The accompanying notes are an integral part of the financial statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS AND RECENT DEVELOPMENTS
Unless the context indicates otherwise, references to “Galaxy Gaming, Inc.,” “we,” “us,” “our,” or the “Company,” refer to Galaxy Gaming, Inc., a Nevada corporation (“Galaxy Gaming”).
We are an established global gaming company specializing in the design, development, assembly, marketing and acquisition of proprietary casino table games and associated technology, platforms and systems for the casino gaming industry. Casinos use our proprietary products and services to enhance their gaming floor operations and improve their profitability, productivity and security, as well as to offer popular cutting-edge gaming entertainment content and technology to their players. We market our products and services to land-based and riverboat gaming companies located in North America, the Caribbean, Central America, the British Isles, Europe and Africa and to cruise ship companies and internet gaming sites worldwide.
On March 14, 2019, we announced the completion of our previously disclosed strategic alternatives review. After a thorough evaluation of a range of strategic alternatives, including a sale of the Company, we have decided to continue our existing plan of product line and geographic expansions as an independent company.
On May 6, 2019, we redeemed all 23,271,667 shares of our common stock held by Triangulum Partners, LLC (“Triangulum”), an entity controlled by Robert B. Saucier, Galaxy Gaming's founder, and, prior to the redemption, the holder of a majority of our outstanding common stock. The redemption of Triangulum’s shares was given effect pursuant to our Articles of Incorporation (the “Articles”), which expressly provide that if certain events occur in relation to a stockholder that is required to undergo a gaming suitability review or similar investigative process, we have the option to purchase all or any part of such stockholder’s shares at a price per share that is equal to the average closing share price over the thirty calendar days preceding the purchase. The average closing share price over the thirty calendar days preceding the redemption was $1.68 per share.
As consideration for the redemption, we issued a promissory note payable to Triangulum in the face amount of $39,096,401 (the “Triangulum Promissory Note”). See Note 10.
Furthermore, we filed a lawsuit on May 6, 2019 seeking (i) a declaratory judgment that we acted lawfully and in full compliance with the Articles when we redeemed the Triangulum shares and (ii) certain remedies for breach of fiduciary duty and breach of contract by Triangulum and its Managing Member, Mr. Saucier (the “Triangulum Lawsuit”). The suit alleges that the redemption and the other relief sought by us are appropriate and in accordance with the Articles of Incorporation (Galaxy Gaming, Inc. v. Triangulum Partners, LLC, Robert B. Saucier, Clark County, Nevada district court (Case No. A-19-794293-B)).
The defendants to that lawsuit responded to the complaint, and Triangulum filed counterclaims based on a theory of wrongful redemption by us. The defendants also filed a Motion for Preliminary Injunction seeking the redeemed shares be held in a constructive trust. On July 11, 2019, the Court denied the defendants’ Motion for Preliminary Injunction and all related relief. On September 6, 2019, Defendants appealed the denial of the Motion for Preliminary Injunction to the Nevada Supreme Court. We will oppose the appeal, but a briefing schedule has not yet been set by the Supreme Court. Separately, Triangulum filed amended counterclaims, which we moved to dismiss on a number of legal grounds. The Court denied the motion, stating that the amended complaint was sufficiently plead. The Company will file a Petition for a Writ of Mandamus challenging the ruling.
On October 18, 2019, Saucier also filed counterclaims centered similarly on a theory of wrongful redemption, and also claims that for breach of contract and quantum meruit, alleging Galaxy Gaming was obligated to pay Saucier his year-end bonuses, despite his resignation. We will file a timely response, disputing these claims.
Effective June 3, 2019, our Board of Directors (the “Board”) appointed Michael Gavin Isaacs as an independent director. Upon joining the Board, Mr. Isaacs entered into a Board of Directors Services Agreement pursuant to which, among other things, Mr. Isaacs shall receive 75,000 shares of our restricted common stock, which vest in three annual installments on each of the first three anniversary dates of the services agreement. Mr. Isaacs shall also receive quarterly grants of 12,400 common shares (vesting immediately at grant date) for his continued service as a director and shall receive $42,000 in cash compensation annually, paid monthly in arrears. As a non-employee director, he will be entitled to receive any other annual cash and equity compensation payable to our other non-employee directors from time to time.
On August 28, 2019, the Company held its Annual Shareholder meeting. The detailed results are available for review as previously reported on Form 8-K. The Company’s current Board of Directors were reelected to stand for the next period.
8
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. The accompanying condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited interim condensed financial statements contain all necessary adjustments (including all those of a recurring nature and those necessary in order for the financial statements to be not misleading) and all disclosures to present fairly our financial position and the results of our operations and cash flows for the periods presented. As permitted by the rules and regulations of the SEC, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations.
These unaudited interim condensed financial statements should be read in conjunction with the financial statements and the related notes thereto included in our Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on April 1, 2019 (the “2018 10-K”).
The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
Basis of accounting. The financial statements have been prepared on the accrual basis of accounting in conformity with U.S. GAAP. Revenues are recognized as income when earned and expenses are recognized when they are incurred. We do not have significant categories of cost of revenues. Expenses such as wages, consulting expenses, legal, regulatory and professional fees and rent are recorded when the expense is incurred.
Use of estimates and assumptions. We are required to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our company and the industry as a whole, and information available from other outside sources. Our estimates affect reported amounts for assets, liabilities, revenues, expenses and related disclosures. Actual results may differ from initial estimates.
Reclassifications. Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period financial statement presentations.
Other Significant Accounting Policies. See Note 3 in Item 8. “Financial Statements and Supplementary Data” included in our 2018 10-K.
Recently adopted accounting standards
Leases. In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASC 842”). The amended guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. We have adopted the new standard effective January 1, 2019, using the modified retrospective transition approach and recognized $161,310 of right-of-use operating lease assets and $175,335 of operating lease liabilities on our balance sheets upon adoption (Note 9). In addition, we eliminated leasehold improvements related to a finance lease from fixed assets, recognized $14,286 of right-of-use finance lease assets and maintained the finance lease liability at the carrying cost of the previous capital lease liability of $14,198 upon adoption. The adoption has increased our total assets and liabilities as of January 1, 2019. Lessor accounting related to our enhanced table system remains unchanged.
New accounting standards not yet adopted
Fair Value Measurement. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 addresses the required disclosures around fair value measurement, removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The standard is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted. We do not believe the adoption of this guidance will have a material impact on our financial statements.
Internal-Use Software. In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15. This new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption (including early adoption in any interim period) permitted. We do not believe the adoption of this guidance will have a material impact on our financial statements.
9
NOTE 3. REVENUE RECOGNITION
Revenue recognition. We generate revenue primarily from the licensing of our intellectual property. We also, occasionally, receive a one-time sale of certain products and/or reimbursement of our equipment.
License fees. We derive product lease and royalty revenue from negotiated recurring fee license agreements and the performance of our products. We account for these agreements as month-to-month contracts and recognize revenue each month as we satisfy our performance obligations by granting access to intellectual property to our clients. In addition, revenue associated with performance-based agreements is recognized during the month that the usage of the product or intellectual property occurs.
Some of our intellectual property requires the installation of certain equipment and both the intellectual property and the related equipment are licensed in one bundled package. We have determined that the equipment is not distinct from the intellectual property and, therefore, we have only one performance obligation and, as a result, the allocation of the transaction price to different performance obligations is not necessary.
Product sales. Occasionally, we sell certain incidental products or receive reimbursement of our equipment after the commencement of the new license agreement. Revenue from such sales is recognized as a separate performance obligation when we ship the items.
Disaggregation of revenue
The following table disaggregates our revenue by geographic location for the following periods:
|
|
Three Months
Ended September 30,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
North America and Caribbean
|
|
$
|
3,891,875
|
|
|
$
|
3,622,729
|
|
|
$
|
11,644,353
|
|
|
$
|
10,568,129
|
|
Europe
|
|
|
1,479,771
|
|
|
|
1,153,055
|
|
|
|
4,473,230
|
|
|
|
3,104,521
|
|
Total revenue
|
|
$
|
5,371,646
|
|
|
$
|
4,775,784
|
|
|
$
|
16,117,583
|
|
|
$
|
13,672,650
|
|
Revenue contract liability
For a portion of our business, we invoice our clients monthly in advance for unlimited use of our intellectual property licenses and recognize a revenue contract liability that represents such advanced billing to our clients for unsatisfied performance. We reduce the revenue contract liability and recognize revenue when we transfer those goods or services and, therefore, satisfy our performance obligation.
The table below summarizes changes in the revenue contract liability during the nine months ended September 30, 2019:
Beginning balance – January 1, 2019
|
|
$
|
1,438,492
|
|
Increase (advanced billings)
|
|
|
11,547,925
|
|
Decrease (revenue recognition)
|
|
|
(11,691,737
|
)
|
Ending balance – September 30, 2019
|
|
$
|
1,294,680
|
|
Revenue recognized during the nine months ended September 30, 2019 that was included in the beginning balance of revenue contract liability above was $1,436,410.
NOTE 4. INVENTORY
Inventory, net consisted of the following at:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials and component parts
|
|
$
|
361,433
|
|
|
$
|
267,517
|
|
Finished goods
|
|
|
358,333
|
|
|
|
306,335
|
|
Inventory, gross
|
|
|
719,766
|
|
|
|
573,852
|
|
Less: inventory reserve
|
|
|
(29,999
|
)
|
|
|
(42,038
|
)
|
Inventory, net
|
|
$
|
689,767
|
|
|
$
|
531,814
|
|
10
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following at:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Furniture and fixtures
|
|
$
|
312,640
|
|
|
$
|
312,640
|
|
Automotive vehicles
|
|
|
215,127
|
|
|
|
215,127
|
|
Leasehold improvements
|
|
|
9,883
|
|
|
|
156,843
|
|
Computer equipment
|
|
|
189,294
|
|
|
|
159,838
|
|
Office equipment
|
|
|
53,483
|
|
|
|
53,484
|
|
Property and equipment, gross
|
|
|
780,427
|
|
|
|
897,932
|
|
Less: accumulated depreciation
|
|
|
(643,078
|
)
|
|
|
(698,347
|
)
|
Property and equipment, net
|
|
$
|
137,349
|
|
|
$
|
199,585
|
|
Property and equipment, net included $150,000 of leasehold improvements acquired under capital leases and $135,714 of related accumulated depreciation as of December 31, 2018, both of which were reclassified to finance lease right-of-use assets upon the adoption of ASC 842 on January 1, 2019 (Note 9).
For the nine months ended September 30, 2019 and 2018, depreciation expense related to property and equipment was $80,445 and $99,944, respectively.
NOTE 6. ASSETS DEPLOYED AT CLIENT LOCATIONS
Assets deployed at client locations, net consisted of the following at:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Enhanced table systems
|
|
$
|
1,042,997
|
|
|
$
|
946,237
|
|
Less: accumulated depreciation
|
|
|
(623,962
|
)
|
|
|
(474,675
|
)
|
Assets deployed at client locations, net
|
|
$
|
419,035
|
|
|
$
|
471,562
|
|
For the nine months ended September 30, 2019 and 2018, depreciation expense related to assets deployed at client locations was $209,729 and $145,419, respectively.
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill. A goodwill balance of $1,091,000 was created as a result of an asset acquisition completed in October 2011 from Prime Table Games, LLC.
Other intangible assets, net. Other intangible assets, net consisted of the following at:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Patents
|
|
$
|
13,485,000
|
|
|
$
|
13,485,000
|
|
Customer relationships
|
|
|
3,400,000
|
|
|
|
3,400,000
|
|
Trademarks
|
|
|
2,880,967
|
|
|
|
2,880,967
|
|
Non-compete agreements
|
|
|
660,000
|
|
|
|
660,000
|
|
Internally-developed software
|
|
|
153,415
|
|
|
|
126,015
|
|
Other intangible assets, gross
|
|
|
20,579,382
|
|
|
|
20,551,982
|
|
Less: accumulated amortization
|
|
|
(12,796,490
|
)
|
|
|
(11,661,730
|
)
|
Other intangible assets, net
|
|
$
|
7,782,892
|
|
|
$
|
8,890,252
|
|
For the nine months ended September 30, 2019 and 2018, amortization expense related to the other intangible assets was $1,134,760 and $1,127,388, respectively.
11
Estimated future amortization expense is as follows:
Twelve Months Ending September 30,
|
|
Total
|
|
2020
|
|
$
|
1,500,836
|
|
2021
|
|
|
1,410,341
|
|
2022
|
|
|
1,398,822
|
|
2023
|
|
|
253,507
|
|
2024
|
|
|
252,930
|
|
Thereafter
|
|
|
2,966,456
|
|
Total amortization
|
|
$
|
7,782,892
|
|
NOTE 8. ACCRUED EXPENSES
Accrued expenses consisted of the following at:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Payroll and related
|
|
$
|
889,137
|
|
|
$
|
1,136,808
|
|
Interest
|
|
|
322,249
|
|
|
|
—
|
|
Commissions and royalties
|
|
|
45,482
|
|
|
|
113,462
|
|
Other
|
|
|
28,442
|
|
|
|
45,300
|
|
Total accrued expenses
|
|
$
|
1,285,310
|
|
|
$
|
1,295,570
|
|
NOTE 9. LEASES
Lessee
We have operating leases for our corporate office, two satellite facilities in the state of Washington, and for certain equipment. We account for lease components (such as rent payments) separately from the non-lease components (such as common-area maintenance costs, real estate and sales taxes and insurance costs). Discount rate represents the interest rate implicit in each lease or our incremental borrowing rate at lease commencement date.
On January 28, 2019, we executed a first amendment to the corporate office lease to amend the lease expiration date from September 30, 2019 to December 31, 2019, with monthly base rents of $20,508 from July 1, 2019 to December 31, 2019. As a result of the amendment, we recorded a $117,755 increase to operating lease right-of-use assets and operating lease liabilities. In connection with negotiating the original corporate office lease in 2014, the landlord agreed to finance tenant improvements of $150,000. Upon adoption of ASC 842 (effective January 1, 2019), the remaining amount was classified as a finance lease on the condensed balance sheet, which was paid in full by June 30, 2019.
As of September 30, 2019, our leases have remaining lease terms ranging from three months to 33 months. Gross right-of-use assets recorded under finance leases and operating leases were $14,286 and $290,877, respectively, and the related accumulated amortization was $14,286 and $188,919, respectively.
12
Supplemental balance sheet information related to leases is as follows:
|
|
As of September 30, 2019
|
|
|
Amount
|
|
|
Classification
|
Operating leases:
|
|
|
|
|
|
|
Operating lease right-of-use lease assets
|
|
$
|
101,958
|
|
|
|
|
|
|
|
|
|
|
Operating lease current liabilities
|
|
$
|
83,953
|
|
|
Current portion of operating lease liabilities
|
|
|
|
|
|
|
|
Operating lease long-term liabilities
|
|
|
23,074
|
|
|
Long-term operating lease liabilities
|
|
|
|
|
|
|
|
Total operating lease liabilities
|
|
$
|
107,027
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease
term:
|
|
|
|
|
|
|
Operating leases
|
|
1.1 years
|
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate:
|
|
|
|
|
|
|
Operating leases
|
|
|
5.8
|
%
|
|
|
The components of lease expense are as follows:
|
|
Three Months Ended September 30, 2019
|
|
|
Amount
|
|
|
Classification
|
Finance lease cost:
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
—
|
|
|
Depreciation and amortization
|
Interest on lease liabilities
|
|
|
—
|
|
|
Interest expense
|
Total finance lease cost
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
66,303
|
|
|
Selling, general and administrative expense
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
Amount
|
|
|
Classification
|
Finance lease cost:
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
14,286
|
|
|
Depreciation and amortization
|
Interest on lease liabilities
|
|
|
195
|
|
|
Interest expense
|
Total finance lease cost
|
|
$
|
14,481
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
195,234
|
|
|
Selling, general and administrative expense
|
Supplemental cash flow information related to leases is as follows:
|
|
Nine Months Ended September 30, 2019
|
|
|
Amount
|
|
|
Classification
|
Cash paid for amounts included in the
measure of lease liabilities:
|
|
|
|
|
|
|
Operating cash flows from finance leases
|
|
$
|
195
|
|
|
Net income
|
Financing cash flows from finance leases
|
|
$
|
14,198
|
|
|
Principal payments on finance lease obligations
|
Operating cash flows from operating leases
|
|
$
|
195,234
|
|
|
Net income
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange
for lease liabilities:
|
|
|
|
|
|
|
Finance leases
|
|
$
|
14,286
|
|
|
Supplemental cash flow information
|
Operating leases
|
|
$
|
290,877
|
|
|
Supplemental cash flow information
|
13
As of September 30, 2019, future maturities of our operating lease liabilities are as follows:
Twelve Months Ending September 30,
|
|
Amount
|
|
2020
|
|
$
|
83,524
|
|
2021
|
|
|
14,730
|
|
2022
|
|
|
8,773
|
|
Total lease liabilities
|
|
$
|
107,027
|
|
Lessor
Our agreements with the casino clients for the license of proprietary tables games are outside of the scope of ASC 842 as such agreements are related to the license of intellectual property.
Enhanced table systems are electronic enhancements used on casino table games to add to player appeal and enhance game security. An example in this category is our Bonus Jackpot System (“BJS”), an advanced electronic system installed on gaming tables designed to collect data by detecting player wagers and other game activities. Typically, the BJS system includes a server, an electronic video display known as TableVision, which shows game information designed to generate player interest and to promote various aspects of the game, and other electronic components. Our BJS agreements with clients convey to them the rights to use equipment. However, these agreements are month-to-month and there is no penalty for either party to terminate the agreements without permission from the other party. As a result, these agreements are not considered leases and, therefore, are outside of the scope of ASC 842 as well.
NOTE 10. LONG-TERM DEBT
Long-term debt consisted of the following at:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Nevada State Bank credit agreement
|
|
$
|
9,041,000
|
|
|
$
|
10,042,400
|
|
Triangulum Promissory Note
|
|
|
39,096,401
|
|
|
|
—
|
|
Vehicle notes payable
|
|
|
54,776
|
|
|
|
85,043
|
|
Insurance notes payable
|
|
|
—
|
|
|
|
73,794
|
|
Long-term debt, gross
|
|
|
48,192,177
|
|
|
|
10,201,237
|
|
Less: Unamortized debt issuance costs
|
|
|
(73,525
|
)
|
|
|
(94,562
|
)
|
Long-term debt, net
|
|
|
48,118,652
|
|
|
|
10,106,675
|
|
Less: Current portion
|
|
|
(1,437,950
|
)
|
|
|
(1,456,847
|
)
|
Long-term debt, long-term portion
|
|
$
|
46,680,702
|
|
|
$
|
8,649,828
|
|
Amendments to the Nevada State Bank (“NSB”) Credit Agreement. On May 6, 2019, we entered into a Second Amendment to the Nevada State Bank (“NSB”) Credit Agreement to (i) provide an additional $10 million Term Loan B availability under the Term Loan; and (ii) waive for a period of 180 days the breach of any covenant in the Credit Agreement resulting of the redemption of common stock held by Triangulum.
On August 16, 2019, we entered into a Third Amendment to the NSB Credit Agreement, pursuant to which we agreed to pay a fee on the unused amounts under the revolving portion of the credit agreement at a rate of 0.25% per annum, retroactive to April 22, 2019.
On October 14, 2019, we entered into a Fourth Amendment to the NSB Credit Agreement, which established a Senior Leverage Ratio (as defined in the amended Credit Agreement) of 2.0x for the remaining term of the NSB Credit Agreement. In addition, the Total Leverage Ratio (as defined in the amended Credit Agreement) was set at 7.25x, with semi-annual step-downs of 0.25x every six months, commencing June 30, 2020 through December 31, 2022. Lastly, the $10 million additional Term Loan B availability that was provided in the Second Amendment was eliminated.
Outstanding balances under amended NSB Credit Agreement accrue interest based on one-month US dollar London interbank offered rate (“LIBOR”) plus an Applicable Margin of 3.50% or 4.00%, depending on our Leverage Ratio (as defined in the amended Credit Agreement).
14
Triangulum Promissory Note. On May 6, 2019, we issued the Triangulum Promissory Note in the face amount of $39,096,401. The Triangulum Promissory Note has no mandatory amortization, matures on May 5, 2029, and bears interest at a rate of 2% per annum, with accrued interest payable annually in arrears. It is unsecured and is subordinated to our existing and future indebtedness in accordance with its terms. We may prepay principal and any accrued interest in full or in part at any time.
As of September 30, 2019, future maturities of our long-term debt obligations are as follows:
Twelve Months Ending September 30,
|
|
Total
|
|
2020
|
|
$
|
1,437,950
|
|
2021
|
|
|
1,530,149
|
|
2022
|
|
|
1,616,655
|
|
2023
|
|
|
4,511,022
|
|
2024
|
|
|
—
|
|
Thereafter
|
|
|
39,096,401
|
|
Long-term debt, gross
|
|
|
48,192,177
|
|
Less:
|
|
|
|
|
Unamortized debt issuance costs
|
|
|
(73,525
|
)
|
Long-term debt, net
|
|
$
|
48,118,652
|
|
NOTE 11. COMMITMENTS AND CONTINGENCIES
Concentration of risk. We are exposed to risks associated with clients who represent a significant portion of total revenues. For the nine months ended September 30, 2019 and 2018, respectively, we had the following client revenue concentration:
|
|
Location
|
|
2019
Revenue
|
|
|
2018
Revenue
|
|
|
Accounts
Receivable
September 30, 2019
|
|
|
Accounts
Receivable
December 31, 2018
|
|
Client A
|
|
North America
|
|
|
9.4
|
%
|
|
|
11.0
|
%
|
|
$
|
213,642
|
|
|
$
|
207,343
|
|
Client B
|
|
Europe
|
|
|
9.9
|
%
|
|
|
9.8
|
%
|
|
$
|
171,935
|
|
|
$
|
156,478
|
|
Legal proceedings (also see Note 1). In the ordinary course of conducting our business, we are, from time to time, involved in various legal proceedings, administrative proceedings, regulatory government investigations and other matters, including those in which we are a plaintiff or defendant, that are complex in nature and have outcomes that are difficult to predict. An unexpected adverse judgment in any pending litigation could cause a material impact on our business operations, intellectual property, results of operations or financial position. Unless otherwise expressly stated, we believe costs associated with litigation will not have a material impact on our financial position or liquidity but may be material to the results of operations in any given period.
On May 31, 2019 and June 6, 2019 respectively, Derek Webb and Hannah O’Donnell together filed a complaint and a related Motion for Order Granting Request to Compel an Annual Meeting, or in the Alternative for a Writ of Mandamus and Injunctive Relief (the “Motion”). The Motion sought the Court to compel us to hold an Annual Shareholder’s Meeting in 2019 and also sought related relief: that we not issue shares or redeem any shares or amend its Bylaws in any manner that could affect the obligation to hold the meeting or elect directors at the meeting. On June 6, 2019, we notified the public of the holding of an Annual Meeting to take place on August 28, 2019 for shareholders of record of July 17, 2019. During a hearing held on July 11, 2019, the Court denied Webb and O’Donnell’s Motion and all related relief. The Annual Meeting took place on August 28, 2019. On October 17, 2019, the Court dismissed the case as a result of a stipulation of the parties.
NOTE 12. STOCKHOLDERS’ EQUITY (DEFICIT)
During the nine months ended September 30, 2019, we issued an aggregate of 229,200 restricted shares of our common stock valued at $388,919, to our board members in consideration of their service on the Board. These shares vested immediately on the grant date.
On May 6, 2019, we redeemed all 23,271,667 shares of our common stock held by Triangulum.
15
NOTE 13. INCOME TAXES
Our forecasted annual effective tax rate (“ETR”) at September 30, 2019 was 16.5%, as compared to 17.5% at September 30, 2018. This decrease was primarily due to changes in permanent book-to-tax differences for the nine months ended September 30, 2019.
For the nine months ended September 30, 2019 and 2018, our ETR was 0.8% and 17.5%, respectively. The following discrete items during nine months ended September 30, 2019 caused the year-to-date effective tax rate to be significantly different from our historical ETR: (i) we recorded an income tax benefit of approximately $150,000 as a result of a prior period change in estimate related to the foreign-derived intangible income (“FDII”) special deduction under Section 250 of the Internal Revenue Code, which reduced the ETR by 7.1% and (ii) we recorded an income tax benefit of approximately $180,000 as a result of tax benefits related to non-qualified stock options exercised during the period, which reduced the ETR by 8.5%.
NOTE 14. STOCK OPTIONS
On May 10, 2018, the Board ratified and confirmed the 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan is a broad-based plan under which 5,550,750 shares of our common stock are authorized for issuance for awards, including stock options, stock appreciation rights, restricted stock, and cash incentive awards to members of our Board, executive officers, employees and independent contractors. As of September 30, 2019, 177,634 shares remained available for issuance as new awards under the 2014 Plan.
Stock options. During the nine months ended September 30, 2019 and 2018, we issued 320,000 and 270,000 options to purchase our common stock, respectively, to members of our Board, executive officers, employees and independent contractors. The fair value of all stock options granted for the nine months ended September 30, 2019 and 2018 was determined to be $564,450 and $169,807, respectively, using the Black-Scholes option pricing model with the following assumptions:
|
|
Options Issued 2019
|
|
|
Options Issued 2018
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
71.61% - 72.11
|
%
|
|
78
|
%
|
Risk free interest rate
|
|
1.37% - 2.51
|
%
|
|
2.46% - 2.73
|
%
|
Expected life (years)
|
|
|
5.00
|
|
|
|
5.00
|
|
On February 21, 2019, we amended the employment agreement between the Company and Todd Cravens, our President and Chief Executive Officer. Among other things, this amendment grants Mr. Cravens an option to purchase 150,000 shares of our common stock (the “2020 Option”). The 2020 Option, which vests on August 1, 2020 so long as Mr. Cravens remains a full-time employee of the Company on August 1, 2020, has an exercise price equal to the price per share of our common stock as reported on OTC Markets on August 1, 2020 (or the nearest trading date thereafter). If Mr. Cravens is terminated as a result of a change of control of the Company prior to August 1, 2020, the 2020 Option vests in full upon his termination at an exercise price of $1.90 per share (our common stock closing price on February 21, 2019).
A summary of stock option activity is as follows:
|
|
Common Stock Options
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
Outstanding – December 31, 2018
|
|
|
3,496,250
|
|
|
$
|
0.66
|
|
|
$
|
2,608,329
|
|
|
|
3.04
|
|
Issued
|
|
|
320,000
|
|
|
|
1.76
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(712,916
|
)
|
|
|
0.37
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited or expired
|
|
|
(103,334
|
)
|
|
|
0.94
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding – September 30, 2019
|
|
|
3,000,000
|
|
|
$
|
0.84
|
|
|
$
|
2,992,800
|
|
|
|
2.88
|
|
Exercisable – September 30, 2019
|
|
|
1,988,333
|
|
|
$
|
0.62
|
|
|
$
|
2,426,025
|
|
|
|
3.65
|
|
16
A summary of unvested stock option activity is as follows:
|
|
Common Stock Options
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
Unvested – December 31, 2018
|
|
|
1,161,666
|
|
|
$
|
0.95
|
|
|
$
|
535,475
|
|
|
|
4.15
|
|
Granted
|
|
|
320,000
|
|
|
|
1.76
|
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(373,333
|
)
|
|
|
0.76
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited or expired
|
|
|
(96,666
|
)
|
|
|
0.93
|
|
|
|
—
|
|
|
|
—
|
|
Unvested – September 30, 2019
|
|
|
1,011,667
|
|
|
$
|
1.17
|
|
|
$
|
680,526
|
|
|
|
4.39
|
|
As of September 30, 2019, our unrecognized share-based compensation expense associated with the stock options issued was $506,330, which will be amortized over a weighted-average of 2.04 years.
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
We estimate fair value for financial assets and liabilities in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”). ASC 820 defines fair value, provides guidance for measuring fair value, requires certain disclosures and discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). ASC 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
|
•
|
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
•
|
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
|
|
•
|
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
|
The estimated fair value of cash equivalents, restricted cash, accounts receivable and accounts payable approximates their carrying amount due to their short-term nature. The estimated fair value of our long-term debt and lease obligations approximates their carrying value based upon our expected borrowing rate for debt with similar remaining maturities and comparable risk. As of September 30, 2019, the interest rate swap agreement was the only financial instrument measured at estimated fair value on a recurring basis based on valuation reports provided by counterparties, which are classified as level 2 inputs.
NOTE 16. SUBSEQUENT EVENTS
We evaluate subsequent events through the date of issuance of the financial statements. There have been no subsequent events that occurred during such period that would require adjustment to or disclosure in the financial statements as of and for the quarter ended September 30, 2019 except as follows disclosed in Note 1 and Note 11 and as follows:
On October 10, 2019 the Board of Directors authorized a one million share increase in the number of shares available under the 2014 Plan.
On October 22, 2019 we entered into Amendment #3 to the employment agreement with our Chief Financial Officer (“Mr. Hagerty”). Among other things, Amendment #3 provides (i) that Mr. Hagerty’s base salary will remain at the annual rate of $200,000.00; (ii) that Mr. Hagerty receive a grant of 200,000 options at a strike price of $1.972, vest as follows: 66,666 shares on October 22, 2020, 66,666 shares on October 22, 2021, and 66,668 shares on April 30, 2022; (iii) that the end date of the term of employment be extended from April 30, 2020 to April 30, 2022.
17