Exhibit 99.2
PIETECH, INC.
Financial Statements
December 31, 2017
Table of Contents
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| |
| Page |
Report of Independent Auditors | 1-2 |
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Financial Statements: | |
Balance Sheet | 3 |
Statement of Income | 4 |
Statement of Changes in Stockholders' Equity | 5 |
Statement of Cash Flows | 6-7 |
Notes to Financial Statements | 8-19 |
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
PIEtech, Inc.
We have audited the accompanying financial statements of PIEtech, Inc. (the "Company") which comprise the balance sheet as of December 31, 2017 and the related statements of income, changes in stockholders' equity and cash flows for the year then ended and the related notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
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 from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PIEtech, Inc. as of December 31, 2017, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Livingston, New Jersey
June 14, 2019
PIETECH, INC.
Balance Sheet
December 31, 2017
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| | | | |
Assets | | |
Current assets: | | |
Cash and cash equivalents | | $ | 16,896,364 |
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Certificates of deposit | | 2,682,595 |
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Accounts receivable | | 1,070,843 |
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Due from related party | | 51,968 |
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Prepaid expenses and other current assets | | 792,609 |
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Total current assets | | 21,494,379 |
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| | |
Property and equipment, net | | 7,837,846 |
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Internally developed software, net | | 4,044,173 |
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Intangible assets, net | | 98,766 |
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Unbilled contract revenue, long-term | | 920,361 |
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| | $ | 34,395,525 |
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| | |
Liabilities and Stockholders' Equity | |
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Current liabilities: | | |
Accounts payable | | $ | 821,819 |
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Accrued expenses | | 519,760 |
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Deferred revenue | | 8,367,632 |
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Note payable to former stockholder, current portion | | 489,580 |
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Total current liabilities | | 10,198,791 |
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| | |
Long-term liabilities: | | |
Note payable to former stockholder, long-term | | 489,580 |
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Deferred revenue, non-current | | 866,715 |
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Total liabilities | | 11,555,086 |
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| | |
Stockholders' equity: | | |
Common stock, no par value, 25,000 shares | | |
authorized, 11,481 shares issued and outstanding | | 1,649,981 |
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Retained earnings | | 21,190,458 |
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Total stockholders' equity | | 22,840,439 |
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| | $ | 34,395,525 |
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See accompanying notes to financial statements.
PIETECH, INC.
Statement of Income
Year Ended December 31, 2017
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| | | | |
Revenue: | | |
Software license fees | | $ | 32,596,344 |
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Software customization fees | | 2,280,816 |
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Software training fees | | 508,858 |
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| | |
Total revenue | | 35,386,018 |
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| | |
Operating expenses: | | |
Compensation and benefits | | 15,018,289 |
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General and administration | | 7,622,947 |
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Depreciation and amortization | | 2,314,557 |
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Total operating expenses | | 24,955,793 |
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| | |
Income from operations | | 10,430,225 |
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| | |
Other income (expense): | | |
Interest income | | 78,134 |
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Interest expense | | (12,109 | ) |
| | |
Total other income (expense), net | | 66,025 |
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| | |
Net income | | $ | 10,496,250 |
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See accompanying notes to financial statements.
PIETECH, INC.
Statement of Changes in Stockholders' Equity
Year Ended December 31, 2017
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| | | | | | | | | | | | | | | | |
| | Common Stock | | Note Receivable from Stockholder | | Retained Earnings | | Total Stockholders' Equity |
Balance at January 1, 2017 | | $ | 3,149,981 |
| | $ | (1,527,150 | ) | | $ | 17,856,783 |
| | $ | 19,479,614 |
|
Accrued interest to stockholder | | — |
| | (6,811 | ) | | — |
| | (6,811 | ) |
Retirement of accrued interest | | | | | | | | — |
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from stockholder | | — |
| | 33,961 |
| | — |
| | 33,961 |
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Retirement of common stock | | (1,500,000 | ) | | 1,500,000 |
| | (1,502,700 | ) | | (1,502,700 | ) |
Distributions to stockholders | | — |
| | — |
| | (5,659,875 | ) | | (5,659,875 | ) |
Net income | | — |
| | — |
| | 10,496,250 |
| | 10,496,250 |
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Balance at December 31, 2017 | | $ | 1,649,981 |
| | $ | — |
| | $ | 21,190,458 |
| | $ | 22,840,439 |
|
See accompanying notes to financial statements.
PIETECH, INC.
Statement of Cash Flows
Year Ended December 31, 2017
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| | | | |
Cash flows from operating activities: | | |
Net income | | $ | 10,496,250 |
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Adjustments to reconcile net income to net cash | | |
from operating activities: | | |
Depreciation and amortization | | 2,314,557 |
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Interest reinvested in certificates of deposit | | (18,296 | ) |
Accrued interest on notes receivable from stockholder | | (6,811 | ) |
Change in operating assets and liabilities: | | |
Accounts receivable | | (127,543 | ) |
Prepaid expenses and other current assets | | (321,150 | ) |
Unbilled contract revenue | | (148,987 | ) |
Accounts payable | | 349,073 |
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Accrued expenses | | 208,181 |
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Deferred revenue | | 1,253,906 |
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Deferred revenue, non-current | | (30,014 | ) |
Net cash provided by operating activities | | 13,969,166 |
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| | |
Cash flows used in investing activities: | | |
Due from related party | | 691,893 |
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Purchase of property and equipment | | (376,903 | ) |
Capitalization of internally developed software | | (2,494,234 | ) |
Net cash used in investing activities | | (2,179,244 | ) |
| | |
Cash flows used in financing activities: | | |
Payments on note payable - former stockholder | | (489,579 | ) |
Distributions to stockholders | | (5,659,875 | ) |
Net cash used in financing activities | | (6,149,454 | ) |
| | |
Net change in cash and cash equivalents | | 5,640,468 |
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| | |
Cash and cash equivalents - beginning of year | | 11,255,896 |
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| | |
Cash and cash equivalents - end of year | | $ | 16,896,364 |
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PIETECH, INC.
Statement of Cash Flows, Continued
Year Ended December 31, 2017
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| | | | |
Supplemental disclosure of non-cash activities: | | |
Purchase of common stock through issuance of note | | |
payable and retirement of notes receivable including | | |
accrued interest from stockholder | | $ | 3,002,700 |
|
See accompanying notes to financial statements.
PIETECH, INC.
Notes to Financial Statements
1. Organization and Summary of Significant Accounting Policies:
Nature of Business: PIEtech, Inc. (the “Company”) was incorporated in the Commonwealth of Virginia on May 6, 1997. The Company was organized to develop and market financially oriented computer software and application programs. The Company markets MoneyGuidePro® and other software to securities brokers, financial planners and other professionals.
Basis of Accounting: The financial statements are prepared in accordance with accounting standards established by the Financial Accounting Standards Board (“FASB”) to ensure consistent reporting of financial condition, results of operations and cash flows. References to U.S. generally accepted accounting principles (“GAAP”) in these footnotes are to the FASB Accounting Standards Codification, referred to as the codification or (“ASC”).
Revenue Recognition: The Company’s revenue is derived primarily from the sale of software licenses to end users and customization and implementation of the related software. Generally included within the price of the license fees are services for ongoing customer support, software maintenance, and software upgrades. Provided that no uncertainties regarding customer acceptance exist and collection of the related receivable is probable, revenue is recognized as follows:
•Software customization revenue is recognized over the period the customizations are performed.
•Implementation revenue is recognized on a straight-line basis over the life of the contract
•Usage based revenue for software licenses are recognized based on usage over the term of the related license.
•Non-usage based revenue for software licenses are generally recognized on a straight-line basis over the term of the related license.
•Training revenue is recognized over the period the training is provided.
Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration that we expect to be entitled to in exchange for those services. All revenue recognized in the statements of income is considered to be revenue from contracts with customers. Sales and usage-based taxes are excluded from revenues.
Cash and Equivalents: The Company considers all investment instruments with a maturity of three months or less to be cash equivalents.
Certificates of Deposit: The Company’s certificates of deposit are invested with federally insured institutions and generally have a duration of twelve months. The Company’s investments in certificates of deposit are carried at initial cost plus accrued interest.
PIETECH, INC.
Notes to Financial Statements
1. Summary of Significant Accounting Policies, Continued:
Accounts Receivable: Generally, the Company does not require collateral to support its accounts receivable. The Company evaluates the need for an allowance for doubtful accounts for uncollectible fees receivable. In establishing the amount of the allowance, if any, customer-specific information is considered related to delinquent accounts, including historical loss experience and current economic conditions. As of December 31, 2017, the Company has determined that the likelihood of non-collection is low and that an allowance is unnecessary.
Property and Equipment: Property and equipment are stated at cost less accumulated depreciation and amortization. The costs of major improvements are capitalized, while the costs of normal maintenance and repairs are charged to expense as incurred. Depreciation of furniture and equipment is computed using the straight-line method based on estimated useful lives of the depreciable assets. Leasehold improvements are amortized on a straight-line basis over their estimated economic useful lives or the remaining lease term, whichever is shorter. Improvements are capitalized, while repairs and maintenance costs are charged to operations as incurred. Assets are reviewed for recoverability whenever events or circumstances indicate the carrying value may not be recoverable. At December 31, 2017, management has determined that these assets are not impaired.
Internally Developed Software for Internal Use: Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Maintenance and training costs are expensed as incurred. Internally developed software is amortized on a straight-line basis over its estimated useful life. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
There were no impairments of internally developed software during the year ended December 31, 2017.
Intangible Assets: Intangible assets are recorded at cost less accumulated amortization. Costs of domain name and trademarks are amortized on a straight-line basis over a 15 year period. Intangible assets are reviewed for impairment whenever events or changes in circumstances may affect the recoverability of the net assets. Such reviews include an analysis of current results and take into consideration the undiscounted value of projected operating cash flows. No intangible asset impairment charges have been recorded for the year ended December 31, 2017.
PIETECH, INC.
Notes to Financial Statements
1. Summary of Significant Accounting Policies, Continued:
Operating Leases: In certain circumstances, the Company enters into leases with free rent periods, rent escalations or lease incentives over the term of the lease. In such cases, the Company calculates the total payments over the term of the lease and records them ratably as rent expense over that term.
Recent Accounting Pronouncements: In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which amends the existing accounting standards for revenue recognition, and all subsequent ASUs that modified Topic 606. This standard is effective for financial statements issued by private companies for annual and interim periods beginning after December 15, 2018. However, the Company decided to adopt this guidance for the Company's fiscal year beginning January 1, 2018.
The Company’s adoption of ASU 2014-09 will result in an increase to retained earnings of $877,536 as of January 1, 2018. This adjustment consist of $410,775 relating to activity during the year ended December 31, 2017 and $466,761 for cumulative activity through December 31, 2016.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326)". This update significantly changes the way that entities will be required to measure credit losses. The new standard requires that entities estimate credit losses based upon an "expected credit loss" approach rather than the "incurred loss" approach, which is currently used. The new approach will require entities to measure all expected credit losses for financial assets based on historical experience, current conditions, and reasonable forecasts of collectability. The change in approach is anticipated to impact the timing of recognition of credit losses. This ASU will become effective for beginning January 1, 2020. Early adoption is permitted for fiscal years beginning January 1, 2019. The Company is currently evaluating the potential impact of this guidance on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases.” This update amends the requirements for assets and liabilities recognized for all leases longer than twelve months. Lessees will be required to recognize a lease liability measured on a discounted basis, which is the lessee’s obligation to make lease payments arising from the lease, and a right-of-use (“ROU”) asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company will adopt the new standard on its effective date of January 1, 2019 using the cumulative-effect adjustment transition method with certain available transitional practical expedients.
The standard will have a material impact on our balance sheets and related disclosures but will not have a material impact on our statements of income. The most significant impact will be the recognition of ROU assets and lease liabilities for operating leases
PIETECH, INC.
Notes to Financial Statements
1. Summary of Significant Accounting Policies, Continued:
The Company currently estimates adoption of ASU 2016-02 will result in the recognition of ROU assets and lease liabilities for operating leases of approximately $2,123,000 and $2,286,000, respectively, as of January 1, 2019. The difference between the ROU assets and lease liabilities primarily represents the existing deferred rent liabilities, resulting from historical straight-lining of operating leases, which was reclassified upon adoption to reduce the measurement of the ROU assets.
Management Estimates: Management of the Company has made certain estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with GAAP. Areas requiring the use of management estimates relate to estimating uncollectible receivables, revenue recognition, intangible and other long-lived assets, uncertain tax positions and sales tax liabilities. Actual results could differ materially from those estimates.
Income Taxes: Effective July 1, 2006, the Company elected under the Internal Revenue Code to be an S Corporation. In lieu of corporate income taxes, the stockholders of an S Corporation are taxed on their proportionate share of the Company’s taxable income. As a result, the Company does not incur any income tax obligations, unless there is a substantial sale of the assets of the Company that could cause the Company to incur a built-in gains tax based on the excess of the sale price over the fair market value of the assets sold as of the date of the S election. Any possible liability of a built-in gains tax decreases ratably over a period expiring 10 years after the effective date of the S election. As of December 31, 2017, the Company is no longer subject to U.S. Federal tax examinations for year-ends prior to December 31, 2014. With limited exceptions, the Company is no longer subject to income tax examinations for the years prior to December 31, 2013.
The Company follows authoritative guidance related to how uncertain tax positions should be recognized, measured, disclosed and presented in the consolidated financial statements. This requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained “when challenged” or “when examined” by the applicable tax authority. Company management has analyzed the tax positions the Company has taken and has concluded that as of December 31, 2017, there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements.
PIETECH, INC.
Notes to Financial Statements
1. Summary of Significant Accounting Policies, Continued:
Concentrations and Credit Risk: Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, certificates of deposit and receivables. The Company maintains its cash in multiple financial institutions with balances that regularly exceed federally insured limits. Certificates of deposit are held with multiple financial institutions to mitigate credit risk. Receivables, consisting principally of trade accounts receivable, result from contracts with customers in the United States. Credit is extended to customers after an evaluation for credit worthiness. At December 31, 2017, two customers accounted for 27% of accounts receivable. For the year ended December 31, 2017, one customer accounted for 11% of total revenue.
Advertising Costs: Advertising costs are expensed as incurred and are included in operating expenses in the accompanying statements of income. Advertising costs were $321,710 for the year ended December 31, 2017.
Subsequent Events: Management has evaluated subsequent events through June 14, 2019, the date the financial statements were available for issuance. In November 2018, the Company acquired approximately 27% of the outstanding membership interests of a privately held company for cash consideration of $1,200,000. In accordance with the agreement, the Company is required to make future capital contributions of $1,200,000 and $1,100,000 in 2019 and 2020, respectively, subject to certain conditions. On March 14, 2019, the Company entered into a merger agreement (the “Merger Agreement”) with Envestnet, Inc. (“Envestnet”). Pursuant to the Merger Agreement, PIEtech will merge with and into Envestnet, with Envestnet continuing as the surviving corporation. This transaction closed on May 1, 2019.
2. Revenue:
Contract Balances: The Company records contract liabilities (deferred revenue) when cash payments are received in advance of its performance. For the majority of its arrangements, the Company requires advance quarterly payments before the services are delivered to the customer.
Deferred revenue primarily consists of implementation fees, professional services, and subscription fee payments received in advance from customers.
Unbilled receivables, which are not classified as contract assets, represent arrangements in which revenues have been recorded prior to billing and right to payment is unconditional.
PIETECH, INC.
Notes to Financial Statements
2. Revenue, Continued:
The opening and closing balances of the Company’s billed receivables, unbilled receivables and deferred revenues are as follows:
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| | | | | | | | | | | | | | | | |
| | Receivables, which are included in accounts receivable | | Unbilled receivables, which are included in accounts receivable | | Deferred Revenue (current) | | Deferred Revenue (non-current) |
Opening balance as of January 1, 2017 | | $ | 798,461 |
| | $ | 144,839 |
| | $ | 7,113,726 |
| | $ | 896,729 |
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Increase (decrease), net | | (134,140 | ) | | 261,683 |
| | 1,253,906 |
| | (30,014 | ) |
Ending balance as of December 31, 2017 | | $ | 664,321 |
| | $ | 406,522 |
| | $ | 8,367,632 |
| | $ | 866,715 |
|
The change in receivables is primarily a result of growth in revenue and the timing of payments on software licenses during the year ended December 31, 2017.
The increase in unbilled receivables is primarily driven by revenue recognized in excess of billings related to subscription-based services during the year ended December 31, 2017.
The increase in deferred revenue is primarily the result of increased subscription-based services during the year ended December 31, 2017, most of which will be recognized over the course of the next twelve months.
The amount of revenue recognized that was included in the opening deferred revenue balance was $7,113,726 for the year ended December 31, 2017. The amount of revenue recognized from performance obligations satisfied in prior periods was not material.
3. Prepaid Expenses and Other Current Assets:
Prepaid expenses and other current assets consist of the following at December 31, 2017:
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| | | | |
Prepaid technology | | $ | 312,229 |
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Prepaid insurance | | 165,460 |
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Prepaid taxes | | 21,814 |
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Other prepaid expenses | | 293,106 |
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Total | | $ | 792,609 |
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PIETECH, INC.
Notes to Financial Statements
4. Property and Equipment:
Property and equipment consist of the following at December 31, 2017:
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| | | | | | |
| | Estimated Useful Life | | |
| | | |
Cost: | | | | |
Land | | not applicable | | $ | 2,873,762 |
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Building | | 39 years | | 2,663,979 |
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Furniture and fixtures | | 7 years | | 746,327 |
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Computer equipment and software | | 3 years | | 2,220,346 |
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Office equipment | | 5 years | | 224,234 |
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Automotive equipment | | 5 years | | 270,309 |
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Building improvements | | 7-39 years | | 2,195,371 |
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Leasehold improvements | | Shorter of the lease term or useful life of the asset | | 1,536,225 |
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| | | | 12,730,553 |
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Less: accumulated depreciation and amortization | | (4,892,707 | ) |
Total | | | | $ | 7,837,846 |
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Depreciation and amortization expense for the year ended December 31, 2017 was $708,516.
5. Internally Developed Software:
Internally developed software consists of the following at December 31, 2017:
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| | | | | | |
| | Estimated Useful Life | | |
| | | |
Internally developed software | | 3 years | | $ | 6,533,940 |
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Less: accumulated depreciation and amortization | | | | (2,489,767 | ) |
Total | | | | $ | 4,044,173 |
|
Amortization expense for the year ended December 31, 2017 was $1,598,373.
PIETECH, INC.
Notes to Financial Statements
6. Intangible Assets:
The Company’s intangible assets consisted of the following at December 31, 2017:
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| | | | | | | | | | | | | | |
| | Estimated Useful Life | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Definite lived intangible assets: |
Domain name | | 15 years | | $ | 81,886 |
| | $ | (13,693 | ) | | $ | 68,193 |
|
Trademarks | | 15 years | | 32,861 |
| | (5,495 | ) | | 27,366 |
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Patents | | not applicable | | 3,207 |
| | — |
| | 3,207 |
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| | | | $ | 117,954 |
| | $ | (19,188 | ) | | $ | 98,766 |
|
Amortization expense for the year ended December 31, 2017 was $7,668.
On January 1, 2016, the domain name with a net carrying amount of $79,156 was transferred to the Company from a related party. Amortization expense amounted to $5,459 for 2017. Estimated amortization for the next five years is $5,459 per year with remaining amortization of $40,898 thereafter.
On January 1, 2017, the trademark with a net carrying amount of $29,575 was transferred to the Company from a related party. Amortization expense amounted to $2,209 for 2017. Estimated amortization for the next five years is $2,191 per year with remaining amortization of $16,411 thereafter.
On January 1, 2017, the patent with gross carrying amount of $3,207 was transferred to the Company from a related party. The patent is pending as of December 31, 2017. It will start amortizing over 15 years after the patent is issued.
7. Accrued Expenses:
Accrued expenses consist of the following at December 31, 2017:
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| | | | |
Accrued compensation and related taxes | | $ | 226,641 |
|
Accrued rent expense | | 100,882 |
|
Accrued sales taxes | | 152,620 |
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Interest payable to former stockholder | | 12,109 |
|
Other accrued expenses | | 27,507 |
|
Total | | $ | 519,759 |
|
PIETECH, INC.
Notes to Financial Statements
8. Note Payable to Former Stockholder:
During 2017, the Company entered into a note payable with a former stockholder for the redemption of stock described in Note 9 for $1,468,739. The note bears interest at a rate of 2.12% per annum and requires three equal annual payments of principal in the amount of $489,580 plus all accrued interest, with a final payment due on April 1, 2019. The Company incurred interest expense on the note payable for the year ended December 31, 2017 of $12,109.
9. Related Party Transactions:
MoneyGuide Advisory, Inc., an affiliated company, owed the Company $11,870 as of December 31, 2017. MoneyGuide Solutions, Inc., an affiliated company, owed the Company $22,370 at December 31, 2017. Amounts totaling $17,728 were due from other related parties at December 31, 2017. These balances are non-interest bearing.
The Company had a note receivable due from a stockholder in the amount of $1,500,000 at December 31, 2016 which was for the purchase of Company stock. Interest was charged at 1.81% per annum and amounted to $6,811 for 2017. The stockholder was required to repay the outstanding principal amount and interest without demand on or before January 1, 2024. On April 1, 2017, the Company repurchased the stock for $3,002,700 through retirement of the note receivable including accrued interest and issuance of a note payable to the former stockholder as described in Note 8. The repurchased stock was retired in 2017.
10. Fair Value Measurements:
The Company follows ASC 825-10, Financial Instruments, which provides companies the option to report selected financial assets and liabilities at fair value. ASC 825-10 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect of the Company’s choice to use fair value on its earnings. ASC 825-10 also requires entities to display the fair value of the selected assets and liabilities on the face of the balance sheets. The Company has not elected the ASC 825-10 option to report selected financial assets and liabilities at fair value.
Financial assets and liabilities recorded at fair value in the balance sheets are categorized based upon a fair value hierarchy established by GAAP, which prioritizes the inputs used to measure fair value into the following levels:
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| |
Level I: | Inputs based on quoted market prices in active markets for identical assets or liabilities at the measurement date. |
Level II: | Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or inputs that are observable and can be corroborated by observable market data. |
PIETECH, INC.
Notes to Financial Statements
10. Fair Value Measurements, Continued:
|
| |
Level III: | Inputs reflect management’s best estimates and assumptions of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the valuation of the instruments. |
Fair Value on a Recurring Basis
The following tables set forth the fair value of the Company’s financial assets measured at fair value in the balance sheets as of December 31, 2017, based on the three-tier fair value hierarchy:
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| | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | |
Money market funds and other (1) | | $ | 12,829,492 |
| | $ | 12,829,492 |
| | $ | — |
| | $ | — |
|
Certificates of deposit (2) | | 2,682,595 |
| | — |
| | 2,682,595 |
| | — |
|
Total assets | | $ | 15,512,087 |
| | $ | 12,829,492 |
| | $ | 2,682,595 |
| | $ | — |
|
| |
(1) | The fair values of the Company’s investments in money-market funds are based on the daily quoted market prices for the net asset value of the various money market funds and time deposit accounts which mature on a daily basis. |
| |
(2) | The fair value of the Company's certificates of deposit are based on the initial investment, plus accrued interest, which approximates fair value due to the short duration before maturity. |
The Company’s fair value measurement of assets and liabilities include money-market funds and certificates of deposit not insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company periodically invests excess cash in money-market funds not insured by the FDIC. The Company believes that the investments in money market funds are on deposit with creditworthy financial institutions and that the funds are highly liquid. These money-market funds are considered Level 1 and are included in cash and cash equivalents in the balance sheets.
11. Employee Retirement Plan:
The Company has an employee retirement plan under Section 401(k) of the Internal Revenue Code. The plan provides for salary reduction contributions by eligible employees and for Company matching contributions, subject to certain limitations. The plan also provides for discretionary Company contributions as determined annually by the Board of Directors. Total Company contributions were $359,566 for 2017.
PIETECH, INC.
Notes to Financial Statements
12. Commitments and Contingencies:
During 2015, the Company entered into a lease agreement for office space that includes scheduled rent increases and was expected to expire in January 2020. This lease was terminated as of December 19, 2017 and the Company entered into a new lease agreement for additional office space that also includes scheduled rent increases and expires in December 2022. Rent expense amounted to $405,185 in 2017.
During 2016, the Company entered into two lease agreements for certain vehicles requiring monthly payments of $1,234 and $1,323, respectively, and expiring in March 2019 and May 2019, respectively.
At December 31, 2017, the approximate minimum commitments for the lease agreements are as follows:
|
| | | | |
Year | | Amount |
| | |
2018 | | $ | 540,002 |
|
2019 | | 599,826 |
|
2020 | | 604,247 |
|
2021 | | 619,353 |
|
2022 | | 634,837 |
|
| | $ | 2,998,265 |
|
The Company entered into agreements with employees which allow for an annual bonus equal to a 1% share of the Company’s estimated distributions made to stockholders, plus any related income taxes. The employees share only in the excess of the minimum distributions allocated for stockholders to pay federal and state income taxes on the Company’s net income. The agreement will terminate automatically upon the employee’s termination of employment, death, a change in control of the Company, or an initial public offering of the Company’s securities. Under this agreement, the Company paid $24,000 in 2017. These costs are expensed as incurred and recorded as a component of operating expenses in the accompanying statement of income.
PIETECH, INC.
Notes to Financial Statements
12. Commitments and Contingencies, Continued:
The Company is involved in legal proceedings arising in the ordinary course of its business. Legal fees and other costs associated with such actions are expensed as incurred. The Company will record a provision for these claims when it is both probable that a liability has been incurred and the amount of the loss, or a range of the potential loss, can be reasonably estimated. These provisions are reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case. Legal proceedings accruals are recorded when and if it is determined that a loss is both probable and reasonably estimable. For litigation matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it is subject to disclosures. The Company believes that liabilities associated with any claims, while possible, are not probable, and therefore has not recorded any accrual for any claims as of December 31, 2017. Further, while any possible range of loss cannot be reasonably estimated at this time, the Company does not believe that the outcome of any of these proceedings, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on its financial condition or business, although an adverse resolution of legal proceedings could have a material adverse effect on the Company’s results of operations or cash flow in a particular quarter or year.
Certain of the Company’s revenues are subject to sales and use taxes in certain jurisdictions where it conducts business in the United States. During 2017, the Company estimated that a sales and use tax liability of $152,620 related to multiple taxing jurisdictions with respect to revenues in the year ended December 31, 2017, and prior years was probable. This amount is included in accrued expenses on the accompanying balance sheet.
Additional future information obtained from the applicable jurisdictions may affect the Company’s estimate of its sales and use tax liability, but such change in the estimate cannot currently be made.
