008

     536,500      $ 0.55       $ 0.55   

Granted

     54,493      $ 0.55       $ 0.55   

Exercised

     —          —           —     

Cancelled

     (14,834   $ 0.55       $ 0.55   
  

 

 

      

Outstanding at December 31, 2009

     576,159      $ 0.55       $ 0.55   
  

 

 

   

 

 

    

 

 

 

Shares vested and exercisable at December 31, 2009

     256,448      $ 0.55       $ 0.55   
  

 

 

   

 

 

    

 

 

 

 

19


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2009

 

 

NOTE 7 - SHAREHOLDERS’ EQUITY (Continued)

Stock Option Plan (Continued)

 

There were no options exercised during the period ended December 31, 2009. For the year ended December 31, 2009, the total fair value of shares vested amounted to $28,382. The aggregate intrinsic value of options outstanding at December 31, 2009 was $0.

 

Options Outstanding     Options Exercisable  

Exercise

Prices

    Number of
Shares
    Weighted-
Average
Exercise
Price
    Weighted-
Average
Remaining
Contractual

Life
    Number of
Shares
    Weighted-
Average
Exercise
Price
 
$ 0.55        536,500      $ 0.55        8.66        256,448      $ 0.55   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation expense related to stock options of $22,165 for the year ended December 31, 2009, was recorded in the financial statements as a component of general and administrative expenses.

As of December 31, 2009, there was $41,773 of total unrecognized compensation expense related to nonvested stock-based compensation awards. That expense will be recognized ratably over the remaining requisite service period of the award.

NOTE 8 - INCOME TAXES

The significant components of the income tax provision for the period ended December 31, 2009 were as follows:

 

     2009  

Current

  

Federal

   $ —     

State

     3,200   
  

 

 

 
     3,200   

Prior year under accrual

     8,982   
  

 

 

 

Total

   $ 12,182   
  

 

 

 

 

20


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2009

 

 

NOTE 8 - INCOME TAXES (Continued)

 

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are presented below:

 

Deferred tax assets

  

Net operating loss carryforward

   $ 1,199,000   

Accrued vacation

     68,500   

Accruals and allowances

     29,000   

Stock-based compensation

     9,300   

Depreciation and amortization

     2,500   
  

 

 

 

Total deferred tax assets

     1,308,300   
  

 

 

 

Deferred tax liabilities

  

Deferred state income tax

     (20,100
  

 

 

 

Less valuation allowance

     (1,288,200
  

 

 

 

Net deferred income tax

   $ —     
  

 

 

 

The current and long-term portion of the deferred tax assets and liabilities were as follow:

 

     Current     Long-Term  

Deferred tax assets

   $ 97,400      $ 1,210,900   

Deferred tax liabilities

     (20,100     —     
  

 

 

   

 

 

 

Total

   $ 77,300      $ 1,210,900   
  

 

 

   

 

 

 

Income tax expense for the year ended December 31, 2009 differed from the amounts computed by applying the U.S. Federal income tax rate of 34% to income before tax expense as a result of the following:

 

     Tax Rate Effect  

Statutory rate

     34.00

Permanent differences

     (1.12 %) 

Timing differences

     (36.97 %) 

State tax – net of federal benefit

     4.40
  

 

 

 
     0.31
  

 

 

 

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance.

 

21


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2009

 

 

NOTE 8 - INCOME TAXES (Continued)

 

At December 31, 2009, the Company had federal and state net operating loss carryforwards of approximately $3,410,465 and $446,378, respectively. If not utilized, the carryforwards expire between the year 2019 and 2029 for federal income tax purposes and between the year 2011 and 2029 for California income tax purposes.

Utilization of the net operating losses and credits may be limited due to Internal Revenue Code Section 382 and 383.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

Litigation

The Company, from time to time, is involved in certain legal matters which arise in the normal course of business. Management believes, based in part on the advice of legal counsel, that the resolution of such matters will not have a material adverse effect on the financial position of the Company.

Licensing Fees

The Company has entered into various reseller agreements whereby the Company sells specific software licenses and annual software maintenance to customers. Such reseller agreements call for licensing or maintenance fees to be based on a per customer sale or per individual user basis. The Company accrues such fees based on each sale to a customer.

For the year ended December 31, 2009, the Company recorded total related licensing and maintenance fee expenses of $587,522. As of December 31, 2009, related accrued licensing and maintenance fees amounted to $40,213.

Operating Leases

The Company leases its office for average monthly payments of $19,780. The lease expired on February 28, 2009. On December 19, 2008, the Company entered into a new lease agreement effective March 1, 2009 which expires on May 31, 2012. The new lease agreement provides an optional three year lease renewal option exercisable upon written notice. The written notice must be provided between 270 days to 180 days prior to the expiration of the lease. For the year ended December 31, 2009, total rental expense was $276,895.

On June 4, 2008 the Company entered into a sublease agreement with a third party. The sublease was effective June 17, 2008 with a total minimum monthly payment of $8,617. The lease expired with the original master lease on February 28, 2009. For the year ended December 31, 2009, total sublease rental revenue received was $17,235 and is included in services and other revenues on the accompanying statement of operations.

 

22


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2009

 

 

NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)

Operating Leases (Continued)

 

The following is a schedule by years of future minimum lease payments on operating leases that have initial or remaining terms in excess of one year as of December 31, 2009:

 

Year Ending

December 31,

   Rental  

2010

   $ 233,628   

2011

     261,984   

2012

     109,960   
  

 

 

 

Total

   $ 605,572   
  

 

 

 

Related Party Transaction

The Company receives management services from a related party and pays management fees of $30,000 per month. For the year ended December 31, 2009, management fee expenses to the related party amounted to $360,000.

NOTE 10 - 401(K) PLAN AND PROFIT SHARING

The Company has a qualified 401(k) plan (the “Plan”) covering substantially all eligible employees. Plan contributions include employer contribution matching and profit sharing. Plan contributions are at the discretion of the Company. For the period ended December 31, 2009, the Company did not elect to make 401(k) matching contributions or contributions to the profit sharing plan. For the year ended December 31, 2009, total 401(k) administrative expenses were $1,500. As of December 31, 2009, there was no accrued 401(k) employer contribution.

NOTE 11 – SUBSEQUENT EVENTS

Management evaluated all activity through November 3, 2010 (the issue date of the financial statements) and concluded that no subsequent events have occurred that would require recognition in the financial statements or disclosure in the notes to the financial statements.

 

23

EX-99.2 4 d248571dex992.htm UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF DMD Unaudited Condensed Consolidated Financial Statements of DMD

Exhibit 99.2

DEL MAR DATATRAC, INC.

FINANCIAL STATEMENTS

As of June 30, 2011 and December 31, 2010 and

for the six months ended June 30, 2011 and 2010


DEL MAR DATATRAC, INC.

UNAUDITED BALANCE SHEETS

 

 

 

     June 30,
2011
    December 31,
2010
 
ASSETS     

Current assets

    

Cash and cash equivalents

   $ 1,119,089      $ 1,437,349   

Accounts receivable, net of allowance for doubtful accounts of $9,447 and $13,497, respectively.

     1,178,135        475,708   

Prepaid expenses and other current assets

     65,687        47,842   
  

 

 

   

 

 

 

Total current assets

     2,362,911        1,960,899   

Property and equipment, net

     204,665        116,383   

Computer software, net

     73,815        59,494   

Goodwill

     2,774,463        2,774,463   

Intangible asset, net

     694,849        770,650   

Deposits

     31,689        26,112   
  

 

 

   

 

 

 

Total assets

   $ 6,142,392      $ 5,708,001   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current liabilities

    

Accounts payable

   $ 604,998      $ 112,486   

Accrued expenses and other current liabilities

     369,281        378,055   

Income tax payable

     —          7,600   

Customer Deposits

     —          —     

Deferred revenue

     2,218,135        1,793,410   

Current portion of capital lease obligations

     5,973        5,603   
  

 

 

   

 

 

 

Total current liabilities

     3,198,387        2,297,154   

Capital lease obligations, net of current portion

     6,787        9,869   
  

 

 

   

 

 

 

Total liabilities

     3,205,174        2,307,023   
  

 

 

   

 

 

 

Commitments and contingencies (Note 9)

    

Shareholders’ equity

    

Common stock, no par value, 13,000,000 shares authorized 8,999,995 shares issued and outstanding

     5,000,000        5,000,000   

Preferred stock, no par value, 7,000,000 shares authorized No shares issued and outstanding

     —          —     

Additional paid-in capital

     107,053        92,139   

Accumulated deficit

     (2,169,835     (1,691,161
  

 

 

   

 

 

 

Total shareholders’ equity

     2,937,218        3,400,978   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 6,142,392      $ 5,708,001   
  

 

 

   

 

 

 


DEL MAR DATATRAC, INC.

UNAUDITED STATEMENTS OF OPERATIONS

 

 

 

     Six Months Ended  
     June 30,
2011
    June 30,
2010
 

Revenues

    

Licenses

   $ 2,054,268      $ 1,218,366   

Services and other

     2,543,504        2,306,117   
  

 

 

   

 

 

 

Total revenue

     4,597,772        3,524,483   

Cost of sales

     815,651        278,972   
  

 

 

   

 

 

 

Gross profit

     3,782,121        3,245,511   
  

 

 

   

 

 

 

Operating expenses

    

Sales and marketing expenses

     996,339        855,204   

Research and development expenses

     2,059,310        1,776,947   

General and administrative expenses

     1,203,429        1,170,770   
  

 

 

   

 

 

 

Total operating expenses

     4,259,078        3,802,921   
  

 

 

   

 

 

 

Loss from operations

     (476,957     (557,410
  

 

 

   

 

 

 

Other income (expense)

    

Interest income

     —          —     

Interest expense

     (923     —     
  

 

 

   

 

 

 

Total other income (expense)

     (923     —     
  

 

 

   

 

 

 

Loss before provision for income taxes

     (477,880     (557,410

Provision for income taxes

     794        9,796   
  

 

 

   

 

 

 

Net loss

   $ (478,674   $ (567,206
  

 

 

   

 

 

 


DEL MAR DATATRAC, INC.

UNAUDITED STATEMENTS OF CASH FLOWS

 

 

 

     Six Months Ended  
     June 30,
2011
    June 30,
2010
 

Cash flows from operating activities

    

Net loss

   $ (478,674   $ (567,206

Adjustments to reconcile net loss to net cash provided by operating activities

    

Stock-based compensation

     14,914        51,211   

Bad debt expense

     —          7,693   

Depreciation and amortization

     231,616        210,991   

Decrease (increase) in

    

Accounts receivable

     (702,427     73,504   

Prepaid expenses and other current assets

     (17,845     19,636   

Increase (decrease) in

    

Accounts payable

     492,512        (62,296

Accrued expenses and other current liabilities

     (8,774     133,228   

Accrued income tax payable

     (7,600     (5

Deferred revenue

     424,725        (198,116
  

 

 

   

 

 

 

Net cash flows used in operating activities

     (57,130     (331,360
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchase of property and equipment

     (129,250     (27,650

Purchase of computer software

     (129,167     0   
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (258,418     (27,651
  

 

 

   

 

 

 

Cash flows from financing activities

    

Principal payments on capital lease

     (2,712     —     
  

 

 

   

 

 

 

Net cash flows used in financing activities

     (2,712     —     
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     (318,260     (359,011

Cash and cash equivalents, beginning of period

     1,437,349        1,130,471   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 1,119,089      $ 771,460   
  

 

 

   

 

 

 


DEL MAR DATATRAC, INC.

UNAUDITED STATEMENT OF SHAREHOLDERS’ EQUITY

For the Six Months Ended June 30, 2011

 

 

 

     Common Stock                      
     Shares      Amount      Additional
Paid-in Capital
     Accumulated
Deficit
    Total  

Balance, December 31, 2010

     8,999,995       $ 5,000,000       $ 92,139       $ (1,691,161   $ 3,400,978   

Stock-based compensation

     —           —           14,914         —          14,914   

Net loss

     —           —           —           (478,674     (478,674
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance, June 30, 2011

     8,999,995       $ 5,000,000       $ 107,053       $ (2,169,835   $ 2,937,218   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

 

 

NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS

Del Mar DataTrac, Inc. (the “Company”) is based in San Diego, California and was founded in 1991. The Company provides software for mortgage lending solutions. The Company offers a suite of software products including DataTrac, WebTrac (DataTrac Web), DocumentTrac (DataTrac EDM), BusinessTrac, CommissionTrac (DataTrac Commissions) and InTrac (DataTrac Originator). The Company serves businesses in the mortgage and lending industry including credit unions, banks and mortgage brokers.

On January 24, 2008, the Company was acquired from its former parent company, Fiserv, Inc. (NYSE: FISV).

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The summary of significant accounting policies presented below is designed to assist in understanding the Company’s financial statements. The financial statements and accompanying notes are the representations of the Company’s management, who is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) in all material respects.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

The Company recognizes software license and third party product revenues upon shipment or download of the product, when no significant vendor obligations remain and collection is probable. In cases where a significant vendor obligation exists, revenue recognition is delayed until such obligation has been satisfied. For new software products where a historical record has not yet been demonstrated that acceptance is perfunctory, the Company defers recognition of revenue until acceptance has occurred. If an undelivered element of the arrangement exists under the license arrangement, a portion of revenue is deferred based on vendor-specific objective evidence (“VSOE”) of the fair value of the undelivered element until delivery occurs. If VSOE does not exist for all undelivered elements, all revenue is deferred until sufficient evidence exists or all elements have been delivered.

 

6


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

 

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Revenue Recognition (Continued)

 

Annual maintenance revenues, which consist of ongoing support and product updates, are recognized on a straight-line basis over the term of the contract. Payments received in advance of performance of the related service for maintenance contracts are recorded as deferred revenue. Revenues from training and consulting services are recognized when the services are performed and adequate evidence of providing such services is available. The Company’s deferred revenue is recognized as revenues between 1 to 12 months. The Company considers many factors when applying accounting principles generally accepted in the United States of America related to revenue recognition. These factors include, but are not limited to:

 

   

The actual contractual terms, such as payment terms, delivery / download dates, and pricing of the various product and service elements of a contract.

 

   

Availability of products to be delivered / downloaded.

 

   

Time period over which services are to be performed.

 

   

Creditworthiness of the customer.

 

   

The complexity of customizations to the Company’s software required by service contracts.

 

   

The sales channel through which the sale is made (direct, VAR, distributor, etc.).

 

   

Discounts, if any, given for each element of a contract.

 

   

Any commitments made as to installation or implementation of “go live” dates.

Each of the relevant factors is analyzed to determine its impact, individually and collectively with other factors, on the revenue to be recognized for any particular contract with a customer. Management is required to make judgments regarding the significance of each factor in applying the revenue recognition standards, as well as whether or not each factor complies with such standards. Any misjudgment or error by management in its evaluation of the factors and the application of the standards, especially with respect to complex or new types of transactions, could have a material adverse effect on the Company’s future operating results.

Cash and Cash Equivalents

For purposes of reporting the statement of cash flows, the Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of six months or less to be cash equivalents.

Fair Value of Financial Instruments

The estimated fair values of the Company’s short-term financial instruments, including cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, deferred revenue and other current liabilities arising from the ordinary course of business, approximate their individual carrying amounts due to the relatively short period of time between their origination and expected realization.

 

7


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

 

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Accounts Receivable

The Company extends credit to its customers. Collateral is generally not required. Credit losses are provided for in the financial statements based on management’s evaluation of historical and current industry trends. Although the Company expects to fully collect amounts due, actual collections may differ from estimated amounts, and the Company provides for an allowance for doubtful accounts as necessary.

Property and Equipment

Property and equipment are stated at cost. The Company provides for depreciation and amortization using the straight-line method over the estimated useful lives of the various classes of property, as follows:

 

Computers

   3 years

Furniture and fixtures

   5 years

Office equipment

   3 years

Leasehold improvements

  

Lesser of useful life

or term of lease

Equipment acquired under capital leases are amortized on a straight-line basis over the estimated useful life of the equipment or the term of the related lease based on Accounting Standards Codification Topic No. 840, Accounting for Leases (“ASC 840”). Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. At the time of retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the results of operations. Depreciation expense for the six months ended June 30, 2011 and 2010 was $40,968 and $29,927, respectively.

Capitalization of Software

Software development costs are capitalized when technological feasibility and marketability of the related product have been established. Software development costs incurred solely in connection with a specific contract are charged to cost of revenues. Capitalized software costs are amortized on a product-by-product basis, beginning when the product is available for general release to customers.

For the six months ended June 30, 2011 and 2010, the Company capitalized $129,167 and $0, respectively, of software costs. Annual amortization expense is calculated using the greater of the ratio of each product’s current gross revenues to the total of current and expected gross revenues, or the straight-line method over the estimated useful life of three years. Accumulated amortization of capitalized software was $700,810 and $585,964 at June 30, 2011 and December 31, 2010, respectively. The related amortization expense was $114,846 and $105,263 for the six months ended June 30, 2011 and 2010, respectively. The Company has determined that none of its capitalized development costs have been impaired as of June 30, 2011 and December 31, 2010 in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification No. 985-20.

 

8


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

 

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Accounting for the Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets in question may not be recoverable. An impairment would be recorded in circumstances where the fair value of an asset is less than the carrying value of that asset. The Company assesses the fair value of the asset using the undiscounted cash flows expected to be generated by the asset. As of June 30, 2011 and December 31, 2010, management believes no indicators existed which would require an impairment to be recorded.

Intangible Assets

Intangible assets were obtained from the acquisition of the Company from Fiserv, Inc. on January 24, 2008. These assets consist of customer lists with definite lives. The Company provides for amortization using the straight-line method over the estimated useful lives of the assets, which is 8 years.

The Company reviews intangible assets for impairment when indicators arise. Due to the Company’s net loss during the period, an evaluation for impairment was performed; however, there was no impairment loss considered necessary related to intangible assets for the six months ended June 30, 2011 and 2010.

Goodwill

Goodwill is the excess of the acquisition cost of an acquired entity over the fair value of identifiable net assets acquired. The Company accounts for its goodwill and other intangibles in accordance with generally accepted accounting principles. Goodwill is not amortized, but is subject to an impairment test annually, or earlier if certain events occur indicating that the carrying value of goodwill may be impaired. If the fair value of the goodwill or intangible is less than its carrying value, an impairment loss is recorded. To determine the fair value of the intangible, the Company uses a discounted cash flow present value model. Based on the Company’s evaluation, there was no impairment of goodwill at June 30, 2011 and December 31, 2010.

Product Warranty

The Company provides a warranty for the replacement or repair of certain defective units. The standard warranty requires the Company to repair certain defective units at no cost to the customer during the warranty period, which is typically 90 days. Warranty costs are accrued for in the financial statements based on management’s evaluation of historical and current industry trends and warranty costs. As of June 30, 2011 and December 31, 2010, the Company does not believe an accrual is necessary.

Advertising

Advertising expenses are charged to expense as incurred. For the six months ended June 30, 2011 and 2010, advertising expense was $14,950 and $7,761, respectively.

 

9


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

 

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Research and Development

Research and development costs are charged to expense as incurred. These costs consist primarily of salaries, outside consultant fees and related expenses involved in the development of new software. For the six months ended June 30, 2011 and 2010, research and development costs were $2,059,310 and $1,776,947, respectively.

Leases

The Company accounts for its lease agreements pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification No. 840, Accounting for Leases, which categorizes leases at their inception as either operating or capital leases depending on certain defined criteria. On certain lease agreements, the Company receives rent holidays and other incentives. The Company recognizes lease costs on a straight-line basis without regard to the deferred payment terms and the difference between rent expense and amounts paid under the lease agreements are recorded.

Share-Based Compensation

The Company recognizes compensation expense in accordance with the FASB Accounting Standards Codification. As a result, the Company recognizes compensation expense in an amount equal to the estimated fair value of stock-based awards and issuances, such as stock options granted to employees. This estimation of the fair value of each stock-based grant on the date of grant involves numerous assumptions by management. Although the Company calculates the fair value of each stock option under the Black-Scholes Option Pricing Model, which is a standard option pricing model, this model still requires the use of numerous assumptions. Assumptions used in this model include, among others, the expected life (turnover), volatility of the underlying equity security, and expected dividends.

Options or stock awards issued to non-employees who are not directors are recorded at their estimated fair value at the measurement date and are periodically revalued as the options vest and are recognized as expense over the related service period on a graded vesting method. Stock options issued to consultants with performance conditions are measured and recognized when the performance is complete.

Income Taxes

Income taxes are accounted for under FASB Accounting Standards Codification No. 740, Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

10


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

 

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Income Taxes (Continued)

 

The Company will recognize the impact of tax positions in the financial statements if that position is more likely than not to be sustained on audit by the Internal Revenue Service, based on the technical merits of the position. To date, the Company has not recorded any uncertain tax positions.

The Company recognizes potential accrued interest and penalties related to uncertain tax positions in income tax expense. During the periods ended June 30, 2011 and 2010, the Company did not recognize any amount in potential interest and penalties associated with uncertain tax positions.

Sales Tax

The Company records taxes collected from customers on a net basis.

Recently Adopted Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 requires new disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation of disclosed assets and liabilities, and about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. Management does not expect the adoption of these rules to have a material impact on the Company’s financial statements.

In April 2010, the FASB issued Accounting Standards Update No. 2010-13, Compensation – Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades (“ASU 2010-13”). ASU 2010-13 clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. ASU 2010-13 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Management does not expect the adoption of these rules to have a material impact on the Company’s financial statements.

In July 2010, the FASB issued Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU 2010-20”). ASU 2010-20 is intended to provide additional information to assist financial statement users in assessing an entity’s risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures are effective for annual reporting periods ending on or after December 15, 2011. The amendments in ASU 2010-20 encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption. Management does not expect the adoption of these rules to have a material impact on the Company’s financial statements.

 

11


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

 

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

In December 2010, the FASB issued Accounting Standards Update No. 2010-28, Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts – a consensus of the FASB Emerging Issues Task Force (“ASU 2010-28”). ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Management does not expect the adoption of these rules to have a material impact on the Company’s financial statements.

In December 2010, the FASB issued Accounting Standards Update No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations – a consensus of the FASB Emerging Issues Task Force (“ASU 2010-29”). ASU 2010-29 specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. ASU 2010-29 also expands the supplemental pro forma disclosures under Accounting Standards Codification Topic 805. The amendments are effective prospectively for business combinations for which the acquisition date is on or after December 15, 2010. Management does not expect the adoption of these rules to have a material impact on the Company’s financial statements.

In May 2011, the FASB issued ASU 2011-04 which generally represents clarifications of Topic 820, Fair Value Measurement, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This ASU 2011-04 results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards, or IFRSs. ASU 2011-04 should be applied prospectively and are effective for annual periods beginning after December 15, 2011. Early adoption is not permitted. The adoption of this ASU 2011-04 is not expected to have a material impact on the Company’s financial statements.

In June 2011, the FASB, issued an amendment to the Accounting Standards Codification, or ASC Topic 220, Comprehensive Income, in the Accounting Standards Update, or ASU 2011-05 where an entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied

 

12


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

 

 

 

retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-05 is not expected to have a material impact on the Company’s financial statements.

NOTE 3 - CONCENTRATIONS OF RISKS

Cash

The Company maintains its cash balances at Wells Fargo Bank, N.A., which from time to time, exceed amounts insured by the Federal Deposit Insurance Corporation (“FDIC”). Effective December 31, 2010, as part of the Dodd-Frank Wall Street Reform and Consumer Protections Act, all funds in non-interest bearing accounts are fully insured and funds in interest bearing accounts are insured up to $250,000 by the FDIC. As of June 30, 2011 and December 31, 2010, the Company’s deposits exceeded insured amounts by $62,588 and $62,586, respectively. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.

Customers

For each of the six months ended June 30, 2011 and 2010, no customers represented more than 10% of total revenue. As of June 30, 2011, one customer represented approximately 10% of accounts receivable. As of December 31, 2010, three customers represented approximately 37% of accounts receivable.

Suppliers

For the six months ended June 30, 2011 and 2010, three suppliers represented approximately 85% and 73%, respectively of total purchases. As of June 30, 2011 and December 31, 2010, three suppliers represented approximately 51% and 59%, respectively, of accounts payable.

NOTE 4 - PROPERTY AND EQUIPMENT

 

     June 30,
2011
    December 31,
2010
 

Computers

   $ 620,340      $ 532,781   

Furniture and fixtures

     129,130        107,611   

Office equipments

     59,182        56,657   

Leasehold improvements

     73,955        56,308   
  

 

 

   

 

 

 
     882,607        753,357   

Less accumulated depreciation and amortization

     (677,942     (636,974
  

 

 

   

 

 

 
   $ 204,665      $ 116,383   
  

 

 

   

 

 

 

 

13


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

 

 

 

NOTE 5 - INTANGIBLE ASSET

 

     June 30,
2011
    December 31,
2010
 

Customer List

   $ 1,212,826      $ 1,212,826   

Less accumulated amortization

     (517,977     (442,176
  

 

 

   

 

 

 

Intangible asset, net

   $ 694,849      $ 770,650   
  

 

 

   

 

 

 

For the six months ended June 30, 2011 and 2010, amortization expense was $75,802 and $75,802, respectively.

NOTE 6 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

     June 30,
2011
     December 31,
2010
 

Accrued vacation

   $ 249,191       $ 178,780   

Sales tax payable

     44,762         80,209   

Accrued third party license fee

     —           15,413   

Other accrued expenses

     16,508         47,519   

Accrued payroll

     44,817         41,506   

Accrued 401K and employee benefits

     14,003         14,628   
  

 

 

    

 

 

 
   $ 369,281       $ 378,055   
  

 

 

    

 

 

 

 

14


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

 

 

 

NOTE 7 - CAPITAL LEASE OBLIGATIONS

 

     June 30,
2011
    December 31,
2010
 

12% capital lease secured by computer services. Payable in monthly installments of $606, maturing through June 2013.

   $ 12,760      $ 15,472   

Less current portion

     (5,973     (5,603
  

 

 

   

 

 

 

Long term

   $ 6,787      $ 9,869   
  

 

 

   

 

 

 

The following is a schedule by years of future minimum lease payments under the capital lease and the present value of net minimum lease payments as at June 30, 2011:

 

Year ending

December 31,

      

2011 (remaining six months)

   $ 3,634   

2012

     7,269   

2013

     3,634   
  

 

 

 

Total minimum lease payments

     14,537   

Less amount representing interest

     1,777   
  

 

 

 

Present value of future minimum lease payments

   $ 12,760   
  

 

 

 

The following is an analysis of the leased equipment under capital lease as of June 30, 2011 and December 31, 2010 which is included in property and equipment:

 

     June 30,
2011
    December 31,
2010
 

Computers

   $ 18,016      $ 18,016   

Less accumulated depreciation

     (6,005     (3,003
  

 

 

   

 

 

 
   $ 12,011      $ 15,013   
  

 

 

   

 

 

 

 

 

15


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

 

 

 

NOTE 8 - SHAREHOLDERS’ EQUITY

Common and Preferred Stock

The Company reserves 1,000,000 shares of common stock for future issuance related to option exercises. The Company’s common shares have no par value.

The Company has 7,000,000 shares of preferred shares authorized. As of June 30, 2011 and December 31, 2010, the Company has no preferred stock outstanding.

Stock Option Plan

The Company adopted the 2008 Stock Plan (the “2008 Plan”), which provides for the granting of stock options for purchases up to 1,000,000 shares of the Company’s common stock. Under the terms of the 2008 Plan, options may be granted to employees, directors and consultants at prices not less than the fair market value at the date of grant. Options generally vest over four years, 25% after the first year and monthly over the remaining three years, and generally expire 10 years from the date of grant. For the six months ended June 30, 2011 and 2010, the Company granted approximately 51,000 and 157,975 options.

For purposes of computing the compensation expense, the fair value of each option granted to employees and directors is estimated using the Black-Scholes Option Pricing Model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its employee stock options.

In the absence of a public market for the Company’s shares, the expected volatility for the six months ended June 30, 2011 and 2010 was based on analysis of volatilities of comparable public companies. The expected term represents the period that the Company’s stock-based awards will be outstanding and is determined using the simplified method given that the Company does not have adequate history of exercises of its stock-based awards. The Company used 6.25 years as the expected term for options granted during 2010 and 2011 with a vesting term of 4 years and a term to expiration of 10 years. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a term equal to the expected term of the option assumed at the date of grant. The Company estimated a 3% forfeiture rate for the six months ended June 30, 2011 and 2010 based on the Company’s historical forfeiture experience.

 

16


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

 

 

 

The weighted-average fair values of stock options granted for the six months ended June 30, 2011 and 2010 have been estimated utilizing the following assumptions:

 

     6 months ended
June 30, 2011
  6 months ended
June 30, 2010

Risk-free interest rate

   4.13%   2.69% - 3.32%

Expected term (in years)

   6.25   6.25

Dividend yield

   —     —  

Expected volatility

      78%   76.4% - 80.0%

The weighted-average fair value of stock options granted during the six months ended June 30, 2011 and 2010 was $0.38 and $0.43, respectively.

Stock Option Plan (Continued)

The following table summarizes the Company’s stock option activity:

 

     Number of
Shares
     Exercise Price
Per Share
     Weighted-
Average
Exercise Price
 

Outstanding at December 31, 2010

     720,042       $ 0.55       $ 0.55   
  

 

 

       

Granted

     51,000       $ 0.55       $ 0.55   

Exercised

     —         $ —         $ —     

Cancelled

     6,146       $ 0.55       $ 0.55   

Outstanding at June 30, 2011

     764,896       $ 0.55       $ 0.55   
  

 

 

       

Shares vested and exercisable at June 30, 2011

     505,992       $ 0.55       $ 0.55   
  

 

 

       

There were no options exercised during the period ended June 30, 2011.

 

17


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

 

 

 

The following table summarizes by exercise price the outstanding and vested options as of June 30, 2011:

 

Options Outstanding      Options Exercisable  

Exercise

Prices

     Number
of Shares
     Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual
Life
     Number of
Shares
     Weighted-
Average
Exercise
Price
 
  $ 0.55         764,896       $  0.55         7.64 years         505,992       $ 0.55   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Stock-based compensation expense related to stock options of $14,914 and $51,211 for the six months ended June 30, 2011 and 2010, respectively, was recorded in the financial statements as a component of general and administrative expenses.

As of June 30, 2011 and December 31, 2010, there was $60,948 and $63,501 of total unrecognized compensation expense related to nonvested stock-based compensation awards. That expense will be recognized over the remaining requisite service period of the award.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

Litigation

The Company, from time to time, is involved in certain legal matters which arise in the normal course of business. Management believes, based in part on the advice of legal counsel, that the resolution of such matters will not have a material adverse effect on the financial position of the Company.

Licensing Fees

The Company has entered into various reseller agreements whereby the Company sells specific software licenses and annual software maintenance to customers. Such reseller agreements call for licensing or maintenance fees to be based on a per customer sale or per individual user basis. The Company accrues such fees based on each sale to a customer.

For the six months ended June 30, 2011 and 2010, the Company recorded total related licensing and maintenance fee expenses of $807,444 and $270,585, respectively. As of June 30, 2011 and December 31, 2010, related accrued licensing and maintenance fees amounted to $308,740 and $15,413, respectively.

Operating Leases

The Company leases its office for average monthly payments of $26,019. On December 19, 2008, the Company entered into the lease agreement effective March 1, 2009 which expires on May 31, 2012. The lease agreement provides an optional three year lease renewal option exercisable upon written notice. The written notice must be provided between 270 days to 180 days prior to the expiration of the lease. On March 17, 2011 the Company entered into a First Amendment to Lease effective May 1, 2011 to expand the office space into the adjoining suite. This First Amendment to Lease extended the expiration term to May 31, 2014. For the six months ended June 30, 2011 and 2010, the rent expenses was $100,335 and $118,679, respectively.

 

18


DEL MAR DATATRAC, INC.

NOTES TO THE FINANCIAL STATEMENTS

 

 

 

The following is a schedule by years of future minimum lease payments on operating leases that have initial or remaining terms in excess of one year as of June 30, 2011:

 

Year Ending

December 31,

   Rental  

2011 (remaining six months)

   $ 147,054   

2012

     302,928   

2013

     315,048   

2014

     107,096   
  

 

 

 

Total

   $ 872,126   
  

 

 

 

Related Party Transaction

The Company receives management services from a related party and pays management fees of $30,000 per month. For each of the six months ended June 30, 2011 and 2010, management fee expenses to the related party amounted to $180,000.

NOTE 10 - 401(K) PLAN AND PROFIT SHARING

The Company has a qualified 401(k) plan (the “Plan”) covering substantially all eligible employees. Plan contributions include employer contribution matching and profit sharing. Plan contributions are at the discretion of the Company. For the six months ended June 30, 2011, the Company did not elect to make 401(k) matching contributions or contributions to the profit sharing plan. For each of the six months ended June 30, 2011 and 2010, total 401(k) administrative expenses were $750. As of June 30, 2011, there was no accrued 401(k) employer contribution.

 

19

EX-99.3 5 d248571dex993.htm UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED BALANCE SHEET Unaudited Pro Forma Condensed Combined Consolidated Balance Sheet

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined financial statements are based on the historical financial statements of Ellie Mae, Inc. (the “Company”) and Del Mar Datatrac, Inc. (“DMD”) after giving effect to (1) the consummation of the acquisition of all of the outstanding shares of DMD by the Company (the “Acquisition”) pursuant to that certain Stock Purchase Agreement , dated as of August 15, 2011, by and among Ellie Mae, Inc., Northgate Private Equity Partners III, L.P., NPEP III-Q, L.L.C., TVC Capital L.P., TVC Capital 12-4-0 Fund L.P., TVC Capital Partners L.P., TVC Capital, LLC , as Sellers’ Representative, and certain listed management employees of DMD, and (2) the assumptions, reclassifications and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements.

The unaudited pro forma condensed combined balance sheet as of June 30, 2011 is presented as if the Acquisition had occurred on June 30, 2011. The unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2011 and year ended December 31, 2010 are presented as if the Acquisition had occurred on January 1, 2010 with recurring acquisition-related adjustments reflected in each of the periods.

Determination of the DMD purchase price and fair value of assets and liabilities acquired as used in the unaudited pro forma condensed combined financial statements are based upon preliminary estimates and assumptions. These preliminary estimates and assumptions could change significantly during the purchase price measurement period as the Company finalizes the valuations of the net tangible assets and intangible assets. Any change could result in material variances between the Company’s future financial results and the amounts presented in these unaudited condensed combined financial statements, including variances in fair values recorded, as well as expenses associated with these items.

The unaudited pro forma condensed combined financial statements are prepared for illustrative purposes only and are not necessarily indicative of or intended to represent the results that would have been achieved had the Acquisition been consummated as of the dates indicated or that may be achieved in the future. The unaudited pro forma condensed combined financial statements do not reflect any operating efficiencies and associated cost savings that the Company may achieve on a consolidated basis .

The unaudited pro forma condensed combined financial statements should be read in conjunction with the Company’s historical consolidated financial statements for the year ended December 31, 2010 and accompanying notes included in the Company’s prospectus dated April 14, 2011 filed with the Securities and Exchange Commission (File No. 333-166438), pursuant to Rule 424(b) under the Securities Act of 1933, as amended, and the Company’s Quarterly Reports on Form 10-Q for the three and six months ended June 30, 2011.


UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

JUNE 30, 2011

(in thousands, except share and per share amounts)

 

     Historical              
     Ellie Mae
June 30, 2011
    DMD
June 30, 2011
    Pro Forma
Adjustments
(Note 2)
    Pro Forma
Combined
 
Assets         

Current assets

        

Cash and cash equivalents

   $ 35,137      $ 1,119      $ (17,188 )(a)    $ 19,068   

Short-term investments

     2,446        —          —          2,446   

Accounts receivable, net

     4,817        1,178        (123 )(a)      5,872   

Prepaid expenses and other

     1,026        66        —          1,092   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     43,426        2,363        (17,311     28,478   

Property and equipment, net

     5,038        278        (6 )(a)      5,310   

Deposits and other assets

     108        32        —          140   

Note receivable

     1,018        —          —          1,018   

Other intangibles, net

     939        695        7,205 (a)      8,839   

Goodwill

     31,965        2,774        13,685 (a)      48,424   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 82,494      $ 6,142      $ 3,573      $ 92,209   
  

 

 

   

 

 

   

 

 

   

 

 

 
Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)         

Current liabilities

        

Accounts payable

   $ 2,501      $ 605      $ —        $ 3,106   

Accrued and other current liabilities

     3,203        369        —          3,572   

Deferred revenue

     2,897        2,218        (1,083 )(a)      4,032   

Deferred rent

     203        —          —          203   

Leases payable

     12        6        —          18   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     8,816        3,198        (1,083     10,931   

Deferred revenue, net of current portion

     212        —          —          212   

Deferred rent, net of current portion

     707        —          —          707   

Acquisition holdback

     —          —          7,593 (a)      7,593   

Other long term liabilities

     350        —          —          350   

Leases payable, net of current portion

     —          7        —          7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     10,085        3,205        6,510        19,800   

Redeemable convertible preferred stock, $0.0001 par value per share; 10,000,000 authorized shares, 0 shares issued and outstanding as of June 30, 2011

     —          —          —          —     

Stockholders’ equity (deficit)

        

Common stock, $0.0001 par value per share; 140,000,000 authorized shares, 20,689,893 shares issued and outstanding as of June 30, 2011

     2        5,000        (5,000 )(a)      2   

Additional paid-in capital

     114,022        107        (107 )(a)      114,022   

Accumulated deficit

     (41,615     (2,170     2,170 (a)      (41,615
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     72,409        2,937        (2,937 )      72,409   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity (deficit)

   $ 82,494      $ 6,142      $ 3,573      $ 92,209   
  

 

 

   

 

 

   

 

 

   

 

 

 


UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2010

(in thousands, except share and per share amounts)

 

     Historical              
     Ellie Mae for
Year Ended
December 31,
2010
    DMD for Year
Ended
December 31,
2010
    Pro Forma
Adjustments
(Note 2)
    Pro Forma
Combined
 

Revenues

   $ 43,234      $ 7,784      $ (544 )(b)     $ 50,474   

Cost of revenues

     12,505        1,734        320 (c)       14,559   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     30,729        6,050        (864     35,915   

Operating expenses:

        

Sales and marketing

     9,555        1,675        905 (c)       12,135   

Research and development

     10,468        2,419        —          12,887   

General and administrative

     9,823        2,279        —          12,102   
  

 

 

   

 

 

   

 

 

   

 

 

 
     29,846        6,373        905        37,124   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     883        (323     (1,769     (1,209

Interest expense

     (29     (1     (215 )(e)       (245

Interest income

     148        —          —          148   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     1,002        (324     (1,984     (1,306

Income tax provision

     225        17        —          242   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 777      $ (341   $ (1,984   $ (1,548
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share:

        

Basic

   $ 0.22          $ (0.44

Diluted

   $ 0.05          $ (0.44

Weighted average shares used in calculation:

        

Basic

     3,495,731            3,495,731   

Diluted

     17,146,735            3,495,731   


UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2011

(in thousands, except share and per share amounts)

 

     Historical              
     Ellie Mae for Six
months ended
June 30, 2011
    DMD for Six
months ended
June 30, 2011
    Pro Forma
Adjustments
(Note 2)
    Pro Forma
Combined
 

Revenues

   $ 22,067      $ 4,598      $ (272 )(b)    $ 26,393   

Cost of revenues

     6,875        1,560        160 (c)      8,595   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     15,192        3,038        (432     17,798   

Operating expenses:

        

Sales and marketing

     4,948        996        452 (c)      6,396   

Research and development

     5,410        1,316          6,726   

General and administrative

     5,727        1,203        (129 )(d)      6,801   
  

 

 

   

 

 

   

 

 

   

 

 

 
     16,085        3,515        323        19,923   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (893     (477     (755     (2,125

Interest expense

     (3     (1     (68 )(e)      (72

Interest income

     82        —          —          82   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (814     (478     (823     (2,115

Income tax provision

     25        1        —          26   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (839   $ (479   $ (823   $ (2,141
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

        

Basic

   $ (0.08       $ (0.21

Diluted

   $ (0.08       $ (0.21

Weighted average shares used in calculation:

        

Basic

     10,412,469            10,412,469   

Diluted

     10,412,469            10,412,469   


NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

1. Preliminary Allocation of Consideration Transferred

On August 15, 2011, the Company entered into a Stock Purchase Agreement and acquired all of the outstanding shares of DMD, a mortgage lending automation business, for a total purchase consideration of approximately $25.2 million in cash, of which $17.2 million was paid at closing subject to a post-closing working capital adjustment and the remaining $8.0 million (the “holdback”) will be paid without interest as follows: (i) $3.0 million on August 15, 2012; (ii) $3.0 million on August 15, 2013; and (iii) $2.0 million August 15, 2014 (the “Acquisition”). The Company did not issue any equity instruments or assume any outstanding stock options to purchase capital stock of DMD in the Acquisition.

The Acquisition will be accounted for as a business combination under Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”). The estimated total purchase price of $24.8 million, net of $0.4 million of imputed interest related to the holdback, has been allocated to the net tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of June 30, 2011, as follows (in thousands):

 

Current Assets

   $ 2,240   

Property and equipment

     272   

Other long-term assets

     32   

Amortizable intangible assets:

  

Customer relationships

     4,220   

Maintenance relationships

     2,490   

Developed technology

     960   

Tradename

     230   

Indefinite-lived intangible assets:

  

Goodwill

     16,459   
  

 

 

 

Total assets acquired

     26,903   
  

 

 

 

Deferred revenue, current

     (1,135

Other current liabilities

     (980

Long-term liabilities

     (7
  

 

 

 

Total liabilities assumed

     (2,122
  

 

 

 

Net assets acquired

   $ 24,781   
  

 

 

 

Customer relationships relate to the Company’s ability to sell existing and future versions of the Company’s products and services to existing DMD customers. The fair value of the customer relationships was determined by discounting the estimated net future cash flows of the customer contracts. The Company will amortize customer relationships on a straight-line basis over an estimated life of 6 years.

Maintenance relationships relate to DMD’s existing maintenance contracts and the Company’s


ability to sell existing and future versions of the Company’s products and services to existing DMD customers. The fair value of the maintenance relationships was determined by discounting the estimated net future cash flows from those maintenance customer contracts. The Company will amortize the assets on a straight-line basis over an estimated life of 9 years.

Developed technology consists of products which have reached technological feasibility and relate to mortgage lending solutions. The value of the developed technology was determined by discounting the estimated net future cash flows of these products. The Company will amortize the existing and core technology on a straight-line basis over estimated life of 3 years.

Tradename represents various DMD brands, registered product names and marks. The fair value of tradename was determined by estimating a benefit from owning the asset rather than paying a royalty to a third party for the use of the asset. The Company will amortize the asset on a straight-line basis over an estimated life of 3 years.

Of the total estimated purchase price paid at the time of the Acquisition, approximately $16.5 million has been allocated to goodwill. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets and is not deductible for tax purposes. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets was the acquisition of an assembled workforce of experienced mortgage origination software development engineers, synergies in products, technologies, skillsets, operations, customer base and organizational cultures that can be leveraged to enable the Company to build an enterprise value greater than the sum of its parts. In accordance with Accounting Standards Codification Topic 350, Intangibles – Goodwill and Other, goodwill will not be amortized but instead be tested for impairment at least annually and more frequently if certain indicators of impairment are present. In the event that the Company determines that the value of goodwill has become impaired, it will record an expense for the amount impaired during the fiscal quarter in which the determination is made.

Upon completion of the fair value assessment after the Acquisition, the Company anticipates that the final purchase price allocation will differ from the preliminary allocation outlined above. Additionally, the fair value of assets acquired and liabilities assumed may be materially impacted by the results of DMD’s operations up to the date of completion of the Acquisition. The actual amounts recorded may differ materially from the information presented herein. Any changes to the initial estimates of the fair value of the assets and liabilities will be recorded as adjustments to those assets and liabilities, with any residual amount recorded as goodwill.

2. Pro Forma Adjustments

The pro forma adjustments included in the unaudited pro forma condensed combined balance sheet and statements of operations are as follows:

 

  (a) To record the initial purchase accounting entries as of June 30, 2011, including the allocation of fair values of the associated tangible assets, intangible assets, goodwill and acquired liabilities, to eliminate historical DMD shareholders equity balances, to record the estimated use of cash to fund the cash portion of the Acquisition, and to record the net present value of the remaining amounts due related to the holdback payments.

 

  (b)

To record the adjustment of the deferred revenue to fair value at a discount of approximately 34% of the prior carrying value and the resulting impact on subsequent recognized revenue.


  The estimated fair value of the deferred revenue was calculated based on the estimated direct costs to fulfill the related future legal performance obligations with an assumed profit margin over the remaining terms of the maintenance or service contracts, as applicable. The assumed profit margin is an estimate of the margin to be generated by a market participant and may differ from actual margins to be realized by the Company on these contracts in future periods.

 

  (c) To record the amortization of intangible assets over their estimated useful lives. The useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the Company. The pro forma amounts have been reduced by the amounts already recorded in the DMD financial statements for the amortization of customer lists.

The amortization of intangible assets is included in cost of revenue and sales and marketing expenses as follows:

 

     Estimated
Value
     Expected
Life
     Expense For
Six Months
Ended June 30,
2011
    Expense For
Twelve Month
Ended December 31,
2010
 
     (in thousands, except expected life data)  

Amortization of intangible assets included in cost of revenue

          

Developed Technology

   $ 960         3 yrs       $ 160      $ 320   
        

 

 

   

 

 

 

Amortization of intangible assets included in sales and marketing expenses

          

Customer Relationships

     4,220         6 yrs         352        703   

Maintenance Relationships

     2,490         9 yrs         138        277   

Tradename

     230         3 yrs         38        77   
  

 

 

       

 

 

   

 

 

 
   $ 7,900          $ 528      $ 1,057   

Less: DMD customer list amortization

           (76     (152
        

 

 

   

 

 

 

Pro forma adjustments

         $ 452      $ 905   
        

 

 

   

 

 

 

 

  (d) To record the reduction of direct acquisition costs and fees included in the historical results of operations for the Company as these costs are not expected to have a continuing impact beyond the next 12 months.

 

  (e) To record the estimated accretion of the holdback payments to face value, for which the associated payments were discounted at an effective annual interest rate of 2.8%.
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