ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
GALAXY GAMING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
NOTE 1. NATURE OF OPERATIONS
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, acquisition, assembly, marketing and licensing 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 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 online casinos worldwide and to land-based casino gaming companies in North America, the Caribbean, Central America, the United Kingdom, Europe and Africa and to cruise ship companies. We license our products and services for use solely in legalized gaming markets. We also license our content and distribute content from other companies to iGaming operators throughout the world.
Share Redemption. 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. Our Articles of Incorporation (the “Articles”) 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.
The consideration owed to Triangulum for the redemption was $39,096,401 (the “Redemption Consideration Obligation”). See Note 10. All of the litigation related to the Redemption Consideration Obligation and other matters between the Company and Triangulum was resolved on November 15, 2021, when Galaxy made a settlement payment in the amount of $39,507,717 to Triangulum. See Note 10 and Note 11.
Membership Interest Purchase Agreement. On February 25, 2020, Galaxy Gaming entered into a Membership Interest Purchase Agreement, dated February 25, 2020 (the “Purchase Agreement”), between the Company and the membership interest holders of Progressive Games Partners, LLC (“PGP”).
On August 21, 2020, the Company entered into a First Amendment to the Purchase Agreement between the Company and the membership interest holders of PGP. The First Amendment, among other things, fixed the cash portion of the purchase price at $6.425 million and established that the stock portion would be satisfied through the issuance of 3,141,361 shares of the Company’s common stock with a value of $1.27 per share on the date of the acquisition. The shares issued are being held in escrow with Philadelphia Stock Transfer, Inc., the Company’s stock transfer agent. The shares were released to the sellers in August 2021.
On August 21, 2020, the Company completed the acquisition of 100% of the member interests in PGP. The entirety of the purchase price ($10,414,528) has been allocated to customer relationships and is included in Other intangible assets, net, on the Company’s balance sheet. See Note 7. The Company also acquired certain receivables and payables in the net amount of $581,885, which was to be remitted to the sellers of PGP as the receivables and payables were settled. The remaining balance of $76,053 at December 31, 2020 was paid to the sellers on May 7, 2021.
Management has determined that, for accounting purposes, the PGP transaction does not meet the definition of a business combination and, therefore, has been accounted for as an asset acquisition.
COVID-19. On March 11, 2020, the World Health Organization declared a pandemic related to the COVID-19 outbreak, which led to a global health emergency. The public-health impact of the outbreak continues to remain largely unknown and still evolving as new strains of COVID-19 continue to evolve. The related health crisis could continue to adversely affect the global economy, resulting in continued economic downturn that could impact demand for our products. Virtually all of our land-based clients have reopened, although casino revenues have not returned to pre-COVID-19 levels.
We rely on third-party suppliers and manufacturers in China, many of whom were shut down or severely cut back production during some portion of 2020, with supply shortages continuing into 2021. Although we have been able to maintain inventories adequate to our needs, any future disruption of our suppliers and their contract manufacturers may impact our sales and operating results going forward.
21
Because of the uncertainties of COVID-19, the Company drew on its Revolving Loan in the amount of $1,000,000 on March 12, 2020. Also, on April 17, 2020, the Company obtained the Paycheck Protection Program (the “PPP Loan”) pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the Paycheck Protection Program Flexibility Act (the “Flexibility Act”). On July 16, 2020, the Company filed an application and supporting documentation for forgiveness in full of the PPP Loan. On November 21, 2020, the Company received notification the PPP Loan had been forgiven in full, including $4,943 in accrued interest. Pursuant to the CARES Act, the Federal Reserve created the Main Street Priority Loan Program (“MSPLP”) to provide financing for small and medium-sized businesses. On October 26, 2020, the Company borrowed $4 million from Zions Bancorporation N.A., dba Nevada State Bank under this program. All of the Company’s obligations under the Nevada State Bank credit agreement were repaid on November 15, 2021. See Note 10.
Credit Agreement Amendments and Fortress Credit Agreement. See Note 10 for discussion of amendments made to the Company’s credit agreement and the entry into the Fortress Credit Agreement.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. The accompanying consolidated 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 consolidated 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.
Basis of accounting. The consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. GAAP.
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.
Consolidation. The financial statements are presented on a consolidated basis and include the results of the Company and its wholly owned subsidiary, PGP. All intercompany transactions and balances have been eliminated in consolidation.
Reclassifications. Certain accounts and financial statement captions in the prior period have been reclassified to conform to the current period financial statement presentations and had no effect on net income (loss).
Cash and cash equivalents. We consider cash on hand and cash in banks as cash. We consider certificates of deposit and other short-term securities with maturities of three months or less when purchased as cash equivalents. Our cash in bank balances are deposited in insured banking institutions, which are insured up to $250,000 per account. To date, we have not experienced uninsured losses, and we believe the risk of future loss is negligible.
Accounts receivable and allowance for doubtful accounts. Accounts receivable are stated at face value less an allowance for doubtful accounts. Accounts receivable are non-interest bearing. The Company reviews the accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. The allowance for doubtful accounts is estimated based on specific customer reviews, historical collection trends and current economic and business conditions.
Inventory. Inventory consists of ancillary products such as signs, layouts and bases for the various games and electronic devices and components to support all our electronic enhancements used on casino table games (“Enhanced Table Systems”), and we maintain inventory levels based on historical and industry trends. We regularly assess inventory quantities for excess and obsolescence primarily based on forecasted product demand. Inventory is valued at the lower of net realizable value or cost, which is determined by the average cost method.
Assets deployed at client locations, net. Our Enhanced Table Systems are assembled by us and accounted for as inventory until deployed at our casino clients’ premises (Note 6). Once deployed and placed into service at client locations, the assets are transferred from inventory and reported as assets deployed at client locations. These assets are stated at cost, net of accumulated depreciation. Depreciation on assets deployed at client locations is calculated using the straight-line method over a three-year period.
Property and equipment, net. Property and equipment are being depreciated over their estimated useful lives (three to five years) using the straight-line method of depreciation (Note 5). Property and equipment are analyzed for potential impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable and exceeds their fair value.
Goodwill. Goodwill (Note 7) is assessed for impairment at least annually or at other times during the year if events or circumstances indicate that it is more-likely-than-not that the fair value of a reporting asset is below the carrying amount. If found to be impaired, the carrying amount will be reduced, and an impairment loss will be recognized.
22
Other intangible assets, net. The following intangible assets have finite lives and are being amortized using the straight-line method over their estimated economic lives as follows:
Patents |
|
4 - 20 years |
Client relationships |
|
9 - 22 years |
Trademarks |
|
12 - 30 years |
Non-compete agreements |
|
9 years |
Software |
|
3 years |
Other intangible assets (Note 7) are analyzed for potential impairment at least annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable and exceeds the fair value, which is the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the intangible assets. No impairment was recorded for the years ended December 31, 2021 or 2020.
Interest rates swap agreement. In May 2018, the Company entered into an interest rate swap agreement to reduce the impact of changes in interest rates on its floating rate long-term debt. The interest rate swap has not been designated a hedging instrument and is adjusted to fair value through earnings in the Company’s statements of operations. The interest rate swap agreement matured on May 1, 2021.
Fair value of financial instruments. We estimate fair value for financial assets and liabilities in accordance with Financial Accounting Standards Board (“FASB”) 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 values of cash equivalents, accounts receivable and accounts payable approximate their carrying amounts due to their short-term nature. The estimated fair value of our long-term debt approximates its carrying value based upon our expected borrowing rate for debt with similar remaining maturities and comparable risk. The Company currently has no financial instruments measured at estimated fair value on a recurring basis based on valuation reports provided by counterparties.
Leases. We account for lease components (such as rent payments) separately from non-lease components (such as common-area maintenance costs, real estate and sales taxes and insurance costs). Operating and finance leases with terms greater than 12 months are recorded on the consolidated balance sheets as right-of-use assets with corresponding lease liabilities. Lease expense is recognized on a straight-line basis using the discount rate implicit in each lease or our incremental borrowing rate at lease commencement date (Note 9).
Revenue recognition. We account for our revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. See Note 3.
Costs of ancillary products and assembled components. Ancillary products include pay tables (display of payouts), bases, layouts, signage and other items as they relate to support of specific proprietary games in connection with the licensing of our games. Assembled components represent the cost of the equipment, devices and incorporated software used to support our Enhanced Table Systems.
Research and development. We incur research and development (“R&D”) costs to develop our new and next-generation products. Our products reach commercial feasibility shortly before the products are released, and therefore R&D costs are expensed as incurred. Employee related costs associated with product development are included in R&D costs.
Foreign currency translation. The functional currency for PGP is the Euro. Gains and losses from settlement of transactions involving foreign currency amounts are included in other income or expense in the consolidated statements of operations. Gains and losses resulting from translating assets and liabilities from the functional currency to U.S. dollars are included in accumulated other comprehensive income or (loss) in the consolidated statements of changes in stockholders’ deficit.
Net income per share. Basic net income per share is calculated by dividing net income by the weighted-average number of common shares issued and outstanding during the year. Diluted net income per share is similar to basic, except that the weighted-average number of shares outstanding is increased by the potentially dilutive effect of outstanding stock options and restricted stock, if applicable, during the year.
23
Segmented information. We define operating segments as components of our enterprise for which separate financial information is reviewed regularly by the chief operating decision-makers to evaluate performance and to make operating decisions. We currently have two operating segments (land-based gaming and online gaming) which are aggregated into one reporting segment.
Share-based compensation. We recognize compensation expense for all restricted stock and stock option awards made to employees, directors and independent contractors. The fair value of restricted stock is measured using the grant date trading price of our stock. The fair value of stock option awards (Note 13) is estimated at the grant date using the Black-Scholes option-pricing model, and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period. We have elected to recognize compensation expense for all options with graded vesting on a straight-line basis over the vesting period of the entire option. The determination of fair value using the Black-Scholes pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables, including expected stock price volatility, risk-free interest rate, expected dividends and projected employee stock option exercise behaviors. We estimate volatility based on historical volatility of our common stock, and estimate the expected term based on several criteria, including the vesting period of the grant and the term of the award. We estimate employee stock option exercise behavior based on actual historical exercise activity and assumptions regarding future exercise activity of unexercised, outstanding options.
Income taxes. We are subject to income taxes in both the United States and in certain non-U.S. jurisdictions. We account for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”) using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. These temporary differences will result in deductible or taxable amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided when it is more-likely-than-not that some or all of the deferred tax assets may not be realized. Adjustments to the valuation allowance increase or decrease our income tax provision or benefit. To the extent we believe that recovery is more likely than not, we establish a valuation allowance against these deferred tax assets. Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. As of December 31, 2021 and 2020, we recorded a full valuation allowance against certain deferred assets.
In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, our tax returns are subject to audit by various tax authorities. Although we believe that our estimates are reasonable, actual results could differ from these estimates. We recognize the tax benefit from an uncertain tax position if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on an evaluation of the technical merits of the position, which requires a significant degree of judgment (Note 13).
Recently adopted accounting standards. Simplifying the Accounting for Income Taxes. In December 2019, the FASB issued Accounting Standard Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This guidance is effective for the first quarter of 2021 on a prospective basis. We adopted the new standard effective January 1, 2021, and its adoption did not have a material impact on our consolidated financial statements.
New accounting standards not yet adopted. Financial Instruments – Credit Losses. In February 2020, the FASB issued ASU No. 2020-02, Financial Instruments – Credit Losses (Topic 326). ASU 2020-02 provides updated guidance on how an entity should measure credit losses on financial instruments and delayed the effective date of Topic 326 for smaller reporting companies until fiscal years beginning after December 15, 2022. Early adoption is permitted. We do not believe the adoption of this guidance will have a material impact on our financial statements or related disclosures.
NOTE 3. REVENUE RECOGNITION
Revenue recognition. We generate revenue primarily from the licensing of our intellectual property. We recognize revenue under recurring fee license contracts monthly as we satisfy our performance obligation, which consists of granting the customer the right to use our intellectual property. Amounts billed are determined based on flat rates or usage rates stipulated in the customer contract.
Disaggregation of revenue
The following table disaggregates our revenue by geographic location for the years ended December 31, 2021 and 2020:
|
|
2021 |
|
|
2020 |
|
North America and Caribbean |
|
$ |
10,024,537 |
|
|
$ |
5,757,143 |
|
Europe, Middle East and Africa |
|
|
9,959,841 |
|
|
|
4,473,173 |
|
Total revenue |
|
$ |
19,984,378 |
|
|
$ |
10,230,316 |
|
Contract liabilities. Amounts billed and cash received in advance of performance obligations fulfilled are recorded as contract liabilities and recognized as performance obligations are fulfilled.
24
Contract assets. The Company’s contract assets consist solely of unbilled receivables which are recorded when the Company recognizes revenue in advance of billings. Unbilled receivables totaled $771,293 and $502,860 for the years ended December 31, 2021 and 2020 and are included in the accounts receivable balance in the accompanying balance sheets.
Royalty agreements. From time to time, the Company licenses intellectual property from third-party owners and the Company, in turn, re-licenses that intellectual property to its casino clients. In these arrangements, the Company usually agrees to pay the owner of the intellectual property a royalty based on the revenues the Company receives from licensing the intellectual property to its casino clients. For the years ended December 31, 2021 and 2020, license royalty payments of $1,670,210 and $438,837, respectively, are recorded net in revenue.
NOTE 4. INVENTORY
Inventory consisted of the following as of December 31, 2021 and 2020:
|
|
2021 |
|
|
2020 |
|
Raw materials and component parts |
|
$ |
413,320 |
|
|
$ |
300,244 |
|
Finished goods |
|
|
356,928 |
|
|
|
368,281 |
|
Inventory |
|
$ |
770,248 |
|
|
$ |
668,525 |
|
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2021 and 2020:
|
|
2021 |
|
|
2020 |
|
Furniture and fixtures |
|
$ |
312,639 |
|
|
$ |
312,639 |
|
Automotive vehicles |
|
|
171,671 |
|
|
|
215,127 |
|
Office and computer equipment |
|
|
389,628 |
|
|
|
332,544 |
|
Leasehold improvements |
|
|
35,531 |
|
|
|
32,547 |
|
Property and equipment, gross |
|
|
909,469 |
|
|
|
892,857 |
|
Less: accumulated depreciation |
|
|
(810,875 |
) |
|
|
(776,133 |
) |
Property and equipment, net |
|
$ |
98,594 |
|
|
$ |
116,724 |
|
For the years ended December 31, 2021 and 2020, depreciation expense related to property and equipment was $78,199 and $90,979, respectively.
NOTE 6. Assets deployed at client locations
Assets deployed at client locations, net consisted of the following at December 31, 2021 and 2020:
|
|
2021 |
|
|
2020 |
|
Enhanced table systems |
|
$ |
1,139,827 |
|
|
$ |
890,560 |
|
Less: accumulated depreciation |
|
|
(779,092 |
) |
|
|
(658,404 |
) |
Assets deployed at client location, net |
|
$ |
360,735 |
|
|
$ |
232,156 |
|
For the years ended December 31, 2021 and 2020, depreciation expense related to assets deployed at client locations was $197,493 and $222,204, respectively.
25
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill. A goodwill balance of $1,091,000 was created as a result of a transaction completed in October 2011 with Prime Table Games, LLC (“PTG”).
Other intangible assets, net. Other intangible assets, net consisted of the following at December 31, 2021 and 2020:
|
|
2021 |
|
|
2020 |
|
Patents |
|
$ |
13,507,997 |
|
|
$ |
13,507,997 |
|
Customer relationships |
|
|
14,040,856 |
|
|
|
13,942,115 |
|
Trademarks |
|
|
2,880,967 |
|
|
|
2,880,967 |
|
Non-compete agreements |
|
|
660,000 |
|
|
|
660,000 |
|
Software |
|
|
283,340 |
|
|
|
183,415 |
|
Other intangible assets, gross |
|
|
31,373,160 |
|
|
|
31,174,494 |
|
Less: accumulated amortization |
|
|
(17,695,896 |
) |
|
|
(15,087,598 |
) |
Other intangible assets, net |
|
$ |
13,677,264 |
|
|
$ |
16,086,896 |
|
For the years ended December 31, 2021 and 2020, amortization expense related to the finite-lived intangible assets was $2,608,299 and $1,908,858 respectively.
Estimated future amortization expense is as follows:
Year Ended December 31, |
|
Total |
|
2022 |
|
$ |
2,325,888 |
|
2023 |
|
|
1,459,601 |
|
2024 |
|
|
1,444,126 |
|
2025 |
|
|
1,436,968 |
|
2026 |
|
|
1,436,968 |
|
Thereafter |
|
|
5,523,691 |
|
Total amortization |
|
$ |
13,627,242 |
|
NOTE 8. ACCRUED EXPENSES
Accrued expenses consisted of the following at December 31, 2021 and 2020:
|
|
2021 |
|
|
2020 |
|
Share redemption consideration |
|
$ |
— |
|
|
$ |
510,776 |
|
Commissions and royalties |
|
|
1,165,744 |
|
|
|
398,096 |
|
Payroll and related |
|
|
1,156,291 |
|
|
|
173,487 |
|
Interest |
|
|
233,333 |
|
|
|
95,879 |
|
Income tax (receivable) payable |
|
|
(3,111 |
) |
|
|
42,218 |
|
Other |
|
|
113,816 |
|
|
|
112,576 |
|
Total accrued expenses |
|
$ |
2,666,073 |
|
|
$ |
1,333,032 |
|
NOTE 9. LEASES
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). The discount rate represents the interest rate implicit in each lease or our incremental borrowing rate at lease commencement date.
On September 21, 2021, we executed a third amendment to one of our satellite facilities to amend the lease expiration date from December 31, 2021 to December 31, 2023, with monthly base rents of $1,025 from January 1, 2022 to December 31, 2023. As a result of the amendment, we recorded a $23,293 increase to operating lease right-of-use assets and operating lease liabilities.
As of December 31, 2021, our leases have remaining lease terms ranging from 6 months to 60 months.
26
Supplemental balance sheet information related to leases is as follows:
|
|
As of December 31, 2021 |
|
|
Amount |
|
|
Classification |
Operating leases: |
|
|
|
|
|
|
Operating lease right-of-use lease assets |
|
$ |
1,167,903 |
|
|
|
|
|
|
|
|
|
|
Operating lease current liabilities |
|
$ |
222,806 |
|
|
Current portion of operating lease liabilities |
|
|
|
|
|
|
|
Operating lease long-term liabilities |
|
|
1,019,029 |
|
|
Long-term operating lease liabilities |
|
|
|
|
|
|
|
Total operating lease liabilities |
|
$ |
1,241,835 |
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term: |
|
|
|
|
|
|
Operating leases |
|
4.5 years |
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate: |
|
|
|
|
|
|
Operating leases |
|
|
4.2 |
% |
|
|
The components of lease expense are as follows:
|
|
Year Ended December 31, 2021 |
|
|
Amount |
|
|
Classification |
Operating lease cost |
|
$ |
282,121 |
|
|
Selling, general and administrative expense |
Supplemental cash flow information related to leases is as follows:
|
|
Year Ended December 31, 2021 |
|
|
Amount |
|
|
Classification |
Cash paid for amounts included in the
measure of lease liabilities: |
|
|
|
|
|
|
Operating cash flows from operating leases |
|
$ |
197,388 |
|
|
Net income |
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange
for lease liabilities: |
|
|
|
|
|
|
Operating leases |
|
$ |
28,604 |
|
|
Supplemental cash flow information |
As of December 31, 2021, future maturities of our operating lease liabilities are as follows:
Year Ended December 31, |
|
Amount |
|
2023 |
|
$ |
222,806 |
|
2024 |
|
|
234,253 |
|
2025 |
|
|
240,034 |
|
2026 |
|
|
261,148 |
|
2027 |
|
|
283,594 |
|
Thereafter |
|
|
— |
|
Total lease liabilities |
|
$ |
1,241,835 |
|
27
NOTE 10. LONG-TERM DEBT AND LIABILITIES
Long-term debt and liabilities consisted of the following at December 31, 2021 and 2020:
|
|
2021 |
|
|
2020 |
|
Fortress credit agreement |
|
$ |
60,000,000 |
|
|
$ |
— |
|
Nevada State Bank credit agreement |
|
|
— |
|
|
|
8,413,184 |
|
Main Street Priority Loan |
|
|
— |
|
|
|
4,000,000 |
|
Redemption Consideration Obligation |
|
|
— |
|
|
|
39,096,401 |
|
Vehicle notes payable |
|
|
— |
|
|
|
22,614 |
|
Insurance notes payable |
|
|
500,369 |
|
|
|
519,194 |
|
Long-term debt, gross |
|
|
60,500,369 |
|
|
|
52,051,393 |
|
Less: Unamortized debt issuance costs |
|
|
(7,256,190 |
) |
|
|
(137,817 |
) |
Long-term liabilities, net of debt issuance costs |
|
|
53,244,179 |
|
|
|
51,913,576 |
|
Less: Current portion |
|
|
(1,100,369 |
) |
|
|
(2,222,392 |
) |
Long-term debt, net |
|
$ |
52,143,810 |
|
|
$ |
49,691,184 |
|
Share Redemption Consideration Obligation. On May 6, 2019, we issued a promissory note in the face amount of $39,096,401 to Triangulum in connection with the share redemption disclosed in Note 1. In the litigation that followed the share redemption (Note 11), Triangulum is disputing, among other things, the validity of the note and has not accepted its terms. Because Triangulum disputes the promissory note issued by the Company and its terms, the promissory note has not been given accounting effect in the Company’s financial statements. The Company has instead recorded a long-term obligation payable to Triangulum, based on the redemption value specified in our Articles of Incorporation. The obligation is classified as long-term because we do not expect that a final agreement with respect to the litigation will be reached between the parties in the next twelve months. We may repay the Redemption Consideration Obligation at any time but no later than May 6, 2029; however, there can be no assurance that Triangulum will accept such payments. Additional share redemption consideration is being accrued at 2% on the Redemption Consideration Obligation. We paid the first and second annual payments in the amounts of $781,928 on May 5, 2020 and May 6, 2021. Both payments were accepted by Triangulum. The Redemption Consideration Obligation is unsecured and is subordinated to our existing and future indebtedness. On October 7, 2021, Galaxy announced that it had entered into a Settlement Agreement with Triangulum and Robert Saucier. The Settlement Agreement, among other things, resolves the previously disclosed pending litigation between the parties related to the redemption of the Company equity securities owned by Triangulum and Saucier in 2019; provides broad mutual releases to the Company, the Company’s officers and directors, Triangulum and Saucier related to all claims against each other; and includes an agreement by Saucier and Triangulum not to compete with the Company for a period of five years from the date of payment of settlement consideration. Consummation of the settlement was conditioned upon the Company paying Triangulum and Saucier $39.1 million, plus interest accrued at 2% per annum from May 6, 2021, through the date of actual payment. On November 15, 2021, Galaxy made a payment in the amount of $39,507,717 to Triangulum as settlement of the previously disclosed litigation. The Company considers all Triangulum and Saucier related matters to be now closed.
Nevada State Bank (“NSB”) Credit Agreement. The Company was party to a Credit Agreement with Zions Bancorporation, N.A. dba Nevada State Bank (as amended, the “Credit Agreement”). The Credit Agreement provided for a Term Loan in the initial amount of $11,000,000 and a Revolving Loan in the amount of $1,000,000.
On March 29, 2021, the Company entered into an amended and restated credit agreement with Zions Bancorporation, N.A. dba Nevada State Bank (“the A&R Credit Agreement”). The A&R Credit Agreement replaced the original Credit Agreement entered into by the Company with Zions Bancorporation, N.A. dba Nevada State Bank on April 24, 2018 and last modified on November 16, 2020. The A&R Credit Agreement provided for a Term Loan in the amount of $7,022,300 and a Revolving Loan in the amount of $1,000,000. If not paid earlier, amounts outstanding under the Revolving Loan would mature on April 24, 2022, and amounts outstanding under the Term Loan would mature on April 24, 2023.
Under the A&R Credit Agreement, outstanding balances accrued interest based on one-month U.S. dollar London interbank offered rate (“LIBOR”) plus an applicable margin of 3.50% or 4.00%, depending on our Total Leverage Ratio (as defined in the A&R Credit Agreement). Effective December 31, 2021, LIBOR will no longer serve as a reference rate for bank loans, among other investment classes. The A&R Credit Agreement stipulates that a substitute index rate will be selected and used in lieu of LIBOR.
The A&R Credit Agreement contained affirmative and negative financial covenants (as defined in the A&R Credit Agreement) and other restrictions customary for borrowings of this nature. In particular, we were required to maintain (i) a quarterly minimum Fixed Charge Coverage ratio of 1.25x; (ii) a quarterly maximum Total Leverage ratio of 22.50x for the quarter ending March 31, 2021, 10.00x for quarter ending June 30, 2021, 6.50x for the quarter ending September 30, 2021 with semi-annual step-downs of 0.25x commencing December 31, 2021 and quarterly thereafter; (iii) a quarterly maximum Senior Leverage ratio of 5.25x for the quarter ending March 31, 2021, 2.50x for the quarter ending June 30, 2021 and 2.00x quarterly thereafter; (iv) a quarterly Minimum EBITDA covenant of $2.4 million for each of the quarters ending March 31, 2021, June 30, 2021 and September 30, 2021 and $8.0 million quarterly thereafter; (v) a quarterly Minimum Liquidity covenant requiring the Company to have cash and cash equivalents of no less than $1.5 million at quarter ends through and including June 30, 2021 and $2.5 million quarterly thereafter; and (vi) a yearly maximum Maintenance Capital Expenditure covenant of 5% of total revenues for the prior year. The Company was in compliance with its Fixed Charge Coverage ratio, Senior Leverage ratio, Total Leverage ratio and Minimum Liquidity covenants as of June 30, 2021. However, the Company was not in compliance with its Minimum EBITDA covenant as of June 30, 2021. On May 13, 2021, the Company and NSB entered into a Forbearance to the A&R Credit Agreement, in which NSB agreed to forbear from exercising any of its rights or remedies that would result from the potential breaches of the Minimum EBITDA and Total Leverage ratio covenant for the quarters ending June 30, 2021 and September 30, 2021. The Company was in compliance with its Fixed Charge Coverage ratio, Senior Leverage ratio, Minimum EBITDA and Minimum Liquidity covenants as of September 30, 2021. However, the Company was not in compliance with its Total Leverage ratio as of September 30, 2021. On May 13, 2021, the Company and NSB entered into a Forbearance to the A&R Credit Agreement, in which NSB agreed to forbear from exercising any of its rights or remedies that would result from the potential breaches of the Minimum EBITDA and Total Leverage ratio covenant for the quarters ending June 30, 2021 and September 30, 2021.
28
The obligations under the A&R Credit Agreement were secured by substantially all of the assets of the Company. The Company’s wholly owned subsidiary, PGP, was also a guarantor of the A&R Credit Agreement and related agreements.
On November 15, 2021, Galaxy made a payment in the amount of $7,012,265 to NSB as payment in full for both the Term Loan and the Revolving Loan.
Main Street Priority Loan Borrowings. On October 26, 2020, the Company obtained an unsecured loan of $4,000,000 through Zions Bancorporation, N.A. dba Nevada State Bank under section 13(3) of the Federal Reserve Act. On November 15, 2021, Galaxy made a payment in the amount of $4,126,755 to NSB as payment in full for the MSPLP.
The MSPLP bore interest at a rate of three-month U.S. dollar LIBOR plus 300 basis points (initially 3.215%), and interest payments during the first year were deferred and added to the loan balance. The MSPLP had a five-year final maturity, with 15% of principal amortizing in each of years three and four. The MSPLP, plus accrued and unpaid interest, was allowed to be prepaid at any time at par. While the MSPLP was outstanding, and for one year after it is repaid in full, the Company may not 1) repurchase stock, pay dividends or make other distributions, or 2) pay compensation to executive officers that exceeds the total compensation they received in 2019. The entire outstanding principal balance of the MSPLP, together with all accrued and unpaid interest, was due and payable in full on October 26, 2025. The terms of the MSPLP provided for customary events of default, including, among others, those relating to a failure to make payment, bankruptcy, breaches of representations and covenants, and the occurrence of certain events. The MSPLP was secured by a security interest in the assets of the Company, which security interest is pari passu with the security interest granted under the Credit Agreement.
Fortress Credit Agreement. On November 15, 2021, the Company entered into a senior secured term loan agreement with Fortress Credit Corp. (“Fortress Credit Agreement”) in the amount of $60 million. The proceeds of the loan were used to (i) pay approximately $39.5 million to Triangulum as full payment of the settlement amount due under the previously filed settlement agreement between the Galaxy and Triangulum, as set forth above; (ii) repay approximately $11.1 million due and owing to NSB under the MSPLP and under the Amended and Restated Credit Agreement, dated as of May 13, 2021, made between Galaxy and Zions Bancorporation, N.A. dba Nevada State Bank, a Nevada state banking corporation, and (iii) approximately $4.1 million was used to pay fees and expenses. The remaining approximately $5.3 million was added to the Company’s cash on hand and will be used for corporate and operating purposes.
The Fortress Credit Agreement bears interest at a rate equal to, at the Company’s option, either (a) LIBOR (or a successor rate, determined in accordance with the Fortress Credit Agreement) plus 7.75%, subject to a reduction to 7.50% upon the achievement of a net leverage target or (b) a base rate determined by reference to the greatest of (i) the federal funds rate plus 0.50%, (ii) the prime rate as determined by reference to The Wall Street Journal’s “Prime Rate” and (iii) the one-month adjusted LIBOR rate plus 1.00%, plus 6.75%, subject to a reduction to 6.50% upon the achievement of a net leverage target. The Fortress Credit Agreement has a final maturity of November 13, 2026. The obligations under the Fortress Credit Agreement are guaranteed by the Company’s subsidiaries and are secured by substantially all of the assets of the Company and its subsidiaries. The Fortress Credit agreement requires, among other things, principal payments of $150,000 per quarter and includes an annual sweep of 50% of excess cash flow. The Fortress Credit Agreement contains affirmative and negative financial covenants (as defined in the Fortress Credit Agreement) and other restrictions customary for borrowings of this nature. The Company was required to maintain a Total Net Leverage Ratio of 8.00x for the quarter ending December 31, 2021. The Company was in compliance with its Total Net Leverage Ratio as of December 31, 2021. Also, The Fortress Credit Agreement requires that the Company not allow balances in bank accounts that are not covered by an account control agreement to exceed $1 million at any month-end. The bank accounts held by PGP in the Isle of Man are not covered by account control agreements and the balances in those accounts exceeded $1 million at the end of November and December 2021 and January and February 2022. In March 2022, the balances in those accounts were reduced to less than $1 million. The Company informed Fortress of the covenant breach, and a Consent and Waiver Agreement (“the Consent and Waiver Agreement”) was executed among the Company, Fortress, as Agent (“the Agent”), and the Lenders party to the Fortress Credit Agreement on March 16, 2022.
29
In connection with entering into the Fortress Credit Agreement, the Company also issued warrants to purchase a total of up to 778,320 shares of the Company’s common stock to certain affiliates of Fortress at a price per share of $0.01 (the “Warrants”). The Warrants are exercisable at any time, subject to certain restrictions.
As of December 31, 2021, future maturities of our long-term obligations are as follows:
December 31, |
|
Total |
|
2022 |
|
$ |
1,100,369 |
|
2023 |
|
|
600,000 |
|
2024 |
|
|
600,000 |
|
2025 |
|
|
600,000 |
|
2026 |
|
|
57,600,000 |
|
Thereafter |
|
|
— |
|
Total long-term debt, gross |
|
$ |
60,500,369 |
|
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 years ended December 31, 2021 and 2020, respectively, we had the following client revenue concentrations:
|
|
Location |
|
2021
Revenue |
|
|
2020
Revenue |
|
|
Accounts Receivable
December 31, 2021 |
|
|
Accounts Receivable
December 31, 2020 |
|
Client A |
|
Europe |
|
26.1% |
|
|
21.5% |
|
|
$ |
— |
|
|
$ |
348,781 |
|
Legal proceedings. 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.
As discussed in Note 1, we redeemed the shares of our common stock held by Triangulum, an entity controlled by Robert B. Saucier, the Company’s founder, and, prior to the redemption, the holder of a majority of our outstanding common stock.
On May 6, 2019, the Company redeemed the shares of our common stock held by Triangulum. Also on May 6, 2019, the Company filed a lawsuit seeking: (i) a declaratory judgment that it acted lawfully and in full compliance with the Articles when it 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 the Company are appropriate and in accordance with the Articles.
On October 18, 2019, Saucier filed counterclaims against the Company and its Chairman of the Board, Mark Lipparelli, including a breach of contract claim alleging that the Company was obligated to pay Saucier his year-end bonus despite his resignation. The Company and Chairman Lipparelli filed an answer to the counterclaims.
Subsequent to its original counterclaims, Triangulum filed amended counterclaims, which the Company and its Directors moved to dismiss on a number of legal grounds (the “Motion to Dismiss”). The Court denied the Motion to Dismiss. The Company and its Directors filed a writ petition challenging the ruling, which the Nevada Supreme Court denied on January 23, 2020.
On May 6, 2020, Saucier made a demand of the Company under our Bylaws and an Indemnification Agreement between Saucier and the Company, for indemnity and advancement of funds seeking repayment of his attorneys’ fees and expenses he allegedly incurred in connection with the Company’s claims against him in the Triangulum Lawsuit. An independent counsel, selected per the terms of the Indemnification Agreement, concluded that Saucier was entitled to a small amount of indemnity funds related to the time he was employed by the Company, but denied an entitlement to indemnification thereafter.
On May 19, 2020, Saucier commenced a separate action in Nevada district court by filing a complaint he verified as true, seeking advancement of indemnification fees to which he claims an entitlement under the Bylaws and an Indemnification Agreement (the “Advancement Lawsuit”). The Company filed its opposition on June 4, 2020. Saucier’s Motion was denied in a hearing that occurred on June 24, 2020. Saucier filed a notice of his appeal of the Nevada district court’s decision in the Advancement Lawsuit to the Nevada Supreme Court on August 10, 2020. Saucier subsequently moved for attorneys' fees related to the filing of the Advancement Lawsuit, which the Nevada district court granted, and the Company filed a notice of appeal to the Nevada Supreme Court. When Saucier filed a supplemental motion for attorneys’ fees, the Nevada district court denied his motion, finding the fees incurred to be unreasonable, among other things. Saucier also appealed this ruling of the Nevada district court.
Various other but related matters and appeals remained pending between the parties.
30
On October 7, 2021, Galaxy announced that it had entered into a Settlement Agreement with Triangulum and Robert Saucier. The Settlement Agreement, among other things, resolves the previously disclosed pending litigation between the parties related to the redemption of the Company equity securities owned by Triangulum and Saucier in 2019; provides broad mutual releases to the Company, the Company’s officers and directors, Triangulum and Saucier related to all claims against each other; and includes an agreement by Saucier and Triangulum not to compete with the Company for a period of five years from the date of payment of settlement consideration. Consummation of the settlement was conditioned upon the Company paying Triangulum and Saucier $39.1 million, plus interest accrued at 2% per annum from May 6, 2021, through the date of actual payment. On November 15, 2021, Galaxy made a payment in the amount of $39,507,717 to Triangulum as settlement of previously disclosed litigation. The Company considers all Triangulum and Saucier related matters to be now closed.
In September 2018, we were served with a complaint by TableMax Corporation (“TMAX”) regarding the TMAX Agreement. We filed an answer denying the allegations and filed a partial motion for summary judgment seeking dismissal of the plaintiff’s claims. The suit was dismissed, subject to the right of the plaintiff to file an amended complaint on or before March 20, 2019. The plaintiff did not file an amended complaint within the time period set by the Judge. After that time, the Company considered the matter closed. TMAX filed a Motion for Leave to Amend their Complaint, which was granted by the Judge on May 11, 2020. On May 26, 2020 TMAX filed an Amended Complaint against the Company and other Co-Defendants. The Company filed a Motion To Enforce Settlement Or, In The Alternative, Motion To Dismiss And/Or For Summary Judgement and Request For Sanctions, on April 30, 2021. On June 22, 2021, the Company’s s Motion to Dismiss was granted, with prejudice to the right of TMAX to file an amended complaint. The Company considers the matter closed.
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 and accordingly, no provision for loss has been reflected in the accompanying financial statements related to these matters.
Intellectual property agreements. From time to time, the Company purchases intellectual property from third-parties and the Company, in turn, utilizes that intellectual property in certain games sold to clients. In these purchase agreements, the Company may agree to pay the seller of the intellectual property a fee, if and when, the Company receives revenue from games containing the intellectual property.
NOTE 12. INCOME TAXES
The components of the provision consist of the following for the years ended December 31, 2021 and 2020:
|
|
2021 |
|
|
2020 |
|
U.S.(loss) |
|
$ |
(770,771 |
) |
|
$ |
(3,477,895 |
) |
Non-U.S. income |
|
|
2,931,220 |
|
|
|
663,071 |
|
Income (loss) before income taxes |
|
$ |
2,160,449 |
|
|
$ |
(2,814,824 |
) |
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
2020 |
|
Current: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
(62,074 |
) |
|
$ |
(1,204,556 |
) |
State |
|
|
11,500 |
|
|
|
1,745 |
|
Foreign |
|
|
74,885 |
|
|
|
— |
|
Total current |
|
|
24,311 |
|
|
|
(1,202,811 |
) |
Deferred: |
|
|
|
|
|
|
|
|
Federal |
|
|
(97,965 |
) |
|
|
674,138 |
|
State |
|
|
122,291 |
|
|
|
(77,264 |
) |
Total deferred |
|
|
24,326 |
|
|
|
596,874 |
|
Provision (benefit) for income taxes |
|
$ |
48,637 |
|
|
$ |
(605,937 |
) |
31
The income tax provision differs from that computed at the federal statutory corporate income tax rate as follows for the years ended December 31, 2021 and 2020:
|
|
2021 |
|
|
2020 |
|
Tax provision computed at the federal statutory rate |
|
$ |
453,694 |
|
|
$ |
(591,113 |
) |
Foreign rate differential |
|
|
(540,670 |
) |
|
|
(139,246 |
) |
State income tax, net of federal benefit |
|
|
22,226 |
|
|
|
(55,558 |
) |
162(m) compensation limit |
|
|
228,069 |
|
|
|
— |
|
Share based compensation |
|
|
(615,062 |
) |
|
|
(4,568 |
) |
Subpart F income |
|
|
717,218 |
|
|
|
204,326 |
|
Non-taxable PPP loan forgiveness |
|
|
— |
|
|
|
(176,451 |
) |
Other permanent items |
|
|
1,138 |
|
|
|
29,511 |
|
Credits |
|
|
(94,223 |
) |
|
|
(24,801 |
) |
Impact of CARES Act |
|
|
(71,168 |
) |
|
|
(466,642 |
) |
State tax true ups |
|
|
(79,997 |
) |
|
|
10,153 |
|
Change in federal statutory rate, net of benefit |
|
|
(15,698 |
) |
|
|
1,364 |
|
Uncertain tax positions |
|
|
1,933 |
|
|
|
46,699 |
|
Valuation allowance |
|
|
41,177 |
|
|
|
560,389 |
|
Provision (benefit) for income taxes |
|
$ |
48,637 |
|
|
$ |
(605,937 |
) |
The tax effects of significant temporary differences representing net deferred tax assets and liabilities consisted of the following at December 31, 2021 and 2020:
|
|
2021 |
|
|
2020 |
|
Deferred Tax Assets: |
|
|
|
|
|
|
|
|
Right-of-use asset |
|
$ |
268,137 |
|
|
$ |
320,787 |
|
Share based compensation |
|
|
228,574 |
|
|
|
313,910 |
|
Intangible assets |
|
|
176,457 |
|
|
|
182,511 |
|
Accruals and reserves |
|
|
127,332 |
|
|
|
67,259 |
|
Debt issuance costs |
|
|
50,246 |
|
|
|
— |
|
Other |
|
|
96,111 |
|
|
|
86,231 |
|
Total deferred tax assets |
|
|
946,857 |
|
|
|
970,698 |
|
|
|
|
|
|
|
|
|
|
Total valuation allowance |
|
|
(601,566 |
) |
|
|
(560,389 |
) |
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities: |
|
|
|
|
|
|
|
|
Right-of-use liability |
|
|
(285,111 |
) |
|
|
(316,481 |
) |
Prepaid assets |
|
|
(171,411 |
) |
|
|
(207,005 |
) |
Basis difference in fixed assets |
|
|
(62,968 |
) |
|
|
(37,715 |
) |
Other |
|
|
(1,019 |
) |
|
|
— |
|
Total deferred tax liabilities |
|
|
(520,509 |
) |
|
|
(561,201 |
) |
Net deferred tax liabilities |
|
$ |
(175,218 |
) |
|
$ |
(150,892 |
) |
On August 21, 2020, the Company completed the acquisition of 100% of the member interests in PGP. As of December 31, 2020, the Company has evaluated its deferred tax attributes related to the acquisition within the foreign jurisdiction of Isle of Man and recorded a tax-effected deferred tax asset of $0 as of December 31, 2020. The Company has assessed the foreign subsidiary income and Subpart F requires us to include the income of PGP in the U.S. tax base on an annual basis.
In addition, as of December 31, 2021, the Company recognized state net operating loss carryforwards of $1.0 million. The majority of the state carryforward amounts will begin to expire in 2040, while some state net operating losses have an indefinite carryforward period.
In accordance with U.S. GAAP, the need to establish a valuation allowance against deferred tax assets is assessed periodically based on a more-likely-than-not realization threshold. Appropriate consideration is given to all positive and negative evidence related to that realization. This assessment considers, among other matters, the nature, frequency and severity of recent losses; forecasts of future profitability; the duration of statutory carryforward periods; experience with tax attributes expiring unused; and tax planning alternatives. The weight given to these considerations depends upon the degree to which they can be objectively verified.
32
A significant piece of objective negative evidence evaluated was the three-year cumulative loss position the company is in as of the period ended December 31, 2021. Such objective negative evidence limits the ability to consider other more subjective evidence such as projections of future income. The amount of the deferred tax asset considered realizable could be adjusted in future periods if the objective negative evidence of a cumulative loss is no longer present, and more weight is given to subjective evidence such as future income and growth.
Upon assessing all of the relevant evidence, the Company determined it has not met the more-likely-than-not threshold to support the realization of all or part of its deferred tax assets. The Company has recorded a valuation allowance against certain of its deferreds in the amount of $601,566. The current-year change resulted in additional tax expense of $41,177, which impacted the Company’s effective tax rate by 1.91%.
The aggregate changes in the balance of gross unrecognized tax benefits (included as part of deferred tax liabilities, net in the accompanying financial statements), which excludes interest and penalties, are as follows as of and for the years ended December 31, 2021 and 2020:
|
|
2021 |
|
|
2020 |
|
Beginning balance |
|
$ |
46,699 |
|
|
$ |
— |
|
Increases related to tax positions taken during the prior year |
|
|
— |
|
|
|
45,207 |
|
Increases related to tax positions taken during the current year |
|
|
1,933 |
|
|
|
1,492 |
|
Other adjustments |
|
|
— |
|
|
|
— |
|
Ending balance |
|
$ |
48,632 |
|
|
$ |
46,699 |
|
Our total liability for unrecognized gross tax benefits was $48,632 as of December 31, 2021, which, if ultimately recognized, would impact the annual estimated effective tax rate in future periods. We are subject to examination by the Internal Revenue Service for fiscal years 2018 and thereafter. For states within the U.S. in which we conduct significant business, we generally remain subject to examination for fiscal years 2018 and thereafter, unless extended for longer periods under state laws. We have no accrual for interest or penalties related to uncertain tax positions at December 31, 2021 and 2020, and did not recognize interest or penalties in the statements of operations during the years ended December 31, 2021 and 2020, as such amounts would be immaterial, if any.
NOTE 13. SHARE-BASED COMPENSATION
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 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 December 31, 2021, a total of 7,550,750 shares of our common stock were authorized for issuance. As of December 31, 2021, 745,368 shares remained available for issuance as new awards under the 2014 Plan.
During the years ended December 31, 2021 and 2020, we issued 90,000 and 465,000 options to purchase our common stock, respectively, to executive officers, employees and independent contractors. The fair value of all stock options granted for the years ended December 31, 2021 and 2020 was determined to be $162,252 and $435,639, respectively, using the Black-Scholes option pricing model with the following assumptions:
|
|
Options Issued For the Twelve Months Ended December 31, 2021 |
|
|
Options Issued For the Twelve Months Ended December 31, 2020 |
|
Dividend yield |
|
0% |
|
|
0% |
|
Expected volatility |
|
61.12% - 68.74% |
|
|
70.98% - 76.97% |
|
Risk free interest rate |
|
0.48% - 0.98% |
|
|
0.27% - 1.39% |
|
Expected life (years) |
|
|
5.00 |
|
|
|
5.00 |
|
33
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, 2020 |
|
|
2,982,000 |
|
|
$ |
1.08 |
|
|
$ |
2,101,780 |
|
|
|
2.35 |
|
Issued |
|
|
90,000 |
|
|
$ |
3.38 |
|
|
|
— |
|
|
|
— |
|
Exercised |
|
|
(1,094,998 |
) |
|
$ |
0.82 |
|
|
$ |
(3,166,433 |
) |
|
|
— |
|
Forfeited or expired |
|
|
(42,000 |
) |
|
$ |
1.04 |
|
|
|
— |
|
|
|
— |
|
Outstanding – December 31, 2021 |
|
|
1,935,002 |
|
|
$ |
1.33 |
|
|
$ |
4,788,314 |
|
|
|
1.87 |
|
Exercisable – December 31, 2021 |
|
|
1,458,001 |
|
|
$ |
1.12 |
|
|
$ |
3,914,356 |
|
|
|
1.35 |
|
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, 2020 |
|
|
845,000 |
|
|
$ |
1.55 |
|
|
$ |
197,608 |
|
|
|
3.83 |
|
Granted |
|
|
90,000 |
|
|
$ |
3.38 |
|
|
|
— |
|
|
|
— |
|
Vested |
|
|
(416,333 |
) |
|
$ |
1.51 |
|
|
|
— |
|
|
|
— |
|
Forfeited |
|
|
(41,666 |
) |
|
$ |
1.04 |
|
|
|
— |
|
|
|
— |
|
Unvested – December 31, 2021 |
|
|
477,001 |
|
|
$ |
1.97 |
|
|
$ |
873,958 |
|
|
|
3.45 |
|
As of December 31, 2021, our unrecognized share-based compensation expense associated with the stock options issued was $382,021, which is expected to be amortized over a weighted-average of 1.75 years.
Restricted Awards
During the year ended December 31, 2021, we issued an aggregate of 298,333 restricted shares of our common stock valued at $1,112,882 to our board members in consideration of their service on the Board. These shares vested immediately on the grant date. An additional 80,000 restricted shares of our common stock valued at $181,600 were issued to an employee of the Company on February 17, 2021. These shares were granted in consideration of the individual’s service to the Company. These shares vested on November 11, 2021. As of December 31, 2021, there were 2,379,466 restricted shares outstanding. Of the restricted shares outstanding, 100,000 restricted shares were unvested.
NOTE 14. SUBSEQUENT EVENTS
On March 16 2022, we, the lenders from time to time party (the “Loan Parties”) and Fortress Credit Corp., as the Agent entered into the Consent and Waiver to Fortress Credit Agreement.
Pursuant to the Consent and Waiver Agreement, the Company acknowledged that it was in default under the Fortress Credit Agreement as a result of its failure to comply with a requirement of the Fortress Credit Agreement not to permit, on the last Business Day of each calendar month, more than the Dollar Equivalent of $1,000,000 (or such greater amount determined by the Agent in its sole discretion) in the aggregate to be on deposit in Isle of Man deposit or securities accounts which are not subject to Control Agreements (as such term is defined in the Guaranty and Security Agreement) or other security arrangements acceptable to the Agent (the “Existing Default”) for the months of November 2021, December 2021, January 2022 and February 2022 (the “Specified Compliance Periods”). The Company cured the default. Pursuant to the Consent and Waiver Agreement, the Company has requested that the Agent and Required Lenders waive, and the Agent and the Lenders signatory hereto constituting the Required Lenders agree to waive, the Existing Default for the Specified Compliance Periods indicated above.
Other than as specifically referenced in the Consent and Waiver Agreement, the Credit Agreement remains in full force and effect.
34