Annual report pursuant to Section 13 and 15(d)

Note 18 - Commitments and Contingencies

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Note 18 - Commitments and Contingencies
12 Months Ended
Dec. 31, 2015
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Disclosure [Text Block]
Note 18
– Commitments and Contingencies

Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business.  The Company records a provision for a liability when it believes that is both probable that a liability has been incurred, and the amount can be reasonably estimated.  If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s consolidated financial statements.  Contingencies are inherently unpredictable and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.

Legal Proceedings

The defense costs related to the legal proceeding against the Company may be offset by payment of our claims from our insurance carriers.

Discover Growth Fund v. 6D Global Technologies, Inc., et al., Case No. 15-cv-7618 (PKC) (S.D.N.Y.)

On September 28, 2015, Discover Growth Fund (“Discover”) filed an action in the United States District Court for the Southern District of New York (the “District Court”) against 6D Global Technologies, Inc., its officers and directors, and certain third-parties.  In its complaint, Discover alleges, among other things, that it was fraudulently induced into executing the Stock Purchase Agreement (the “SPA”), because the Company allegedly made misrepresentations regarding Benjamin Wey - also a defendant in the pending action - and his alleged involvement with the Company.  Discover’s complaint further asserts claims for violations of federal securities laws, rescission, breach of contract, and fraud, all substantially arising out of the same factual allegations.

Discover’s suit was assigned to District Court Judge P. Kevin Castel.  Discover made a motion in the District Court for a pre-judgment attachment of the Company’s assets in aid of arbitration, and for a temporary restraining order pending a decision on its motion for attachment of the Company’s assets, which was initially granted by the court and then revised.  The Company opposed Discover’s attachment motion and cross-moved to compel arbitration of Discover’s claims in accordance with the terms of the SPA.

On October 30, 2015, Judge Castel completely denied Discover’s motion for an attachment of the Company’s assets and vacated the temporary restraining order. The Court found that the plaintiff had not satisfied their burden of proof regarding any alleged wrongdoing by the Company, or its officers and directors. As of the date of this filing, Discover has not filed for arbitration of its underlying claims.

The Company vigorously disputes Discover’s underlying claims and intends to aggressively defend them if any arbitration is filed by Discover. The extent of the Company’s potential liability in this matter has not yet been determined.  And as a result, no accrual for this exposure was made in the consolidated financial statements.

Puddu et al. v. 6D Global Technologies, Inc., et al., Case No. 15-cv-8061 (RWS) (S.D.N.Y.)

On October 13, 2015, an individual named Sixto Castillo IV filed a putative class action complaint in the United States District Court for the Southern District of New York against the Company, certain officers and directors, and certain third-parties, putatively on behalf of the Company’s stockholders.  The lawsuit seeks damages arising from alleged material misstatements and omissions concerning defendant Benjamin Wey, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act (15 U.S.C. §§ 78j(b) and 78t(a), respectively) and Rule 10b-5 promulgated thereunder (17 C.F.R. § 240.10b-5).  Plaintiffs Joseph Puddu, Mark Ghitis, Valery Burlak, and Adam Butter, on behalf of the putative class, subsequently filed an amended complaint and second amended complaint on March 23, 2016 and April 4, 2016, respectively.

Plaintiffs allege, among other things, that defendants made false and/or misleading statements and/or failed to disclose: (1) the extent of Benjamin Wey’s purported involvement in the Company’s operations, and (2) Benjamin Wey’s purported beneficial ownership of more than 5% of the Company’s stock.

Plaintiffs seek an undetermined amount of compensatory damages allegedly sustained by the putative class a result of these purported misstatements and omissions.

The Company vigorously disputes the allegations made in the complaint and intends to assert an aggressive defense.  The extent of the Company’s potential liability in this matter has not yet been determined.  And as a result, no accrual for this exposure was made in the consolidated financial statements.

Scott v. Wei et al. and 6D Global Technologies, Inc., Case No. 1:15-cv-09691 (S.D.N.Y.)  

On December 11, 2015, an individual named Allan Scott filed a shareholder action in the United States District Court for the Southern District of New York derivatively on behalf of 6D Global Technologies Inc. against certain officers and directors of the Company, certain third-parties, and the Company itself (as a nominal defendant).  Mr. Scott seeks damages and injunctive relief arising from alleged breaches of fiduciary duties, unjust enrichment, and purported material misstatements and omissions in violation Section 14 of the Exchange Act (15 U.S.C. § 78n) and Rule 14a-9 promulgated thereunder (17 C.F.R. § 240.14a-9).

Specifically, the complaint alleges, among other things, that defendants have harmed the Company: (1) by permitting defendant Benjamin Wei to manipulate the share price and trading volume of the Company’s stock, (2) by lacking adequate internal controls to prevent such alleged manipulation, and (3) by failing to disclose Wei’s purported actions and involvement in the Company.  Mr. Scott seeks an award to the Company in an undetermined amount for damages it allegedly sustained as a result of these alleged violations, as well as injunctive relief requiring 6D Global to reform and improve its corporate governance and internal procedures.  The lawsuit has been stayed by the Court pending the outcome of the motion to dismiss that defendants intend to file in the Puddu lawsuit.

The Company and the named directors and officers dispute the allegations made in the complaint and intend to amount an aggressive defense.  The extent of the potential liability in this matter has not yet been determined.  And as a result, no accrual for this exposure was made in the consolidated financial statements.

Cottam v. Glob. Emerging Capital Grp. et al., Case No. 16-cv-04584 (S.D.N.Y.)

The Company has learned that on June 16, 2016, an individual named John Cottam filed a complaint in the United States District Court for the Southern District of New York against the Company, its CEO, and certain third-parties.  To the Company’s knowledge, neither the Company nor its CEO has been served with this complaint. 

With regard to the Company and its CEO, Mr. Cottam seeks damages arising from an alleged breach of contract, as well as purported material misstatements or omissions in violation of Section 10(b) of the Securities Exchange Act (15 U.S.C. § 78j(b)) and Rule 10b-5 promulgated thereunder (17 C.F.R. § 240.10b-5).  Specifically, the complaint alleges, among other things, that defendants induced Mr. Cottam to invest in a private offering of Company shares by misrepresenting (i) the nature of a reorganization facilitated by the offering; (ii) certain restrictions on the selling of Company shares; and (iii) the involvement of non-party Benjamin Wey in the offering.  Mr. Cottam further alleges that the Company and its CEO breached a subscription agreement by purportedly failing to issue Mr. Cottam the contracted for number of shares.

Plaintiff seeks an undetermined amount of compensatory and punitive damages allegedly sustained as a result of defendants’ purported breaches, misstatements, and omissions.

The Company and its CEO dispute the allegations made in the complaint and, if served, intend to mount an aggressive defense.  The extent of the potential liability in this matter has not yet been determined.  And as a result, no accrual for this exposure was made in the consolidated financial statements.

Operating Leases

The Company is obligated under various operating lease agreements for office facilities in California, New York, and Ohio.  As a result of the acquisitions, the Company is also obligated under operating leases for facilities in Oregon and Minnesota.  In addition, the Company leases office facilities on a month-to-month basis in Minnesota and Colorado.

Rent expense under all office leases aggregated to $918,045 and $342,170 for the years ended December 31, 2015 and 2014, respectively.  Rent expense was recorded in selling general and administrative expenses in the accompanying Consolidated Statements of Operations.

Future minimum payments of the Company’s operating leases are as follows:

2016
 
$
1,148,759
 
2017
   
1,117,905
 
2018
   
968,639
 
2019
   
792,846
 
2020
   
476,112
 
Thereafter
   
766,401
 
Total
 
$
5,270,662
 

Equipment Lease

Rent expenses under all equipment leases aggregated $92,114 and $81,036 for the years ended December 31, 2015 and 2014, respectively.  The Company is also obligated under various operating lease agreements for equipment.  Rent expenses under all equipment leases are recorded in selling general and administrative expenses in the accompanying Consolidated Statements of Operations. 

Ohio Office Lease

On June 21, 2013, the Company signed a lease commitment for its office and apartment space in Cincinnati, Ohio.  The lease expires on August 30, 2018 and requires annual payments of $53,676 with increases in increments of 3% each year thereafter.  Rent expense will be recognized on a straight line basis over the term of the lease.  The lease contains one option to renew the lease for a term of sixty (60) months at the then prevailing market rates.

New York Office Lease

On January 9, 2015, the Company signed an amendment to its corporate headquarter lease.  The amendment covers an additional 8,887 square feet of floor space in the same building as the original lease.  The new floor space lease expires in March 31, 2020.  This lease requires base annual rental payments of $488,785 for the term of the lease.  Lease payments will be recognized on a straight-line basis over the term of the lease.  As part of this lease agreement, among other requirements, the Company is obligated to obtain a Letter of Credit in the amount of $244,393 which will expire on July 31, 2020 (see Note 10 - Letter of Credit and Restricted Cash).

New York Office Sub-lease

On February 15, 2014, the Company signed a twenty-four month agreement to sub-lease a portion of its office facilities in New York City expiring in February 29, 2016.  The lease requires base annual rental payments to the Company of $120,000 for the term of the lease.  Rental income will be recognized on a straight-line basis over the term of the lease.  As part of the lease agreement, the Company received a $30,000 security deposit, which is shown as a liability on the accompanying Consolidated Balance Sheets.  On April 1, 2015, the Company amended and extended the sub-lease through August 31, 2018 and increased the rental payments to include variable increases to offset a portion of increases from the Company’s corporate headquarter lease.

On April 1, 2015, the Company signed a forty-one (41) month agreement to sub-lease a portion of its office facilities in New York City expiring August 31, 2018.  The lease requires increasing rental payments over the next year of the lease, followed by base annual rental payments to the Company of $102,000, plus variable increases for the remaining term of the lease.  As part of the lease agreement, the Company received a $20,000 security deposit, which is shown as a liability on the accompanying Consolidated Balance Sheets.  Rental income will be recognized on a straight-line basis over the term of the lease.

California Office Leases

On April 29, 2014, the Company signed a lease amendment for its office facilities in San Ramon, California.  The amendment extends the lease past the May 31, 2014 expiration date on a month to month basis with monthly rental payments of $2,836.  On June 30, 2014, the Company cancelled the lease, and the lease expired on September 30, 2014.

On April 16, 2014, the Company signed a thirty-eight month lease agreement for its office facilities in Pleasanton, California expiring on August 31, 2017.  The lease requires base annual rent of approximately $34,000 for the first year, with increases in increments of 3% each year thereafter.  The lease contains a two month rent abatement period starting in July 2014.  Rent expense will be recognized on a straight line basis over the term of the lease.  The lease contains one option to renew for a term of thirty-six months.

Oregon Office Lease

On September 24, 2015 the Company signed an eighty-five month agreement for up to approximately 12,187 square feet of office and warehouse space which commences on March 1, 2016 and expires on March 31, 2023.  The lease requires an initial base annual rental payments of $188,466 with increases in base rent of approximately 3%.  Rental income will be recognized on a straight-line basis over the term of the lease.  As part of the lease agreement, the Company paid a $27,819 security deposit, which will be shown as a security deposit asset on the accompanying Consolidated Balance Sheets.

Deferred Rent

To induce the Company to enter into certain operating leases, landlords have granted free rent for various months over the term of occupancy.  Rent expenses recorded on the straight-line basis in excess of rents paid is recognized as deferred rent.  For the years ended December 31, 2015 and 2014, deferred rent was $69,415 and $55,429, respectively, which is shown as a liability in the Consolidated Balance Sheets.

The Company’s capital lease obligations for computer software and hardware as of December 31, 2015 are as follows:

2016
 
$
148,811
 
2017
   
124,167
 
2018
   
72,910
 
2019
   
-
 
2020
   
-
 
Thereafter
   
-
 
Total
   
345,888
 
Amount representing interest
   
31,179
 
Present value of future minimum lease payments
   
314,709
 
Current portion of capital lease obligations
   
129,857
 
Capital lease obligations, net of current portion
 
$
184,852
 

Future minimum payments of the Company’s capital leases are as follows:

2016
 
$
129,857
 
2017
   
114,066
 
2018
   
70,786
 
2019
   
-
 
2020
   
-
 
Thereafter
   
-
 
Total
 
$
314,709