UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2016
OR
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-30653
Galaxy Gaming, Inc.
(Exact name of small business issuer as specified in its charter)
Nevada |
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20-8143439 |
(State or other jurisdiction of incorporation or organization) |
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(IRS Employer |
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6767 Spencer Street, Las Vegas, NV 89119 |
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(Address of principal executive offices) |
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(702) 939-3254 |
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(Issuer’s telephone number) |
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the issuer has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer |
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☐ |
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Accelerated filer |
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☐ |
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Non-accelerated filer |
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☐ |
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Smaller Reporting Company |
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☒ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 39,315,591 common shares as of November 14, 2016.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2016
TABLE OF CONTENTS
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Page |
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PART I – FINANCIAL INFORMATION
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Item 1: |
1 |
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Item 2: |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
17 |
Item 3: |
20 |
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Item 4T: |
20 |
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PART II – OTHER INFORMATION
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Item 1: |
21 |
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Item 5: |
21 |
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Item 6: |
22 |
PART I - FINANCIAL INFORMATION
Our financial statements included in this Form 10-Q are as follows:
2 |
Condensed Balance Sheets as of September 30, 2016 (unaudited), and December 31, 2015 |
3 |
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4 |
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5 |
Condensed Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 (unaudited) |
6 |
1
GALAXY GAMING, INC.
ASSETS |
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September 30, 2016 |
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December 31, 2015 |
|
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Current assets: |
|
|
(Unaudited) |
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,823,657 |
|
|
$ |
570,623 |
|
Restricted cash |
|
|
87,850 |
|
|
|
97,859 |
|
Accounts receivable, net of allowance for bad debts of $27,190 and $30,944 |
|
|
1,937,343 |
|
|
|
1,828,669 |
|
Inventory |
|
|
484,442 |
|
|
|
411,700 |
|
Deferred tax asset |
|
|
— |
|
|
|
43,017 |
|
Prepaid expense and other |
|
|
99,905 |
|
|
|
108,827 |
|
Total current assets |
|
|
4,433,197 |
|
|
|
3,060,695 |
|
Property and equipment, net |
|
|
244,896 |
|
|
|
298,877 |
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Products leased and held for lease, net |
|
|
204,467 |
|
|
|
134,485 |
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Goodwill and other intangible assets, net |
|
|
13,235,698 |
|
|
|
14,352,636 |
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Deferred tax assets, net |
|
|
— |
|
|
|
82,562 |
|
Other assets, net |
|
|
299,918 |
|
|
|
41,793 |
|
Total assets |
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$ |
18,418,176 |
|
|
$ |
17,971,048 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
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Current liabilities: |
|
|
|
|
|
|
|
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Accounts payable |
|
$ |
563,445 |
|
|
$ |
1,421,848 |
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Accrued expenses |
|
|
976,834 |
|
|
|
823,964 |
|
Income taxes payable |
|
|
1,106,600 |
|
|
|
170,331 |
|
Deferred revenue |
|
|
870,628 |
|
|
|
717,690 |
|
Jackpot liabilities |
|
|
91,602 |
|
|
|
106,671 |
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Deferred tax liabilities |
|
|
75,358 |
|
|
|
— |
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Deferred rent, current portion |
|
|
12,753 |
|
|
|
6,197 |
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Current portion of long-term debt and capital lease obligations |
|
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909,009 |
|
|
|
4,707,316 |
|
Total current liabilities |
|
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4,606,229 |
|
|
|
7,954,017 |
|
Deferred rent, net |
|
|
42,532 |
|
|
|
52,643 |
|
Capital lease obligations, net |
|
|
54,898 |
|
|
|
78,008 |
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Warrant liability |
|
|
806,698 |
|
|
|
— |
|
Long-term debt, net |
|
|
9,028,235 |
|
|
|
7,436,171 |
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Total liabilities |
|
|
14,538,592 |
|
|
|
15,520,839 |
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Commitments and Contingencies (See Note 10) |
|
|
|
|
|
|
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Stockholders’ equity |
|
|
|
|
|
|
|
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Preferred stock, 10,000,000 shares authorized; $.001 par value; 0 shares issued and outstanding, respectively |
|
|
— |
|
|
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— |
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Common stock, 65,000,000 shares authorized; $.001 par value; 39,315,591 and 39,215,591 shares issued and outstanding, respectively |
|
|
39,316 |
|
|
|
39,216 |
|
Additional paid-in capital |
|
|
3,054,847 |
|
|
|
2,963,841 |
|
Accumulated earnings (deficit) |
|
|
785,421 |
|
|
|
(792,446 |
) |
Accumulated other comprehensive income |
|
|
— |
|
|
|
239,598 |
|
Total stockholders’ equity |
|
|
3,879,584 |
|
|
|
2,450,209 |
|
Total liabilities and stockholders’ equity |
|
$ |
18,418,176 |
|
|
$ |
17,971,048 |
|
The accompanying notes are an integral part of the financial statements.
2
GALAXY GAMING, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
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FOR THE THREE MONTHS ENDED September 30, |
|
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FOR THE NINE MONTHS ENDED September 30, |
|
|
||||||||||
|
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2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
|
||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product leases and royalties |
|
$ |
3,190,823 |
|
|
$ |
2,747,774 |
|
|
$ |
9,229,815 |
|
|
$ |
8,003,469 |
|
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Product sales and service |
|
|
1,146 |
|
|
|
7,074 |
|
|
|
10,425 |
|
|
|
18,073 |
|
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Total revenue |
|
|
3,191,969 |
|
|
|
2,754,848 |
|
|
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9,240,240 |
|
|
|
8,021,542 |
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Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cost of ancillary products and assembled components |
|
|
26,763 |
|
|
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22,890 |
|
|
|
78,075 |
|
|
|
70,168 |
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Selling, general and administrative |
|
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1,576,480 |
|
|
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1,736,024 |
|
|
|
4,850,785 |
|
|
|
4,995,984 |
|
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Research and development |
|
|
89,513 |
|
|
|
101,822 |
|
|
|
270,734 |
|
|
|
371,251 |
|
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Depreciation and amortization |
|
|
419,540 |
|
|
|
416,918 |
|
|
|
1,252,860 |
|
|
|
1,251,614 |
|
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Share-based compensation |
|
|
41,075 |
|
|
|
17,909 |
|
|
|
91,006 |
|
|
|
72,850 |
|
|
Total costs and expenses |
|
|
2,153,371 |
|
|
|
2,295,563 |
|
|
|
6,543,460 |
|
|
|
6,761,867 |
|
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Income from operations |
|
|
1,038,598 |
|
|
|
459,285 |
|
|
|
2,696,780 |
|
|
|
1,259,675 |
|
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Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement income |
|
|
697,214 |
|
|
|
— |
|
|
|
697,214 |
|
|
|
— |
|
|
Interest expense |
|
|
(227,632 |
) |
|
|
(248,604 |
) |
|
|
(741,045 |
) |
|
|
(799,407 |
) |
|
Loss on extinguishment of debt |
|
|
(87,578 |
) |
|
|
— |
|
|
|
(87,578 |
) |
|
|
— |
|
|
Change in estimated fair value of warrant liability |
|
|
2,933 |
|
|
|
— |
|
|
|
2,933 |
|
|
|
— |
|
|
Interest income |
|
|
56 |
|
|
|
2,084 |
|
|
|
202 |
|
|
|
13,288 |
|
|
Total other expense |
|
|
384,993 |
|
|
|
(246,520 |
) |
|
|
(128,274 |
) |
|
|
(786,119 |
) |
|
Income before provision for income taxes |
|
|
1,423,591 |
|
|
|
212,765 |
|
|
|
2,568,506 |
|
|
|
473,556 |
|
|
Provision for income taxes |
|
|
(602,619 |
) |
|
|
(93,059 |
) |
|
|
(990,639 |
) |
|
|
(219,418 |
) |
|
Net income |
|
$ |
820,972 |
|
|
$ |
119,706 |
|
|
$ |
1,577,867 |
|
|
$ |
254,138 |
|
|
Net income per share, basic and diluted |
|
$ |
0.02 |
|
|
$ |
0.00 |
|
|
$ |
0.04 |
|
|
$ |
0.01 |
|
|
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
39,315,591 |
|
|
|
39,040,775 |
|
|
|
39,372,944 |
|
|
|
39,040,775 |
|
|
Diluted |
|
|
39,465,676 |
|
|
|
39,079,102 |
|
|
|
39,559,494 |
|
|
|
39,079,102 |
|
|
The accompanying notes are an integral part of the financial statements.
3
GALAXY GAMING, INC.
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
|
FOR THE THREE MONTHS ENDED September 30, |
|
|
FOR THE NINE MONTHS ENDED September 30, |
|
||||||||||
|
|
2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
||||
Net income |
|
$ |
820,972 |
|
|
$ |
119,706 |
|
|
$ |
1,577,867 |
|
|
$ |
254,138 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax |
|
|
— |
|
|
|
120,193 |
|
|
|
— |
|
|
|
89,401 |
|
Total comprehensive income |
|
$ |
820,972 |
|
|
$ |
239,899 |
|
|
$ |
1,577,867 |
|
|
$ |
343,539 |
|
The accompanying notes are an integral part of the financial statements.
4
GALAXY GAMING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
FOR THE NINE MONTHS ENDED September 30, |
|
|||||
|
|
2016 |
|
|
2015 |
|
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Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,577,867 |
|
|
$ |
254,138 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,252,860 |
|
|
|
1,251,614 |
|
Amortization of debt issuance costs and debt discount |
|
|
136,710 |
|
|
|
156,474 |
|
Provision for bad debt expense |
|
|
— |
|
|
|
40,000 |
|
Inventory reserve |
|
|
— |
|
|
|
47,069 |
|
Loss on extinguishment of debt |
|
|
87,578 |
|
|
|
— |
|
Change in estimated fair value of warrant liability |
|
|
(2,933 |
) |
|
|
— |
|
Deferred income tax provision |
|
|
54,370 |
|
|
|
219,418 |
|
Share-based compensation |
|
|
91,006 |
|
|
|
72,850 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Decrease in restricted cash |
|
|
10,009 |
|
|
|
9,392 |
|
Increase in accounts receivable |
|
|
(107,969 |
) |
|
|
(197,139 |
) |
Decrease in other current assets |
|
|
43,017 |
|
|
|
62,314 |
|
Increase in inventory |
|
|
(181,319 |
) |
|
|
(125,820 |
) |
Decrease (increase) in prepaid expenses and other current assets |
|
|
6,608 |
|
|
|
(65,538 |
) |
(Decrease) increase in accounts payable |
|
|
(858,954 |
) |
|
|
495,891 |
|
Increase in income tax payable |
|
|
936,269 |
|
|
|
— |
|
Increase in accrued expenses |
|
|
141,841 |
|
|
|
23,037 |
|
Increase in deferred revenue |
|
|
152,938 |
|
|
|
65,227 |
|
Decrease in jackpot liabilities |
|
|
(15,069 |
) |
|
|
(6,296 |
) |
Decrease in deferred rent |
|
|
(3,555 |
) |
|
|
(957 |
) |
Net cash provided by operating activities |
|
|
3,321,274 |
|
|
|
2,301,674 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of property and equipment |
|
|
(43,345 |
) |
|
|
(44,980 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds received from long-term debt |
|
|
932,126 |
|
|
|
— |
|
Principal payments on capital lease obligations |
|
|
(51,698 |
) |
|
|
(49,186 |
) |
Principal payments on long-term debt |
|
|
(2,873,437 |
) |
|
|
(2,662,699 |
) |
Net cash used in financing activities |
|
|
(1,993,009 |
) |
|
|
(2,711,885 |
) |
Effect of exchange rate changes on cash |
|
|
(31,886 |
) |
|
|
(1,962 |
) |
Net increase (decrease) in cash and cash equivalents |
|
|
1,253,034 |
|
|
|
(457,153 |
) |
Cash and cash equivalents – beginning of period |
|
|
570,623 |
|
|
|
560,184 |
|
Cash and cash equivalents – end of period |
|
$ |
1,823,657 |
|
|
$ |
103,031 |
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
753,250 |
|
|
$ |
800,830 |
|
Inventory transferred to leased assets |
|
$ |
108,577 |
|
|
$ |
39,896 |
|
Cash paid for income taxes |
|
$ |
35,000 |
|
|
$ |
— |
|
Supplemental non-cash financing activities information: |
|
|
|
|
|
|
|
|
Effect of exchange rate on long-term debt payable in foreign currency |
|
$ |
336,485 |
|
|
$ |
119,414 |
|
Issuance of warrants in conjunction with term loan |
|
$ |
809,631 |
|
|
$ |
— |
|
Points paid on term loan |
|
$ |
262,500 |
|
|
$ |
— |
|
The accompanying notes are an integral part of the financial statements.
5
GALAXY GAMING, INC.
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS
Unless the context indicates otherwise, references to “Galaxy Gaming, Inc.,” “we,” “us,” “our,” or the “Company,” refer to Galaxy Gaming, Inc., a Nevada corporation. “GGLLC” refers to Galaxy Gaming, LLC, a Nevada limited liability company that was a predecessor of the Company’s business, but is not directly associated with Galaxy Gaming, Inc.
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.
Casinos use our proprietary products to enhance their gaming floor operations and improve their profitability, productivity and security, as well as offer popular cutting-edge gaming entertainment content and technology to their players. We market our products to land-based, riverboat and cruise ship and internet gaming companies. The game concepts and the intellectual property associated with these games are typically protected by patents, trademarks and/or copyrights. We market our products primarily via our internal sales force to casinos throughout North America, the Caribbean, the British Isles, Europe, and Africa and to cruise ships and internet gaming sites worldwide.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
This summary of our significant accounting policies is presented to assist in understanding our financial statements. The financial statements and notes are representations of our management team, who are responsible for their integrity and objectivity.
Basis of presentation. As permitted by the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“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.
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 the Company’s 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 the Company’s Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on March 30, 2016.
Basis of accounting. The financial statements have been prepared on the accrual basis of accounting in conformity with U.S. GAAP. Revenues are recognized as income when earned and expenses are recognized when they are incurred. We do not have significant categories of cost as our income 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.
Cash and cash equivalents. We consider cash on hand, cash in banks, certificates of deposit, and other short-term securities with maturities of three months or less when purchased, as cash and cash equivalents. Our bank accounts are deposited in insured institutions. The funds are insured up to $250,000 per account. To date, we have not experienced uninsured losses.
Restricted cash. We are required by gaming regulation to maintain sufficient reserves in restricted accounts to be used for the purpose of funding payments to winners of our jackpots offered. Compliance with restricted cash requirements for jackpot funding is reported to gaming authorities in various jurisdictions.
Inventory. Inventory consists of ancillary products such as signs, layouts, and bases for the various games and electronic devices and components. Inventory value (Note 3) is determined by the average cost method and management maintains inventory levels based on historical and industry trends. We regularly assess inventory quantities for excess and obsolescence primarily based on forecasted product demand.
Products leased and held for lease. We develop products intended primarily to be leased by casinos, which are stated at cost, net of depreciation (Note 5). Depreciation on leased products is calculated using the straight-line method over a three-year period
6
Property and equipment. Property and equipment (Note 4) are being depreciated over their estimated useful lives of 3 to 5 years, using the straight-line method.
Goodwill. Goodwill was created as a result of an acquisition in October 2011 (discussed in more detail in Note 9). Goodwill is assessed for impairment at least annually and if found to be impaired, its carrying amount will be reduced and an impairment loss will be recognized.
Other intangible assets. Our finite-lived intangible assets (Note 6) are being amortized using the straight-line method over the following estimated economic lives:
Licensing agreements |
|
60 months |
Patents |
|
87 - 132 months |
Trademarks |
|
144 - 360 months |
Client relationships |
|
264 months |
Intangible assets are analyzed for potential impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable.
Impairment of long-lived assets. We continually monitor events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances are present, we assess the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell.
Leases. We recognize rent expense for operating leases (Note 10) on a straight-line basis (including the effect of reduced or free rent and rent escalations) over the applicable lease term. The difference between the cash paid to the landlord and the amount recognized as rent expense on a straight-line basis is recorded as deferred rent. The landlord of our corporate headquarters financed leasehold improvements in the amount of $150,000. These improvements have been recorded as a capital lease and amortized over the life of the lease.
Revenue recognition. Revenue is primarily derived from the licensing of our products and intellectual property. Consistent with our strategy, revenue is generated from negotiated month-to-month recurring licensing fees or the performance of our products, or both. We also, occasionally, receive a one-time sale of certain products and/or reimbursement of our manufactured equipment.
Substantially all of our revenue is recognized when it is earned. Depending upon the product and negotiated terms, our clients may be invoiced monthly in advance, monthly in arrears or quarterly in arrears for the licensing of our products. If billed in advance, the advance billings are recorded as deferred revenue until earned. If billed in arrears, we recognize the corresponding preceding period’s revenue upon invoicing at the subsequent date. Generally, we begin earning revenue with the installation or “go live” date of the associated product in our clients’ establishment. The monthly recurring invoices are based on executed agreements with each client.
Additionally, clients may be invoiced for product sales at the time of shipment or delivery of the product. Revenue from the sale of our associated products is recognized when the following criteria are met:
|
(1) |
Persuasive evidence of an arrangement between us and our client exists; |
|
(2) |
Shipment has occurred; |
|
(3) |
The price is fixed and/or determinable; and |
|
(4) |
Collectability is reasonably assured or probable. |
We do not segregate the portion of revenue between manufactured equipment and any software or electronic devices needed to use the equipment when the system is provided, nor do we market the software separately from the equipment.
Costs of ancillary products and assembled components. Ancillary products include paytables (display of payouts), bases, layouts, signage and other items as they relate to support 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 the Bonus Jackpot System and SpectrumVision.
7
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. For non-US functional accounts, assets and liabilities are translated at exchange rates in effect at the balance sheet date, and income and expense accounts at the average exchange rates for the year. Resulting currency translation adjustments are recorded as a separate component of shareholders’ equity. We record foreign currency transactions at the exchange rate prevailing at the date of the transaction with resultant gains and losses being included in results of operations. Realized foreign currency transaction gains and losses have not been significant for any period presented.
Income taxes. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. We recognize the tax benefit from an uncertain tax position if we believe it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. Judgment is required in determining the provision for incomes taxes and related accruals, deferred tax assets and liabilities. Additionally, our tax returns for tax years 2013 and thereafter remain open for examination by various tax authorities.
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 warrants, if applicable, during the year, using the treasury stock method.
Share-based compensation. We recognize compensation expense for all share-based awards made to employees, directors and independent contractors. The fair value of share based awards (Note 11) 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.
Share based compensation is recognized only for those awards that are ultimately expected to vest, and we have applied or estimated forfeiture rate to unvested awards for purposes of calculating compensation costs. These estimates will be revised in future periods if actual forfeitures differ from the estimates. Changes in forfeiture estimates impact compensation cost in the period in which the change in estimate occurs.
Warrant accounting. We account for common stock warrants pursuant to the applicable guidance on accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, on the understanding that in compliance with applicable securities laws, registered warrants require the issuance of unregistered securities upon exercise. We classify warrants on the balance sheet as a long-term liability, which is revalued at each balance sheet date subsequent to the initial issuance. Determining the appropriate fair-value model and calculating the fair value of warrants requires considerable judgment, including estimating stock price volatility and expected warrant life. We develop our estimates based on historical data. A small change in the estimates used may have a relatively large change in the estimated valuation. We use the Black-Scholes pricing model to value the registered warrants. Changes in the fair market value of the warrants are reflected in the statement of operations as “Change in the fair value of warrant liability.” No warrants have been exercised as of September 30, 2016.
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.
New accounting standards not yet adopted
Revenue Recognition. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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,
8
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 the company expects 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.
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 and 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. The prospective adoption of the ASU is required and we are currently evaluating the impact of adopting this guidance.
Deferred Taxes. In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which eliminates the requirement to present deferred tax liabilities and assets as current and non-current in a classified balance sheet. Instead, all deferred tax assets and liabilities will be required to be presented as non-current. The ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The amendments in this guidance may be applied prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented with earlier application permitted for financial statements that have not been issued. This ASU is not expected to have a material impact on our financial statements.
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 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. We are currently evaluating the impact of adopting this guidance.
NOTE 3. INVENTORY
Inventory consisted of the following at:
|
|
September 30, 2016 |
|
|
December 31, 2015 |
|
||
Raw materials and component parts |
|
$ |
320,868 |
|
|
$ |
231,709 |
|
Finished goods |
|
|
168,151 |
|
|
|
170,528 |
|
Work-in-process |
|
|
25,423 |
|
|
|
39,463 |
|
|
|
|
514,442 |
|
|
|
441,700 |
|
Less: inventory reserve |
|
|
(30,000 |
) |
|
|
(30,000 |
) |
|
|
$ |
484,442 |
|
|
$ |
411,700 |
|
9
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment, substantially all of which collateralizes long-term obligations (Notes 8 and 9), consisted of the following at:
|
|
September 30, 2016 |
|
|
December 31, 2015 |
|
||
Furniture and fixtures |
|
$ |
238,273 |
|
|
$ |
211,411 |
|
Leasehold improvements |
|
|
156,843 |
|
|
|
156,843 |
|
Automotive vehicles |
|
|
94,087 |
|
|
|
94,087 |
|
Computer equipment |
|
|
96,956 |
|
|
|
89,203 |
|
Office equipment |
|
|
37,871 |
|
|
|
29,140 |
|
|
|
|
624,030 |
|
|
|
580,684 |
|
Less: accumulated depreciation |
|
|
(379,134 |
) |
|
|
(281,807 |
) |
|
|
$ |
244,896 |
|
|
$ |
298,877 |
|
As of September 30, 2016, property and equipment includes $243,970 of assets acquired under capital leases (Note 8). Accumulated depreciation of assets under capital leases totaled $148,500 as of September 30, 2016.
NOTE 5. PRODUCTS LEASED AND HELD FOR LEASE
Products leased and held for lease consisted of the following at:
|
|
September 30, 2016 |
|
|
December 31, 2015 |
|
||
Enhanced table systems |
|
$ |
397,261 |
|
|
$ |
288,683 |
|
Less: accumulated depreciation |
|
|
(192,794 |
) |
|
|
(154,198 |
) |
|
|
$ |
204,467 |
|
|
$ |
134,485 |
|
NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and finite-lived intangible assets consisted of the following at:
|
|
September 30, 2016 |
|
|
December 31, 2015 |
|
||
Goodwill |
|
$ |
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 |
|
Licensing agreements |
|
|
35,000 |
|
|
|
35,000 |
|
|
|
|
20,450,967 |
|
|
|
20,450,967 |
|
Less: accumulated amortization |
|
|
(8,306,269 |
) |
|
|
(7,189,331 |
) |
|
|
|
12,144,698 |
|
|
|
13,261,636 |
|
|
|
$ |
13,235,698 |
|
|
$ |
14,352,636 |
|
10
NOTE 7. ACCRUED EXPENSES
Accrued expenses, consisted of the following at:
|
|
September 30, 2016 |
|
|
December 31, 2015 |
|
||
Royalties |
|
$ |
33,157 |
|
|
$ |
259,193 |
|
TableMAX reimbursement |
|
|
392,358 |
|
|
|
136,785 |
|
Salaries and payroll taxes |
|
|
275,015 |
|
|
|
95,115 |
|
Trade show expenses |
|
|
85,275 |
|
|
|
78,549 |
|
Vacation |
|
|
85,834 |
|
|
|
62,546 |
|
Professional fees |
|
|
69,286 |
|
|
|
154,888 |
|
Commissions |
|
|
33,282 |
|
|
|
22,056 |
|
Accrued interest |
|
|
2,627 |
|
|
|
14,832 |
|
|
|
$ |
976,834 |
|
|
$ |
823,964 |
|
NOTE 8. CAPITAL LEASE OBLIGATIONS
Capital lease obligations consisted of the following at:
|
|
September 30, 2016 |
|
|
December 31, 2015 |
|
||
Capital lease obligation – leasehold improvements |
|
$ |
85,506 |
|
|
$ |
107,365 |
|
Capital lease obligation – office furniture |
|
|
— |
|
|
|
29,839 |
|
|
|
|
85,506 |
|
|
|
137,204 |
|
Less: Current portion |
|
|
(30,608 |
) |
|
|
(59,196 |
) |
|
|
$ |
54,898 |
|
|
$ |
78,008 |
|
Future annual payments for capital leases obligations are as follows for the years ending September 30:
|
|
Total |
|
|
2017 |
|
$ |
34,545 |
|
2018 |
|
|
34,545 |
|
2019 |
|
|
23,030 |
|
2020 |
|
|
— |
|
Total minimum lease payments |
|
$ |
92,120 |
|
Less: amount representing interest |
|
|
(6,614 |
) |
|
|
$ |
85,506 |
|
11
NOTE 9. LONG-TERM DEBT
Long-term debt consisted of the following at:
|
|
September 30, 2016 |
|
|
December 31, 2015 |
|
||
Term loan |
|
$ |
10,500,000 |
|
|
$ |
— |
|
Note payable, unrelated party |
|
|
— |
|
|
|
11,577,858 |
|
Notes payable, related party |
|
|
527,102 |
|
|
|
1,079,083 |
|
Equipment notes payable |
|
|
58,402 |
|
|
|
70,664 |
|
|
|
|
11,085,504 |
|
|
|
12,727,605 |
|
Less: |
|
|
|
|
|
|
|
|
Unamortized debt issuance costs |
|
|
(369,236 |
) |
|
|
— |
|
Warrants issued |
|
|
(809,632 |
) |
|
|
— |
|
Debt discount |
|
|
— |
|
|
|
(643,314 |
) |
|
|
|
9,906,636 |
|
|
|
12,084,291 |
|
Less: Current portion |
|
|
(878,401 |
) |
|
|
(4,648,120 |
) |
|
|
$ |
9,028,235 |
|
|
$ |
7,436,171 |
|
Term loan credit facility. In August 2016, we entered into a 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 will be used for general corporate purposes and working capital needs. The Term Loan is secured by a senior lien on the Company's assets. In conjunction with the Term Loan, we issued the lenders a six-year warrant to purchase 1,965,780 shares of the Company’s common stock (the “Warrants”) (Note 13).
Under the Term Loan, the Company is 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 are not aware of any noncompliance with the financial covenants of the Term Loan Agreement.
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 the Company achieves a specified leverage ratio.
The Term Loan requires quarterly interest-only payments through December 31, 2016 after which the Company is 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.
Note payable, unrelated party. In connection with an asset acquisition in October 2011, we executed a promissory note payable for $12.2 million, and another promissory note payable for £6.4 million GBP ($10.0 million USD). The notes were recorded net of a debt discount of $1,530,000. The effective interest rate of the notes was 6% and 7% during 2015 and 2016, respectively. These notes were repaid in full in connection with the Term Loan agreement executed in August 2016. Concurrently with the repayment of the note obligation payable in GBP, $239,598 of previously unrecognized gains on foreign exchange translations related to the GBP note payable were reclassified out of accumulated other comprehensive income and factored into the calculation of loss on debt extinguishment.
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.
In October 2015, our CEO loaned the Company $500,000 for working capital purposes, in exchange for a promissory note. In April 2016, pursuant to the terms of the agreement, we paid the CEO $535,000 in full satisfaction of the balance due, relieving us of any further payments or obligations under this arrangement.
12
As of September 30, 2016, maturities of our long-term debt obligations are as follows:
Twelve months ending September 30, |
|
Total |
|
|
2017 |
|
$ |
878,401 |
|
2018 |
|
|
1,147,294 |
|
2019 |
|
|
1,442,486 |
|
2020 |
|
|
1,054,823 |
|
2021 |
|
|
6,562,500 |
|
Total notes payable |
|
|
11,085,504 |
|
Less: |
|
|
|
|
Unamortized debt issuance costs |
|
|
(369,236 |
) |
Warrants issued |
|
|
(809,632 |
) |
Notes payable, net |
|
$ |
9,906,636 |
|
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 nine months ended September 30, 2016 and 2015, respectively, we had the following client revenue concentrations:
|
|
Location |
|
2016 Revenue |
|
|
2015 Revenue |
|
||
Client A |
|
North America |
|
|
13.6% |
|
|
|
14.8% |
|
Client B |
|
North America |
|
|
6.9% |
|
|
|
5.5% |
|
Client C |
|
North America |
|
|
6.2% |
|
|
|
6.8% |
|
Client D |
|
North America |
|
|
5.7% |
|
|
|
3.5% |
|
Client E |
|
United Kingdom |
|
|
5.3% |
|
|
|
6.7% |
|
We are also exposed to risks associated with the expiration of our patents. Domestic and international patents for two of our products expired in June 2015. The patents accounted for approximately $4,299,637 or 47% of our revenue for the nine months ended September 30, 2016 and $4,283,055 or 53% of revenue for the nine months ended September 30, 2015.
Operating lease. In February 2014, we entered into a lease (the “Spencer Lease”) for a new corporate office with an unrelated third party. The 5-year Spencer Lease is for a building approximately 24,000 square feet in size, located in Las Vegas, Nevada.
The initial term of the Spencer Lease commenced on April 1, 2014. We paid approximately $153,000 in annual base rent in the first year, which increases 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 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 $165,856 and $171,840 for the nine months ended September 30, 2016 and 2015, respectively.
13
Future minimum lease payments are as follows:
Twelve Months Ending September 30, |
|
Annual Obligation |
|
|
2017 |
|
$ |
229,236 |
|
2018 |
|
|
237,972 |
|
2019 |
|
|
184,794 |
|
2020 |
|
|
1,401 |
|
2021 |
|
|
— |
|
|
|
$ |
653,403 |
|
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, that are complex in nature and have outcomes that are difficult to predict. In accordance with U.S. GAAP, we record accruals for such contingencies to the extent that 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, statute 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 annual report on Form 10-K for the year ended December 31, 2015. Except as discussed in the following paragraph, there are no material updates to matters previously reported on Form 10-K for the year ended December 31, 2015.
On July 11, 2016, we entered into a settlement agreement (the "Settlement Agreement") with Red Card Gaming, Inc. ("RCG"), and AGS, LLC ("AGS") for purposes of resolving all disputes between the parties. Pursuant to the Settlement Agreement, among other things, RCG, AGS and the Company agreed to a mutual release of all claims and counter-claims. RCG and AGS also agreed to terminate all of their rights and obligations related to the APA, and AGS agreed to pay us the sum of $350,000 and agreed to the injunctive terms of the Final Award. Furthermore, we agreed to dismiss the complaint they filed in November 2014 against In Bet Gaming, Inc. and In Bet, LLC (collectively "In Bet"), alleging that In Bet's In-Between side bet game infringed on one of our patents. AGS became involved in an Inter-Parties Review subsequent to November 2014, concerning the patent at issue because AGS had title and interest in the game In-Between. As a result of the Settlement Agreement, we recognized settlement income of $697,214, calculated as follows:
Settlement Income |
|
Amount |
|
|
Release of accrued royalties owed to AGS |
|
$ |
347,214 |
|
Payment from AGS |
|
|
350,000 |
|
|
|
$ |
697,214 |
|
NOTE 11. STOCKHOLDERS’ EQUITY
In April 2015, one of our Directors, was granted 75,000 shares of our restricted common stock as condition of his Board of Directors Director Service Agreement. The fair market value of the grant was $22,500, which was determined using our closing stock price as April 1, 2015, the date of the grant. The restricted stock grant vested immediately.
In November 2015, our CFO, was granted 150,000 shares of our restricted common stock as condition of his Employment Agreement. The fair market value of the grant was $30,000, which was determined using our closing stock price at November 14, 2015, the date of the grant. Beginning June 30, 2016, the restricted stock will vest at six-month intervals through December 31, 2018.
As a condition of his 2015 employment agreement, our CFO can elect to use up to 50% of his annual bonus to purchase shares of the Company’s common stock at a 50% discount. The purchase price is determined by using the average closing price of the prior 10 business days discounted by 50%. On February 28, 2016, our CFO made the election to utilize $9,000 of his annual 2015 bonus to purchase 100,000 shares of common stock at the market price of $0.18 (effective price of $0.09 after discount). The shares vested immediately.
14
NOTE 12. INCOME TAXES
Our forecasted effective tax rate at September 30, 2016 is 40.8%, a 6.8% decrease from the 47.6% effective tax rate recorded at September 30, 2015. After a discrete benefit of $65,078, the effective tax rate for the nine months ended September 30, 2016 was 38.2%. The discrete tax benefit was primarily due to changes in positions taken for uncertain tax positions.
NOTE 13. STOCK WARRANTS, OPTIONS AND GRANTS
Stock options. For the nine months ended September 30, 2016 and 2015, we issued 427,500 and 412,500 stock options, respectively. Stock options issued to members of our Board of Directors were 225,000 and 200,000 for the nine months ended September 30, 2016 and 2015, respectively. Stock options issued to independent contractors were 112,500 for each of the nine month periods ended September 30, 2016 and 2015, respectively.
During the nine months ended September 30, 2016, we issued 90,000 stock options to two employees, with a vesting period of three years. The strike price was equal to the stock price at the date of the grant. During the nine months ended September 30, 2015, we issued 100,000 stock options to an employee, with a vesting period of three years. The strike price was equal to the stock price at the date of the grant.
The value of all stock options granted for the nine months ended September 30, 2016 and 2015 was determined to be $85,606 and $52,600, respectively, using the Black-Scholes option pricing model with the following assumptions:
|
|
Options Issued Nine Months Ended September 30, 2016 |
|
|
Options Issued Nine Months Ended September 30, 2015 |
|
||
Dividend yield |
|
|
0% |
|
|
|
0% |
|
Expected volatility |
|
89% - 90% |
|
|
84% - 85% |
|
||
Risk free interest rate |
|
1.01% - 1.22% |
|
|
1.37% - 1.63% |
|
||
Expected life (years) |
|
|
5.00 |
|
|
|
5.00 |
|
A summary of stock option activity is as follows:
|
|
Common stock options |
|
|
Weighted-average exercise price |
|
||
Outstanding – January 1, 2015 |
|
|
381,250 |
|
|
$ |
0.36 |
|
Issued |
|
|
675,000 |
|
|
|
0.23 |
|
Exercised |
|
|
— |
|
|
|
— |
|
Expired |
|
|
— |
|
|
|
— |
|
Outstanding – December 31, 2015 |
|
|
1,056,250 |
|
|
$ |
0.28 |
|
Issued |
|
|
427,500 |
|
|
|
0.33 |
|
Exercised |
|
|
— |
|
|
|
— |
|
Expired |
|
|
— |
|
|
|
— |
|
Outstanding – September 30, 2016 |
|
|
1,483,750 |
|
|
$ |
0.29 |
|
Exercisable – September 30, 2016 |
|
|
1,143,750 |
|
|
$ |
0.30 |
|
Share based compensation. The cost of all stock options issued has been classified as share based compensation for the nine months ended September 30, 2016 and 2015, respectively. Total share based compensation was $91,006 and $72,850 for the nine months ended September 30, 2016 and 2015, respectively.
Warrants. On August 29, 2016, in connection with the Term Loan agreement, the Company entered into a Warrant Agreement (the "Warrant Agreement") with the lenders pursuant to which the Company issued warrants to purchase 1,965,780 shares of common stock at an initial exercise price of $0.30 per share (the "Warrants"). 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 the Company's 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 the Company may, from time to time, sell and issue.
15
The Warrants expire on August 29, 2022, and may not be exercised prior to the earliest of (a) the fifth anniversary of the Loan Agreement, (b) the date on which the obligations described in the 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 Loan Agreement (collectively, the "Trigger Date"). Exercise of the Warrants requires a sixty (60) day prior written notice, during which time the Company may exercise its Call Right described below.
The Warrant Agreement includes a call right (the "Call Right") whereby the Company 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 the Company 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.
A summary of warrant activity is as follows:
|
|
Common stock warrants |
|
|
Weighted-average exercise price |
|
||
Outstanding – December 31, 2015 |
|
|
— |
|
|
|
— |
|
Issued |
|
|
1,965,780 |
|
|
|
0.30 |
|
Exercised |
|
|
— |
|
|
|
— |
|
Expired |
|
|
— |
|
|
|
— |
|
Outstanding – September 30, 2016 |
|
|
1,965,780 |
|
|
$ |
0.30 |
|
Exercisable – September 30, 2016 |
|
|
— |