Commitments and Contingencies

6 Months Ended

Jun. 30, 2016

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

6. Commitments and Contingencies

Operating Leases

The Company leases approximately 22,000 square feet of office space in Chanhassen, Minnesota. The lease commenced on May 1, 2012 and originally extended through August 31, 2016. In August 2015, the Company amended the terms of the lease agreement to extend the term through January 2022. In addition to the office space, the Company leases certain office furniture and equipment under operating leases through November 2018. The Company has two vehicles on 36-month leases which commenced in January and June 2015, respectively. The Company also entered into a lease agreement in April 2014 for a total of 1,812 square feet of office space in Dallas, Texas related to the employees retained as part of its acquisition of Select Mobile Money. The lease commenced on May 1, 2014 and extends through June 30, 2017. The Company has sub-leased the Dallas, Texas office space, commencing on November 19, 2015 and expiring on June 30, 2017. Rent expense under all leases for the three and six months ended June 30, 2016 was approximately $107,000 and $236,000, respectively, and approximately $126,000 and $253,000, respectively, for the three and six months ended June 30, 2015.

The Company’s headquarters office space lease calls for rent increases over the term of the lease. The Company records rent expense on a straight line basis using average rent for the term of the lease. The excess of the expense over cash rent paid is shown as accrued rent.

The Company also has various computer leases with three year terms. The Company is recording the expense on a monthly basis.

Total future minimum contractual lease payments for all operating leases are as follows:

Six months ending December 31, 2016	$	178,742
2017		292,245
2018		241,894
2019		241,275
2020		247,726
Thereafter		276,563
	$	1,478,445

Capital Leases

The Company entered into a master capital lease arrangement with one of its directors from March 2015 to November of 2015 for certain computer equipment and software licenses with an imputed interest rate ranging from 3.8% to 18% per year. The total cost, net of accumulated amortization included in property and equipment as of June 30, 2016 and December 31, 2015 totaled approximately $562,000 and $501,000, respectively.

The Company also entered into a capital lease with a third-party leasing company, which was co-guaranteed by one of its directors, for prepaid software licenses totaling approximately $253,000. The lease carries an imputed interest rate of 10% per year and requires monthly payments of $10,759 per month through July 2017.

Future lease payments under capital leases are as follows:

Six months ending December 31, 2016	$	233,389
2017		374,506
2018		80,103
2019		32,730
2020		2,836
Total payments		723,564
Less: portion representing interest		(11,827	)
Principal portion		711,737
Less: unamortized deferred financing costs		(102,807	)
Capital lease balance		608,930
Less: current maturities of capital lease obligations		(362,413	)
Capital lease, net of current maturities	$	246,517

In February 2015, the Company entered into an agreement with Mr. Davis, which guarantees financial responsibility for the obligations under the terms of a lease arrangement which he entered into on behalf of the Company. In addition, the Company entered into an agreement with Mr. Davis which provides for the same lease terms as he entered into on behalf of the Company. The three-year lease agreement provides financing for up to $500,000 of computer equipment the Company procured for its data centers to accommodate the overall increase in transactions and ensure it is able to meet customer uptime requirements. As consideration to the director for entering into the lease, the Company issued the director a five-year warrant to purchase up to 27,175 shares of common stock at $17.25 per share. The warrant was 100% vested and exercisable upon issuance. In June 2015, Mr. Davis provided his personal guarantee as part of the lease the Company entered into with a third-party leasing company totaling approximately $242,000. As consideration to Mr. Davis for providing his personal guarantee, the Company issued Mr. Davis a five-year warrant to purchase up to 16,127 shares of common stock at $6.60 per share in June 2015. The warrant was 100% vested and exercisable upon issuance. The Company amortizes the fair value of the warrants over the term of the leases.

Litigation

An entity named Cachet Banq contacted the Company in December 2010 relative to their U.S. Trademark Registration No. 2,857,465 (registered on June 29, 2004) for the standard character mark CACHET covering “financial services, namely automated clearing house processing services for the payroll service industry.” Cachet Banq has alleged that the Company’s use of “CACHET” infringes on their federal trademark registration. On March 4, 2013, Cachet Banq filed a trademark infringement lawsuit against the Company in the United States District Court for the Central District of California. The parties filed cross motions for summary judgment. The initial brief was filed on May 30, 2014, replies were filed on June 26, 2014 and the court took these motions under advisement on July 8, 2014. The Company has denied that its use of the character mark CACHET infringes on Cachet Banq’s purported rights in their mark, and will vigorously defend this and any similar claims made by Cachet Banq in the future. On September 21, 2015, the Court issued an order (1) granting Cachet Banq’s motion for summary judgment, (2) denying the Company’s motion for summary judgment, and (3) ordering the parties to submit memoranda regarding remedies. Following briefing in the Fall of 2015, the Court granted an additional period for discovery regarding remedies and ordered that the parties submit additional briefs on remedies. The discovery was completed and all additional briefing was submitted to the Court by April 19, 2016. In its memorandum to the Court, Cachet Banq stated that it is not presently seeking any monetary damages and is only seeking an injunction and their attorney’s fees. The parties are currently awaiting the Court’s decision on remedies. In any event, the Company believes that the Court’s order granting Cachet Banq’s motion for summary judgment was in error, and plans to appeal its decision. The Company’s insurance covered much of its legal fees related to this litigation and its legal team agreed to write-off certain accounts payable owed by the Company in excess of the insurance proceeds received. As a result, the Company recognized other income of approximately $293,000 for the three and six months ended June 30, 2016.

On March 31, 2016, the holder of the Company’s series subordinated note referred to in Note 4 “Financing Arrangements” commenced an action against the Company in Hennepin County Court in the State of Minnesota alleging that the Company breached the terms of the note and is seeking to collect alleged amounts due and owing under the note. The holder of the note alleges that the Company is in default and the Company owes the note holder $694,869 plus interest and assessments accruing after April 1, 2016. The dispute centers on the note holder’s interpretation of the agreement. Based on the note holder’s interpretation of the agreement, the note holder seeks an extraordinary amount in alleged liquidated damages (approximately $300,000 on an outstanding debt of approximately $415,000). The Company disputes the allegations of the note holder and intends to vigorously defend the claim. Among other things, the Company contends the note holder’s interpretation is unenforceable under Minnesota law. The note holder recently moved for summary judgment and a hearing on that motion was held on August 9, 2016 before the Fourth Judicial District in Hennepin County in Minnesota where the Court heard both arguments and took the motion under advisement. As of August 15, 2016, the Court has not yet rendered its decision on the motion. The alleged default could subject the Company to claims of default or cross default by the Company’s other lenders. At this time no other lender has asserted such a claim. As of June 30, 2016, the Company had recorded approximately $415,000 of outstanding debt and approximately $27,000 of accrued interest related to this note.

On or about May 24, 2016, the Company received notice from Trooien Capital alleging that the Subsidiary has not made interest payments in accordance with the terms of the loan and security agreement entered into by the Subsidiary and Trooien Capital on December 12, 2013 and that, as a result of such alleged breach, all outstanding amounts under that agreement are accelerated. The Company disputes Trooien Capital’s claim because the Subsidiary has been accruing interest expense in accordance with the terms of the agreement for more than two years and Trooien Capital has not objected to that practice. On or about May 27, 2016, the Subsidiary filed a verified complaint with the Fourth District Court of Hennepin County in Minnesota naming Trooien Capital as a defendant and seeking a declaratory judgment against Trooien Capital with respect to this claim. On June 13, 2016, Trooien Capital answered the Company’s complaint and asserted counterclaims. On June 20, 2016, Trooien Capital moved to appoint a receiver for the Company. On June 30, 2016, the Company filed a notice of motion and motion to dismiss a portion of the counterclaims. On July 19, 2016, the Company filed with the Fourth District Court of Hennepin County in Minnesota a memorandum of law and supporting documents requesting that the Court deny Trooien Capital’s motion to appoint a receiver for the Company. The Company believes that Trooien Capital’s claim is inconsistent with the loan and security agreement and the parties’ conduct during the two years since the Subsidiary entered into that agreement. The Company also believes that Trooien Capital’s motion and the remedy sought lacks sufficient evidence and factual support under the applicable legal standard. The Company also believes that Trooien Capital’s motion failed to establish, by clear and convincing evidence, that the appointment of a receiver is necessary. The Company intends to vigorously oppose the motion to appoint a receiver. A hearing in the Fourth Judicial District in Hennepin County in Minnesota is currently scheduled for October 18, 2016.

Financial Service Agreements

In August 2015, the Company entered into an agreement with a firm to provide investor relations and financial advisory services. The initial six month term of the agreement required the issuance of 26,667 shares of the Company common stock and payments totaling $30,000. After the initial six month term, the Company has the option to extend for an additional six months which would require issuing the firm an additional 26,667 shares of common stock and payment totaling $30,000. In February 2016, the Company renewed the services agreement and issued the firm an additional 31,000 shares of the Company’s common stock for another six months of investor relations and financial advisory services.

In January 2016, the Company entered into an agreement with an independent contractor to provide investor relations, capital raising services and other consulting duties. The agreement requires annual compensation for services of $100,000 as well as discretionary bonuses paid in cash or stock based on the consultant’s ability to complete particular projects for the Company. The term of this agreement is for 12 months commencing on January 1, 2016. The agreement is cancelable by either party with a 30-day notice.