The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS AND RESTATEMENT
Unless the context indicates otherwise, references to “Galaxy Gaming, Inc.,” “we,” “us,” “our,” or the “Company,” refer to Galaxy Gaming, Inc., a publicly reporting Nevada corporation (“Galaxy Gaming”).
Nature of operations.
We are an established global gaming company specializing in the design, development, manufacturing, marketing and acquisition of proprietary casino table games and associated technology, platforms and systems for the casino gaming industry. We are a leading supplier of gaming entertainment products worldwide and provide a diverse offering of quality products and services at competitive prices designed to enhance the player experience.
Restatement.
The financial statements as of and for the three months ended March 31, 2016 have been restated to correct the following errors noted during the preparation of the financial statements for the year ended December 31, 2016: (i)
the amortization of original issue discount related to
notes payable to Prime
Table Games LLC and Prime Table Games UK (the “PTG Notes”) was not previously deducted from taxable income in our federal tax returns from 2011 through 2015 or to derive the income tax provision for the three months ended March 31, 2016, which resulted in an understatement of deferred tax assets and an overstatement of the income tax provision in those periods; and (ii) foreign currency exchange gains and losses related to the PTG Notes were incorrectly reported as other comprehensive income instead of earnings (
i.e.
, non-operating income).
The restatements to reflect the correction of both errors are referred to herein collectively as the "Restatement."
The table below sets forth the amounts as originally reported for the categories presented in the statement of income that were affected by the Restatement, the effect of the Restatement and the restated amounts for the three months ended March 31, 2016:
|
|
As originally reported
|
|
|
Impact of restatement
|
|
|
As restated
|
|
Selling, general and administrative
|
|
$
|
1,652,304
|
|
|
$
|
(18,969
|
)
|
|
$
|
1,633,335
|
|
Provision for income taxes
|
|
|
(156,863
|
)
|
|
|
(83,062
|
)
|
|
|
(239,925
|
)
|
Foreign currency exchange gains
|
|
|
—
|
|
|
|
112,562
|
|
|
|
112,562
|
|
Net income
|
|
|
379,367
|
|
|
|
48,468
|
|
|
|
427,835
|
|
The table below sets forth the amounts as originally reported for the categories presented in the statement of cash flow that were affected by the Restatement, the effect of the Restatement and the restated amounts for the three months ended March 31, 2016:
|
|
As originally reported
|
|
|
Impact of restatement
|
|
|
As restated
|
|
Net income
|
|
|
379,367
|
|
|
|
48,468
|
|
|
|
427,835
|
|
Deferred income tax provision
|
|
|
156,863
|
|
|
|
(156,863
|
)
|
|
|
—
|
|
Decrease in accounts receivable
|
|
|
76,900
|
|
|
|
1,339
|
|
|
|
78,239
|
|
Decrease in accounts payable
|
|
|
(111,065
|
)
|
|
|
(174
|
)
|
|
|
(111,239
|
)
|
Increase in income taxes payable
|
|
|
134,792
|
|
|
|
88,111
|
|
|
|
222,903
|
|
Increase in accrued expenses
|
|
|
56,598
|
|
|
|
(544
|
)
|
|
|
56,054
|
|
Net cash provided by operating activities
|
|
|
1,304,161
|
|
|
|
(19,663
|
)
|
|
|
1,284,498
|
|
Principal payments on notes payable
|
|
|
(766,082
|
)
|
|
|
19,663
|
|
|
|
(746,419
|
)
|
Net cash used in financing activities
|
|
|
(783,523
|
)
|
|
|
19,663
|
|
|
|
(763,860
|
)
|
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation.
The accompanying 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, all adjustments necessary in order for the financial statements to be not misleading have been reflected herein.
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.
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.
7
In the opinion of management, the accompanying unaudited interim financial statements contain all necessary adjustments, consisting only of those of a recurring nature, and disclosures to present fairly our financial position and the results of
its operations and cash flows for the periods presented. 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 D
ecember 31, 2016, filed with the SEC on April 14, 2017 (the “2016 10-K”).
Basis of accounting.
The financial statements have been prepared on the accrual basis of accounting in conformity with U.S. GAAP. Revenues are recognized when earned and expenses are recognized when they are incurred. We do not have significant categories of cost as a vast majority of our revenue is recurring with high margins. Expenses such as wages, consulting expenses, legal, regulatory and professional fees and rent are recorded when the expense is incurred.
Significant Accounting Policies.
S
ee Note 2 in Item 8. “Financial Statements and Supplementary Data” included in our 2016 10-K.
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.
Recently adopted accounting standards
Inventory.
In July 2015, the FASB issued ASU No. 2015-11,
Inventory: Simplifying the Measurement of Inventory.
ASU 2015-11 changes the criteria for measuring inventory within the scope of the ASU. Inventory will now be measured at the lower of cost or net realizable value, while the concept of market value will be eliminated. The ASU defines net realizable value as the estimated selling process in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with earlier adoption permitted. ASU 2015-11 was adopted effective January 1, 2017 using the required prospective adoption approach, which did not have
a material effect on our financial condition, results of operations or cash flows.
Stock-based compensation.
In March 2016, the FASB issued No. ASU 2016-09,
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting.
ASU 2016-09 addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This standard is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. ASU 2016-09 was adopted effective January 1, 2017 using the prospective adoption approach, which did not have a material impact on our
financial condition, results of operations or cash flows
.
New accounting standards not yet adopted
Revenue Recognition.
In May 2014, the FASB issued ASU No. 2014-09 (Topic 606),
Revenue from Contracts with Customers
, which is a comprehensive new revenue recognition standard that will supersede virtually all existing revenue guidance, including industry-specific guidance. Under the new standard, revenue will be recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods and services. The standard creates a five-step model that will generally require companies to use more judgment and make more estimates than under current guidance when considering the terms of contracts along with all relevant facts and circumstances. These include the identification of customer contracts and separating performance obligations, the determination of transaction price that potentially includes an estimate of variable consideration, allocating the transaction price to each separate performance obligation, and recognizing revenue in line with the pattern of transfer.
In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, which defers the effective date of ASU 2014-09 by one year to now be effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017. Early adoption of the standard is permitted but not before the original effective date of December 15, 2016. The ASU may be adopted using a full retrospective approach or reporting the cumulative effect as of the date of adoption. We are currently evaluating the impact of adopting this guidance; however, we expect to adopt using the modified retrospective approach.
Leases.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 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. The adoption of this guidance is expected to result in a significant portion of our operating leases being recognized on our balance sheets. The guidance requires lessees and lessors to recognize and
8
measure
leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years with earlier adoption permitted. W
e are currently evaluating the impact of adopting this guidance.
Restricted Cash
. In November 2016, the FASB issued
ASU No. 2016-18,
S
tatement of Cash Flows (Topic 230): Restricted Cash
. This ASU requires amounts generally described as restricted cash and cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. Upon the adoption of ASU 2016-08, restricted cash will be included within beginning and ending cash and cash equivalents amounts on our consolidated statements of cash flows.
NOTE 3. INVENTORY
Inventory consisted of the following at March 31, 2017 and December 31, 2016:
|
|
2017
|
|
|
2016
|
|
Raw materials and component parts
|
|
$
|
209,051
|
|
|
$
|
171,478
|
|
Finished goods
|
|
|
143,346
|
|
|
|
128,956
|
|
Work-in-process
|
|
|
138,593
|
|
|
|
151,671
|
|
Inventory, gross
|
|
|
490,990
|
|
|
|
452,105
|
|
Less: inventory reserve
|
|
|
(25,000
|
)
|
|
|
(25,000
|
)
|
Inventory, net
|
|
$
|
465,990
|
|
|
$
|
427,105
|
|
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following at March 31, 2017 and December 31, 2016:
|
|
2017
|
|
|
2016
|
|
Furniture and fixtures
|
|
$
|
269,470
|
|
|
$
|
269,471
|
|
Automotive vehicles
|
|
|
202,144
|
|
|
|
202,143
|
|
Leasehold improvements
|
|
|
156,843
|
|
|
|
156,843
|
|
Computer equipment
|
|
|
107,462
|
|
|
|
105,114
|
|
Office equipment
|
|
|
49,520
|
|
|
|
37,871
|
|
Property and equipment, gross
|
|
|
785,439
|
|
|
|
771,442
|
|
Less: accumulated depreciation
|
|
|
(457,839
|
)
|
|
|
(415,189
|
)
|
Property and equipment, net
|
|
$
|
327,600
|
|
|
$
|
356,253
|
|
For the
three months
ended March 31, 2017 and 2016, depreciation expense related to property and equipment of $42,650 and $32,180, respectively, is included in depreciation and amortization expense.
Accumulated depreciation of leasehold improvements totaled $89,896 and $82,183 as of March 31, 2017 and December 31, 2016, respectively.
NOTE 5. PRODUCTS LEASED AND HELD FOR LEASE
Products leased and held for lease consisted of the following at March 31, 2017 and December 31, 2016:
|
|
2017
|
|
|
2016
|
|
Enhanced table systems
|
|
$
|
397,960
|
|
|
$
|
424,364
|
|
Less: accumulated depreciation
|
|
|
(182,166
|
)
|
|
|
(212,233
|
)
|
Products leased and held for lease, net
|
|
$
|
215,794
|
|
|
$
|
212,131
|
|
For the
three months
ended March 31, 2017 and 2016, depreciation expense related to products leased and held for lease of $20,469 and $11,483, respectively, is included in depreciation and amortization expense.
9
NOTE
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and finite-lived intangible assets consisted of the following at March 31, 2017 and December 31, 2016:
|
|
2017
|
|
|
2016
|
|
Patents
|
|
$
|
1,091,000
|
|
|
$
|
1,091,000
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
Patents
|
|
|
13,615,967
|
|
|
|
13,615,967
|
|
Customer relationships
|
|
|
3,400,000
|
|
|
|
3,400,000
|
|
Trademarks
|
|
|
2,740,000
|
|
|
|
2,740,000
|
|
Non-compete agreements
|
|
|
660,000
|
|
|
|
660,000
|
|
Software
|
|
|
86,520
|
|
|
|
—
|
|
Other intangible assets, gross
|
|
|
20,502,487
|
|
|
|
20,415,967
|
|
Less: accumulated amortization
|
|
|
(9,033,914
|
)
|
|
|
(8,660,948
|
)
|
Other intangible assets, net
|
|
|
11,468,573
|
|
|
|
11,755,019
|
|
Goodwill and other intangible assets, net
|
|
$
|
12,559,573
|
|
|
$
|
12,846,019
|
|
NOTE 7. ACCRUED EXPENSES
Accrued expenses, consisted of the following at March 31, 2017 and December 31, 2016:
|
|
2017
|
|
|
2016
|
|
TableMAX license fee
|
|
$
|
549,312
|
|
|
$
|
470,512
|
|
Payroll and related
|
|
|
307,690
|
|
|
|
405,553
|
|
Professional fees
|
|
|
185,015
|
|
|
|
59,567
|
|
Commissions and royalties
|
|
|
108,171
|
|
|
|
54,551
|
|
Accrued interest
|
|
|
2,622
|
|
|
|
2,602
|
|
Other
|
|
|
56,247
|
|
|
|
116,643
|
|
Total accrued expenses
|
|
$
|
1,209,057
|
|
|
$
|
1,109,428
|
|
TableMAX license fee
.
Under the terms of a five-year licensing agreement (the “ TMAX Agreement”) with TableMAX Corporation (“TMAX”) a provider of electronic table games and platforms headquartered in Las Vegas, Nevada, we previously had exclusive worldwide rights (excluding one international territory and two U.S. states) to the TMAX electronic gaming platform and certain related game titles. Pursuant to the terms of the TMAX Agreement, the licensee fee payable to TMAX is dependent upon our generating profitable operating results specifically from the use of TMAX products. To the extent there are net profits (as defined in the TMAX Agreement), a percentage of such net profits is payable to TMAX depending on the number of TMAX product installations. The TMAX Agreement expired during 2016, and we are currently negotiating the licensing fee (if any) that is payable to TMAX.
NOTE 8. CAPITAL LEASE OBLIGATIONS
Capital lease obligations consisted of the following at March 31, 2017 and December 31, 2016:
|
|
2017
|
|
|
2016
|
|
Capital lease obligation – leasehold improvements
|
|
$
|
70,396
|
|
|
$
|
78,008
|
|
Less: Current portion
|
|
|
(31,452
|
)
|
|
|
(31,030
|
)
|
Total capital lease obligations - long-term
|
|
$
|
38,944
|
|
|
$
|
46,978
|
|
Future annual payments for capital leases obligations are as follows for the years ending March 31:
March 31,
|
|
Total
|
|
2018
|
|
$
|
31,452
|
|
2019
|
|
|
33,226
|
|
2020
|
|
|
5,718
|
|
Total minimum lease payments
|
|
$
|
70,396
|
|
10
NOTE 9. LONG-TERM DEBT
Long-term debt consisted of the following at March 31, 2017 and December 31, 2016:
|
|
2017
|
|
|
2016
|
|
Term loan
|
|
$
|
10,237,500
|
|
|
$
|
10,500,000
|
|
Notes payable, related party
|
|
|
490,838
|
|
|
|
509,135
|
|
Equipment notes payable
|
|
|
152,955
|
|
|
|
162,274
|
|
Insurance notes payable
|
|
|
22,616
|
|
|
|
36,063
|
|
Notes payable -gross
|
|
|
10,903,909
|
|
|
|
11,207,472
|
|
Less:
|
|
|
|
|
|
|
|
|
Unamortized debt issuance costs
|
|
|
(578,660
|
)
|
|
|
(595,462
|
)
|
Warrants issued
|
|
|
(703,768
|
)
|
|
|
(743,604
|
)
|
Notes payable - net
|
|
|
9,621,481
|
|
|
|
9,868,406
|
|
Less: Current portion
|
|
|
(1,187,570
|
)
|
|
|
(1,199,255
|
)
|
Long-term debt, net
|
|
$
|
8,433,911
|
|
|
$
|
8,669,151
|
|
Term loan.
In August 2016, we entered into a term loan agreement (the “Term Loan Agreement”) for an aggregate principal amount of $10,500,000 (the "Term Loan"). Proceeds of the Term Loan were primarily used to prepay in full the outstanding notes payable to unrelated parties. The remainder of the proceeds from the Term Loan was used for general corporate purposes and working capital needs. The Term Loan is secured by a senior lien on substantially all of our assets. In conjunction with the Term Loan, we also entered into a warrant agreement (the “Warrant Agreement”), pursuant to which we issued the lenders a six-year warrant to purchase 1,965,780 shares of our common stock (the “Warrants”) (Note 13).
Under the Term Loan, we are subject to quarterly financial covenants that, among other things, limit our annual capital expenditures (as defined in the Term Loan Agreement), and require us to maintain a specified leverage ratio and minimum EBITDA amounts, each of which are defined in the Term Loan agreement. We were in compliance with the financial covenants of the Term Loan Agreement as of March 31, 2017.
During the initial twelve-month period of the Term Loan, the outstanding principal will accrue interest at the rate of 14.0% per annum. Thereafter, the outstanding principal will accrue interest at the lesser of 14.0% per annum or 12.5% per annum for any quarterly period in which we achieve a specified leverage ratio.
The Term Loan required quarterly interest-only payments through December 31, 2016, after which we are required to make quarterly principal payments of $262,500 plus accrued interest. The remaining principal and any unpaid interest will be payable in full on August 29, 2021. Voluntary prepayments of the Term Loan, in full or in part, are permitted after the first anniversary of the Term Loan, subject to certain premiums. The Term Loan also requires certain mandatory prepayments in the amount of 100% of the proceeds from certain asset dispositions (other than in the ordinary course of business) and certain other extraordinary events, and 25% of the proceeds from the sale and issuance of capital stock. Substantially all of our assets are pledged as collateral for the Term Loan.
The foregoing summary of the Term Loan Agreement and the Warrant Agreement is qualified in its entirety by reference to the respective agreements, which are found as Exhibits 99.1 and 99.2, respectively, to our Form 8-K filed with the SEC on August 29, 2016.
Notes payable, related party.
In connection with an asset purchase agreement executed in December 2007, we executed a note payable due to an entity owned and controlled by our Chief Executive Officer (“CEO”). This note requires annual principal and interest payments of $109,908, at a fixed interest rate of 7.3% through December 2018, at which time there is a balloon payment due of $354,480.
11
As of March 31, 2017, maturities of our long-term debt oblig
ations are as follows:
Maturities as of
March 31,
|
|
Total
|
|
2018
|
|
$
|
1,187,570
|
|
2019
|
|
|
1,503,811
|
|
2020
|
|
|
1,086,007
|
|
2021
|
|
|
1,072,138
|
|
2022
|
|
|
6,054,383
|
|
Total notes payable
|
|
|
10,903,909
|
|
Less:
|
|
|
|
|
Unamortized debt issuance costs
|
|
|
(578,660
|
)
|
Warrants issued
|
|
|
(703,768
|
)
|
Notes payable, net
|
|
$
|
9,621,481
|
|
NOTE 10. COMMITMENTS AND CONTINGENCIES
Concentration of risk.
We are exposed to risks associated with clients who represent a significant portion of total revenues. For the three months ended March 31, 2017 and 2016, respectively, we had the following client revenue concentration:
|
|
Location
|
|
2017
Revenue
|
|
|
2016
Revenue
|
|
Client A
|
|
North America
|
|
|
14.6%
|
|
|
|
14.2%
|
|
We are also exposed to risks associated with the expiration of our patents. In 2015, domestic and international patents for two of our products expired, which accounted for approximately $1,421,231 or 41% of our revenue for the three months ended March 31, 2017. However, we assumed an agreement between the previous owner of these patents and a competitor of ours that prohibits any similar product offerings based on these expired patents until March 2023. As a result, we do not expect the expiration of these patents to have a significant adverse impact on our financial statements.
Operating lease.
In February 2014, we entered into a lease (the “Spencer Lease”) for a new corporate office with an unrelated third party. The five-year Spencer Lease is for a building approximately 24,000 square feet, which is comprised of approximately 16,000 square feet of office space and 8,000 square feet of warehouse space. The property is located in Las Vegas, Nevada.
The initial term of the Spencer Lease commenced on April 1, 2014. We were obligated to pay approximately $153,000 in annual base rent in the first year, and the annual base rent is scheduled to increase by approximately 4% each year. We are also obligated to pay real estate taxes and other building operating costs. Subject to certain conditions, we have certain rights under the Spencer Lease, including rights of first offer to purchase the premises if the landlord elects to sell. We also have an option to extend the term of the Spencer Lease for two consecutive terms of three years each, at the then current fair market value rental rate determined in accordance with the terms of the Spencer Lease.
In connection with the commencement of the Spencer Lease, the landlord agreed to finance tenant improvements (“TI Allowance”) of $150,000. The base rent is increased by an amount sufficient to fully amortize the TI Allowance through the initial Spencer Lease term upon equal monthly payments of principal and interest, with interest imputed on the outstanding principal balance at the rate of 5.5% per annum. The TI Allowance has been classified as a capital lease on the balance sheet.
Total rent expense was $70,570 and $72,154 for the three months ended March 31, 2017 and 2016, respectively.
12
There are currently no operating lease commitments
that extend
beyond April 1, 2020. As of March 31, 2017, the amounts shown in the accompanying table reflect our estimates of annual future minimum lease obligations:
Twelve Months Ending
March 31,
|
|
Annual Obligation
|
|
2018
|
|
$
|
228,000
|
|
2019
|
|
|
236,736
|
|
2020
|
|
|
59,730
|
|
Total obligations
|
|
$
|
524,466
|
|
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. In accordance with ASC Topic 450, we record accruals for such contingencies to the extent we conclude that it is probable that a liability will be incurred and the amount of the related loss can be reasonably estimated. Our assessment of each matter may change based on future unexpected events. 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. We assume no obligation to update the status of pending litigation, except as may be required by applicable law, statue or regulation. For a complete description of the facts and circumstances surrounding material litigation to which we are a party, see Note 12 in Item 8. “Financial Statements and Supplementary Data” included in our 2016 10-K.
NOTE 11. STOCKHOLDERS’ EQUITY
In February 2017, a former employee forfeited 100,000 shares of unvested restricted stock and paid us $35,000 in connection with the exercise of 150,000 fully-vested stock options.
NOTE 12. INCOME TAXES
Our forecasted annual effective tax rate at March 31, 2017 was 35.0%, as compared to 35.4% at March 31, 2016. For the three months ended March 31, 2017 and 2016, our effective tax rate was 31.4% and 35.5%, respectively. The decrease in the effective tax rate is primarily due to excess stock compensation benefits in income tax expense for the three months ended March 31, 2017 resulting from the adoption of ASU 2016-09,
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting
.
NOTE 13. STOCK WARRANTS, OPTIONS AND GRANTS
Stock options.
For each of the three months ended March 31, 2017 and 2016, we issued 112,500 stock options to members of our Board of Directors and independent contractors.
The fair value of all stock options granted for the three months ended March 31, 2017 and 2016 was determined to be $47,635 and $16,348, respectively, using the Black-Scholes option pricing model with the following assumptions:
|
|
Three months ended
March 31, 2017
|
|
|
Three months ended
March 31, 2016
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
Expected volatility
|
|
|
85%
|
|
|
|
89%
|
|
Risk free interest rate
|
|
|
1.93%
|
|
|
|
1.21%
|
|
Expected life (years)
|
|
|
5.00
|
|
|
|
5.00
|
|
13
A summary of stock option activity is as follows:
|
|
Common
s
tock options
|
|
|
Weighted-average
exercise price
|
|
|
Aggregate intrinsic value
|
|
|
Weighted-average remaining contractual term (years)
|
|
Outstanding – December 31, 2016
|
|
|
1,496,250
|
|
|
$
|
0.32
|
|
|
$
|
385,017
|
|
|
|
3.57
|
|
Issued
|
|
|
112,500
|
|
|
|
0.63
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(150,000
|
)
|
|
|
0.23
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding – March 31, 2017
|
|
|
1,458,750
|
|
|
$
|
0.36
|
|
|
$
|
400,329
|
|
|
|
3.65
|
|
Exercisable – March 31, 2017
|
|
|
1,338,193
|
|
|
$
|
0.36
|
|
|
$
|
365,368
|
|
|
|
3.64
|
|
A summary of unvested stock option activity is as follows:
|
|
Common
s
tock options
|
|
|
Weighted-average
exercise price
|
|
|
Aggregate intrinsic value
|
|
|
Weighted-average remaining contractual term (years)
|
|
Unvested – December 31, 2016
|
|
|
128,889
|
|
|
$
|
0.34
|
|
|
$
|
30,933
|
|
|
|
3.99
|
|
Granted
|
|
|
112,500
|
|
|
|
0.63
|
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(120,832
|
)
|
|
|
0.61
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Unvested – March 31, 2017
|
|
|
120,557
|
|
|
|
0.34
|
|
|
$
|
28,934
|
|
|
|
3.81
|
|
Warrants.
On August 29, 2016, in connection with the Term Loan Agreement, we issued the lenders the Warrants to purchase 1,965,780 shares of common stock at an initial exercise price of $0.30 per share. The number of shares of common stock issuable upon exercise of the Warrants, and/or the exercise price of such shares, is subject to standard anti-dilution adjustments in the event of stock splits, reorganizations, stock dividends, and similar events. As of the date of the Warrant Agreement, the shares of common stock issuable upon a full exercise of the Warrants would represent 5.0% of the total issued and outstanding shares of our common stock. The lenders were also granted the right, but not the obligation, to purchase up to 5.0% of the total number of new securities that we may, from time to time, sell and issue.
The Warrants expire on August 29, 2022, and may not be exercised prior to the earliest of (a) the fifth anniversary of the Term Loan Agreement, (b) the date on which the obligations described in the Term Loan Agreement are repaid in full, or (c) the date on which the Lender declares all or any portion of the outstanding amount of the Term Loan to be due and payable under the terms of the Term Loan Agreement (collectively, the "Trigger Date"). Exercise of the Warrants requires a sixty (60) day prior written notice, during which time we may exercise our Call Right described below.
The Warrant Agreement includes a call right (the "Call Right") whereby we can purchase the Warrants for a fixed sum of $1,333,333 upon providing the Warrant holders with a thirty (30) day prior written notice. Furthermore, the Warrant Agreement also includes a put right (the "Put Right") whereby the Lenders may require us to purchase from the Lenders all or any portion of the Warrants at a purchase price equal to the lesser of (a) the fair market value of the underlying shares of common stock as of the date of exercise of the Put Right, or (b) $1,333,333. The Put Right may not be exercised prior to the Trigger Date (as defined above), and the Put Right expires on August 29, 2022. The foregoing summary of the Term Loan Agreement and the Warrant Agreement is qualified in its entirety by reference to the respective agreements, which are found as Exhibits 99.1 and 99.2, respectively, to our Form 8-K filed with the SEC on August 29, 2016.
NOTE 14. 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.
|
14
|
•
|
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 lia
bilities 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 the carrying amount of these financial instruments due to their short-term nature. The estimated fair value of our long-term debt and capital lease obligations approximates their carrying value based upon our expected borrowing rate for debt with similar remaining maturities and comparable risk. As of
March 31, 2017,
the Warrants were
the only financial instrument measured at estimated fair value on a recurring basis.
NOTE 15. SUBSEQUENT EVENT
On May 1, 2017, we entered into an employment agreement (the “Employment Agreement”) with Harry C. Hagerty, pursuant to which Mr. Hagerty will serve as our Chief Financial Officer. The term of the Employment Agreement is through April 30, 2020. Pursuant to the Employment Agreement, Mr. Hagerty shall receive a base salary of $120,000 per annum and be eligible for bonuses if and as approved by the Compensation Committee of our Board of Directors. In addition, Mr. Hagerty will be granted stock options to purchase 400,000 shares of our Common Stock at an exercise price per share of $0.60, subject to vesting and other conditions.
15