Brightline Interactive, Inc 8-K/A, filed Apr 6, 2022
Brightline Interactive, Inc. (BTLN)
About this 8-K/A
Brightline Interactive, Inc filed this 8-K/A on April 6, 2022, reporting on events of February 1, 2022.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 1)
CURRENT REPORT
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EXPLANATORY NOTE
On February 1, 2022, The Glimpse Group, Inc., a Nevada corporation (the “Company”), filed a Current Report on Form 8-K to report the completion of its acquisition of Sector 5 Digital, LLC, a Texas limited liability company (“S5D”). This Current Report on Form 8-K/A is filed as an amendment to the Current Report on Form 8-K filed by the Company on February 1, 2022, solely to include the financial information described in Item 9.01 below that was previously omitted in accordance with Item 9.01(a) and Item 9.01(b) of Form 8-K.
Item 9.01 Financial Statements and Exhibits
(a) Financial Statements of business acquired.
The audited financial statements and accompanying notes of S5D as of and for the years ended December 31, 2021 and 2020 are filed herewith as Exhibit 99.1 and are incorporated by reference herein.
(b) Pro forma financial information.
The unaudited pro forma condensed combined financial information of the Company as of and for the six months ended December 31, 2021 are filed herewith as Exhibit 99.2 and incorporated by reference herein.
The unaudited pro forma condensed combined financial information of the Company for the year ended June 30, 2021 are filed herewith as Exhibit 99.2 and incorporated by reference herein.
(d) Exhibits
| Exhibit
No. |
Description | |
| 23.1 | Consent of Hoberman & Lesser CPA’s, LLP dated April 5, 2022. | |
| 99.1 | Audited financial statements of Sector 5 Digital, LLC as of and for the years ended December 31, 2021 and 2020. | |
| 99.2 | Unaudited pro forma condensed combined financial information and financial statements of The Glimpse Group, Inc. as of and for the six months ended December 31, 2021 and the year ended June 30, 2021. | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: April 5, 2022
| THE GLIMPSE GROUP, INC. | ||
| By: | /s/ Lyron Bentovim | |
| Lyron Bentovim | ||
| Chief Executive Officer | ||
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITOR
We hereby consent to the inclusion in this Form 8-K/A of our report dated March 22, 2022, relating to the financial statements of Sector 5 Digital, LLC for the years ended December 31, 2021 and 2020.
/s/ Hoberman & Lesser CPA’s, LLP
April 5, 2022
New York, New York
Exhibit 99.1
SECTOR 5 DIGITAL, LLC
FINANCIAL STATEMENTS
YEARS ENDED
DECEMBER 31, 2021 AND 2020
SECTOR 5 DIGITAL, LLC
CONTENTS
| Independent Auditor’s Report | 1 – 2 |
| Financial Statements: | |
| Balance Sheets | 3 |
| Statement of Operations | 4 |
| Statement of Changes in Members’ Equity | 5 |
| Statements of Cash Flows | 6 |
| Notes to Financial Statements | 7 – 15 |
To the Stockholders and Board of Directors
Sector 5 Digital, LLC
Opinion
We have audited the accompanying financial statements of Sector 5 Digital, LLC (a Texas limited liability company) which comprise the balance sheets as of December 31, 2021 and 2020, and the related statements of operations, members’ equity and cash flows for the years then ended, and the related notes to the financial statements.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sector 5 Digital, LLC as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of Sector 5 Digital, LLC and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Sector 5 Digital, LLC’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with generally accepted auditing standards will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
| 1 |
In performing an audit in accordance with generally accepted auditing standards, we:
| ● | Exercise professional judgment and maintain professional skepticism throughout the audit. | |
| ● | Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. | |
| ● | Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Sector 5 Digital, LLC’s internal control. Accordingly, no such opinion is expressed. | |
| ● | Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. | |
| ● | Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about Sector 5 Digital, LLC’s ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit.
New York, New York
March 22, 2022
| 2 |
SECTOR 5 DIGITAL, LLC
December 31, 2021 and 2020
| 2021 | 2020 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 798,220 | $ | 1,081,549 | ||||
| Accounts receivable | 375,010 | 381,420 | ||||||
| Contract assets (costs in excess of billings) | 688 | |||||||
| Prepaid expenses and other current assets | 36,989 | 29,310 | ||||||
| Total Current Assets | 1,210,907 | 1,492,279 | ||||||
| Property and equipment, net | 153,520 | 204,741 | ||||||
| Other assets | ||||||||
| Security deposits and other assets | 9,246 | 9,246 | ||||||
| Total Assets | $ | 1,373,673 | $ | 1,706,266 | ||||
| Liabilities and Members’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 113,840 | $ | 67,940 | ||||
| Contract liabilities (billings in excess of costs) | 459,864 | 736,538 | ||||||
| Sales tax payable | 50,280 | 37,548 | ||||||
| Capital lease payable | 8,505 | 10,761 | ||||||
| Total Current Liabilities | 632,489 | 852,787 | ||||||
| Long-Term Liabilities | ||||||||
| Paycheck Protection Program loan | 434,400 | |||||||
| Total Liabilities | 632,489 | 1,287,187 | ||||||
| Commitments and Contingencies | ||||||||
| Members’ Equity | 741,184 | 419,079 | ||||||
| Total Liabilities and Members’ Equity | $ | 1,373,673 | $ | 1,706,266 | ||||
See accompanying notes to financial statements.
| 3 |
SECTOR 5 DIGITAL, LLC
Years Ended December 31, 2021 and 2020
| 2021 | 2020 | |||||||
| Revenue, net | $ | 3,910,916 | $ | 2,464,273 | ||||
| Costs of services | 1,460,043 | 838,788 | ||||||
| Gross Profit | 2,450,873 | 1,625,485 | ||||||
| Operating Expenses | ||||||||
| Research and development expenses | 912,386 | 783,879 | ||||||
| General and administrative expenses | 977,057 | 963,653 | ||||||
| Sales and marketing expense | 568,805 | 557,948 | ||||||
| Total Operating Expenses | 2,458,248 | 2,305,480 | ||||||
| Loss from Operations Before Other Income (Expense) | (7,375 | ) | (679,995 | ) | ||||
| Other Income (Expense) | ||||||||
| Forgiveness of Paycheck Protection Program loans | 889,598 | |||||||
| Grant income | 50,000 | |||||||
| Other income(expense), net | 138 | (957 | ) | |||||
| Total Other Income (Expense), net | 939,736 | (957 | ) | |||||
| Net Income (Loss) | $ | 932,361 | ($ | 680,952 | ) | |||
See accompanying notes to financial statements.
| 4 |
SECTOR 5 DIGITAL, LLC
Statement of Changes in Members’ Equity
Years Ended December 31, 2021 and 2020
| 2021 | 2020 | |||||||
| Balance, beginning | $ | 419,079 | $ | 1,257,430 | ||||
| Members’ distributions | (610,256 | ) | (157,399 | ) | ||||
| Net Income (Loss) | 932,361 | (680,952 | ) | |||||
| Balance, ending | $ | 741,184 | $ | 419,079 | ||||
See accompanying notes to financial statements.
| 5 |
SECTOR 5 DIGITAL, LLC
Years Ended December 31, 2021 and 2020
| 2021 | 2020 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net income (loss) | $ | 932,361 | $ | (680,952 | ) | |||
| Adjustments to Reconcile Net Income (Loss) to | ||||||||
| Net Cash Provided by (Used in) Operating Activities | ||||||||
| Depreciation and amortization | 111,070 | 103,669 | ||||||
| Forgiveness of Paycheck Protection Program loans | (889,598 | ) | ||||||
| Changes in Operating Assets and Liabilities | ||||||||
| Accounts receivable | 6,410 | 1,105,478 | ||||||
| Contact assets (costs in excess of billings) | (688 | ) | 7,668 | |||||
| Prepaid expenses and other current assets | (7,679 | ) | (15,197 | ) | ||||
| Accounts payable and accrued expenses | 45,900 | (76,283 | ) | |||||
| Contract liabilities (billings in excess of costs) | (276,674 | ) | (304,693 | ) | ||||
| Sales tax payable | 12,732 | (98,491 | ) | |||||
| Net Cash Provided by (Used in) Operating Activities | (66,166 | ) | 41,199 | |||||
| Cash Flows from Investing Activity | ||||||||
| Acquisition of property and equipment | (59,849 | ) | (9,609 | ) | ||||
| Net Cash Used in Investing Activity | (59,849 | ) | (9,609 | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from Paycheck Protection Program loan | 455,198 | 434,400 | ||||||
| Payments for lease payable | (2,256 | ) | (9,255 | ) | ||||
| Members’ distributions | (610,256 | ) | (157,399 | ) | ||||
| Net Cash Provided by (Used in) Financing Activities | (157,314 | ) | 267,746 | |||||
| Net Increase (Decrease) in Cash and Cash Equivalents | (283,329 | ) | 299,336 | |||||
| Cash and Cash Equivalents – beginning | 1,081,549 | 782,213 | ||||||
| Cash and Cash Equivalents – ending | $ | 798,220 | $ | 1,081,549 | ||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | 1,508 | $ | 2,000 | ||||
See accompanying notes to financial statements.
| 6 |
SECTOR 5 DIGITAL, LLC
For the Years Ended December 31, 2021 and 2020
| 1. | Description of Business | Sector 5 Digital, LLC (“Sector 5”) is a virtual (VR) and augmented (AR) reality company, which assists customers with innovative digital content for marketing, communications, sales, entertainment, conferences, virtual events, training and simulation. Sector 5 combines innovative storytelling with emerging technologies for industry leading organizations. |
Profits, losses and distributions are allocated to members as provided for in the member agreement.
As a limited liability company, the members are not liable for the debts, obligations, or liabilities of Sector 5, whether arising in contract, tort, or otherwise, unless the member has signed a specific guarantee.
| 2. | Summary of Significant Accounting Policies |
| Use of Accounting | ||
| Estimates | The preparation of the accompanying financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the accompanying financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. |
The principal estimates relate to the determination of the allowance for doubtful accounts, and the valuation of common stock, stock options, cost of services and the valuation of the percentage of completion to determine revenue.
| Cash and Cash Equivalents | Cash and cash equivalents consist of cash and deposits in bank checking accounts or money market funds with immediate access. |
Revenue Recognition |
||
| Nature of Revenues | The Company reports its revenues in two categories: |
| ● | Software Services: Virtual and Augmented Reality projects, solutions and consulting services. | |
| ● | Other revenues (including equipment sales and rental services) |
The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, (“ASC 606”).
| 7 |
SECTOR 5 DIGITAL, LLC
Notes to Financial Statements
For the Years Ended December 31, 2021 and 2020
| 2. | Summary of Significant Accounting Policies (Continued) |
| Revenue Recognition (Continued) |
| Nature of Revenues | ||
| (Continued) | Under the standard, revenue is recognized as performance obligations are satisfied over time, with the percentage completion generally measured as the percentage of costs incurred to total estimated costs for such performance obligation. |
The Company applies the following steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements:
| ● | identify the contract with a customer; | |
| ● | identify the performance obligations in the contract; | |
| ● | determine the transaction price; | |
| ● | allocate the transaction price to performance obligations in the contract; | |
| ● | recognize revenue as the performance obligation is satisfied; | |
| ● | determine that collection is reasonably assured |
Revenue is recognized when the Company satisfies its performance obligation and collection is reasonably assured. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. Most of the Company’s contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.
The Sale of Customized Project Solutions – Revenue for custom project solutions (projects whereby, the development of the custom project leads to an identifiable asset with no alternative use to the Company, and, in which, the Company also has an enforceable right to payment under the contract), are recognized based on the percentage of completion using an input model with a master budget of man-hours and other project costs. At the end of each reporting period, the Company reviews its estimated budgeted time to completion and adjusts the percentage of completion accordingly.
Other revenue such as support, maintenance, and equipment and rental sales is either invoiced monthly based on hourly fees at predetermined rates based on each customer contract or invoiced upon shipment.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or providing services. As such, revenue is recorded net of returns, allowances, customer discounts, and incentives. Sales taxes and other taxes are excluded from revenues.
| 8 |
SECTOR 5 DIGITAL, LLC
Notes to Financial Statements
For the Years Ended December 31, 2021 and 2020
| 2. | Summary of Significant Accounting Policies (Continued) |
| Revenue Recognition (Continued) |
| Contract Balances | Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records a contract asset (costs in excess of billings) when revenue is recognized prior to invoicing, or a contract liability (billings in excess of costs) when revenue is recognized subsequent to invoicing. | |
| The Company anticipates that substantially all costs incurred for uncompleted contracts as of December 31, 2021 will be billed and collected within one year. | ||
| The following table shows the reconciliation of the costs in excess of billings and billings on excess of costs: |
| 2021 | 2020 | |||||||
| Cost incurred on uncompleted contracts | $ | 425,704 | $ | 219,665 | ||||
| Estimated earnings | 654,799 | 333,606 | ||||||
| Earned revenue | 1,080,503 | 553,271 | ||||||
| Less billings to date | 1,536,679 | 1,289,809 | ||||||
| Billings in excess of costs, net | $ | (459,176 | ) | $ | (736,538 | ) | ||
| Balance Sheet Classification | ||||||||
| Contract assets: costs and estimated earnings in excess of billings on uncompleted contracts | $ | 688 | ||||||
| Contract liabilities: billings in excess of costs and estimated earnings on uncompleted contracts | (459,864 | ) | $ | (736,538 | ) | |||
| Billings in excess of costs, net | $ | (459,176 | ) | $ | (736,538 | ) | ||
| Cost of Revenue | Cost of revenue includes: direct labor, outside direct labor, and other costs directly incurred to support revenue generation. |
| Unfulfilled Performance | ||
| Obligations | Unfulfilled performance obligations represent amounts expected to be earned on executed contracts. As of December 31, 2021, the Company had approximately $460,000 in unfulfilled performance obligations. The Company expects to satisfy approximately 100% of the performance obligations within one year. |
| Significant Judgements | The Company’s contracts with customers may include promises to transfer multiple products/services. Determining whether products/services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Further, judgment may be required to determine the standalone selling price for each distinct performance obligation and to determine the Company’s expected costs to complete a project in process at each reporting period in computing each uncompleted project’s percentage-of-completion. |
| 9 |
SECTOR 5 DIGITAL, LLC
Notes to Financial Statements
For the Years Ended December 31, 2021 and 2020
| 2. | Summary of Significant Accounting Policies (Continued) |
| Revenue Recognition (Continued) | ||
| Disaggregation of | ||
| Revenue | The Company generated revenue for the years ended December 31, 2021 and 2020 by delivering: (i) customized project solutions, consisting primarily of VR/AR projects, solutions and consulting services. | |
The following is a disaggregation of the Company’s revenue by major source for the years ended December 31, 2021 and 2020:
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Customized project solutions | $ | 3,896,311 | $ | 2,304,448 | ||||
| Other revenue | 14,605 | 159,825 | ||||||
| Total Revenue | $ | 3,910,916 | $ | 2,464,273 | ||||
Substantially all Company revenue is recognized over time.
| Accounts Receivable | Accounts receivable consists primarily of amounts due from customers under normal trade terms (30-60 days). Allowances for uncollectible accounts are provided for based upon a variety of factors, including historical amounts written-off, an evaluation of current economic conditions, and assessment of customer collectability. As of December 31, 2021 and 2020 no allowance for doubtful accounts was recorded as all amounts were considered collectible. |
| Customer
Concentration and Credit Risk |
Three customers accounted for approximately 73.3% and 84.7% of the Company’s total gross revenues during the year ended December 31, 2021 and 2020, respectively, of which one customer accounted for 35.1% and 49.9% of total gross revenues during the years ended December 31, 2021 and 2020, respectively. |
Three customers accounted for 96% of the Company accounts receivable at December 31, 2021. One customer accounted for approximately 89.4% of the Company’s accounts receivable at December 31, 2020.
The Company maintains cash in accounts that, at times, may be in excess of the Federal Deposit Insurance Corporation limit. The Company has not experienced any losses on such accounts.
| 10 |
SECTOR 5 DIGITAL, LLC
Notes to Financial Statements
For the Years Ended December 31, 2021 and 2020
| 2. | Summary of Significant Accounting Policies (Continued) |
| Property and Equipment | Property and equipment are carried at cost. Depreciation is being provided by the straight-line method over the estimated useful lives of the assets, generally 3 to 7 years (See Note 3). Leasehold improvements are amortized over the shorter of the assets useful life or the remaining term of the lease. Maintenance and repairs are charged to expense as incurred, while major renewals and betterments are capitalized. |
When assets are retired or otherwise disposed of, the cost of assets disposed of and the related accumulated depreciation/amortization is removed from the accounts and any resulting gain or loss is included in the statements of operations in the period of disposal. Expenditures for repairs and maintenance are charged to expense as incurred.
The Company assesses the recoverability of property and equipment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. There was no impairment of property or equipment for the years presented.
| Research and | ||
| Development Costs | Research and development expenses are expensed as incurred, and include payroll, and employee benefits. Research and development expenses also include third-party development and programming costs. Given the emerging industry and uncertain market environment the Company operates in, research and development costs are not capitalized. |
| Advertising Costs | Advertising costs are charged to expense in the period incurred. Advertising costs amounted to approximately $8,000 and $16,000 for the years ended December 31, 2021 and 2020, respectively. |
| Income Taxes | As a limited liability company, the Company does not pay federal or state income taxes on its taxable income. Instead, taxable profits or losses are passed through to the individual members, and income taxes are paid directly by the members. |
FASB ASC Topic 740, Income Taxes, or ASC 740, clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Based on the Company’s evaluation, there are no significant uncertain tax positions requiring recognition in the Company’s financial statements.
| 11 |
SECTOR 5 DIGITAL, LLC
Notes to Financial Statements
For the Years Ended December 31, 2021 and 2020
| 2. | Summary of Significant Accounting Policies (Continued) |
| Income Taxes | ||
| (Continued) | The Company believes that its income tax positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in material changes to its financial position. |
The Company’s policy for recording interest and penalties associated with audits is to record such expense as a component of income tax expense. There were no amounts accrued for penalties or interest for the years ended December 31, 2021 and 2020. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.
| Recently Issued Pronouncements | ||
| Leases | In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (ASC 842). The amendments under this pronouncement change the way all leases with durations of one year or more are treated. Under this guidance, lessees are required to capitalize virtually all leases on the balance sheet as a right-of-use asset and an associated financing lease liability or capital lease liability. The right-of-use asset represents the lessee’s right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents the lessee’s obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain characteristics, leases are classified as financing leases or operating leases. Financing lease liabilities, those that contain provisions similar to capitalized leases, are amortized in the same manner as capital leases are amortized under current accounting rules, as amortization expense and interest expense in the statement of operations. Operating lease liabilities are amortized on a straight-line basis over the life of the lease as lease expense in the statement of operations. The Company will adopt this standard on January 1, 2022 using the retrospective method. The adoption of the new standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows. | |
| Financial Instruments – | ||
| Credit Losses | In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates (ASC 326). The Company will be required to use a forward-looking expected credit loss model for accounts receivable, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities, if any, will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities The Company does not expect to adopt this standard prior to January 1, 2023. The Company is currently evaluating the impact of this standard on its financial statements. |
| Subsequent Events | In accordance with FASB ASC 855, Subsequent Events, the Company has evaluated events through March 22, 2022, the date on which these financial statements were available to be issued. Except for the transactions disclosed in Notes 5 and 6, there were no material subsequent events that required recognition or additional disclosure in the financial statements. |
| 12 |
SECTOR 5 DIGITAL, LLC
Notes to Financial Statements
For the Years Ended December 31, 2021 and 2020
| 3. | Property and Equipment Property and equipment consist of: |
| As of December 31, | 2021 | 2020 | ||||||
| Computer and office equipment | $ | 504,985 | $ | 445,136 | ||||
| Furniture and fixtures | 63,128 | 63,128 | ||||||
| Leasehold improvements | 25,917 | 25,917 | ||||||
| 594,030 | 534,181 | |||||||
| Less accumulated depreciation and amortization | (440,510 | ) | (329,440 | ) | ||||
| $ | 153,520 | $ | 204,741 | |||||
Depreciation and amortization expense was $111,070 and $103,669 during the years ended December 31, 2021 and 2020, respectively.
| 4. | Credit Facilities |
| SBA Paycheck Protection | ||
| Program Loans | In May 2020, the Company received a Paycheck Protection Program loan (“PPP1”) from the Small Business Administration (“SBA”) in the amount of $434,400. The Company utilized the PPP 1 loan proceeds in full towards payroll and rent in accordance with the SBA guidelines. Pursuant to SBA guidelines, the Company’s PPP1 loan was fully forgiven in May 2021. |
In January 2021, the Company received a second Paycheck Protection Program loan (“PPP2”) in the amount of $455,198. Similar to the PPP1 loan, the Company utilized the loan proceeds in full toward payroll and rent in accordance with SBA guidelines. Pursuant to SBA guidelines, the Company’s PPP2 loan was fully forgiven in October 2021.
| Capital Lease Payable | The Company has a capital lease for the purchase of equipment in the original amount of approximately $25,000. The lease matures in 2022. Interest expense under the capital lease was approximately $1,500 and $2,000 during the years ended December 31, 2021 and 2020, respectively. |
| 5. | Commitments and Contingencies |
| Leases | The Company’s office facility is leased under an operating lease which expired February, 2022. The lease required the Company to pay a pro-rata share of common area maintenance, insurance and real estate taxes. |
The future aggregate minimum rental commitments under the non-cancelable operating lease as of December 31, 2021, are as follows:
| Years Ending December 31, | ||||
| 2022 | $ | 16,079 | ||
| 13 |
SECTOR 5 DIGITAL, LLC
Notes to Financial Statements
For the Years Ended December 31, 2021 and 2020
| 5. | Commitments and Contingencies (Continued) |
| Leases (Continued) | In 2022, the Company renewed its operating lease for its office facility. The new lease also requires the Company to pay a pro-rata share of common area maintenance, insurance and real estate taxes. |
The future aggregate minimum rental commitments under the non-cancelable operating lease (including common area maintenance) are as follows:
| Years Ending December 31, | ||||
| 2022 | $ | 92,916 | ||
| 2023 | 113,911 | |||
| 2024 | 116,877 | |||
| 2025 | 19,562 | |||
| Total minimum lease payments | $ | 343,266 | ||
Rent expense amounted to approximately $124,000 and $122,000 for the years ended December 31, 2021 and 2020, respectively.
| Employee Retirement | ||
| Plan | The Company maintains a defined contribution plan for all eligible full-time employees. Employees may make regular contributions of their compensation each plan year through payroll deductions, subject to the plan and Internal Revenue Code 401(K) limitations. The Company makes matching 401(K) contributions as per the plan agreement. |
The Company is also able to make discretionary profit-sharing contributions. During 2021 and 2020 the Company did not make any profit-sharing contributions.
Total defined contribution plan expense was approximately $36,000 and $35,000 for the years ended December 31, 2021 and 2020, respectively.
| Contingencies | In the normal course of business, the Company may be named in lawsuits in conjunction with its customers. In 2019, the Company was advised that one of its customers was named in a lawsuit for a breach of contract, trade secret misappropriation, and patent infringement. The complaint implicates that the product in question was developed by the Company for its customer. The Company’s customer is defending these claims. Further, the Company has not been named in the lawsuit. Currently, neither the amount of liability, if any, from these proceedings nor a range of such amounts can be presently estimated. However, management believes that the resolution of these matters, both in the aggregate and individually, will not have a material adverse impact on the Company’s financial position, results of operations, and cash flows. |
| COVID-19 | The Company’s business and operations have been adversely affected by the COVID-19 pandemic, as have the markets in which the Company’s customers operate. The COVID-19 pandemic has caused and continues to cause significant business and financial market disruption worldwide and there is significant uncertainty around the duration of this disruption and its ongoing effects on the Company’s business. This has primarily manifested itself in prolonged sales cycles. |
| 14 |
SECTOR 5 DIGITAL, LLC
Notes to Financial Statements
For the Years Ended December 31, 2021 and 2020
| 5. | Commitments and Contingencies (Continued) |
| COVID-19 (Continued) | The Company has required substantially all of its employees to work remotely to minimize the risk of the virus. While working remotely has proven to be effective to this point, it may eventually inhibit the Company’s ability to operate its business effectively. | |
| The Company continues to closely monitor the situation and the effects on its business and operations. The Company does not yet know the full extent of potential impacts on its business and operations. Given the uncertainty, the Company cannot reasonably estimate the impact on its future results of operations, cash flows or financial condition. |
| 6. | Subsequent Events |
| Acquisition of the | ||
| Company | On February 1, 2022, the Company, was purchased by The Glimpse Group, Inc. (“Glimpse”), a public company traded on NASDAQ. |
The transaction’s total potential sales price is $27.0 million, with an initial payment of $8.0 million upon closing, consisting of $4.0 million in cash and $4.0 million of Glimpse’s common stock (approximately 0.28 million shares). Future potential purchase price considerations, up to $19.0 million, are based on the Company’s achievement of revenue growth milestones in the three years post-closing, the payment of which shall be made up to $2 million in cash and the remainder in common shares of Glimpse, priced at the date of the future potential share issuance.
| 15 |
Exhibit 99.2
The Glimpse Group, Inc.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On December 2, 2021, The Glimpse Group, Inc. (the “Company” or “Glimpse”) entered into a Membership Interest Sale Agreement (the “Agreement”) with Sector 5 Digital, LLC (“S5D”) and Jeff Meisner, Jeff Meade, Doug Fidler, and Brandy Cardwell (the “Sellers”). Under the Agreement, the Sellers, who collectively owned all (100%) of the membership interests of S5D, agreed to sell all of the membership interests in S5D to the Company in exchange for a total potential purchase price of $27,000,000, with an initial cash payment of $4,000,000 and the issuance of 277,201 shares of the Company’s common stock with a value of $4,000,000 (the “Initial Payment”) due upon closing (the “Closing”). Future purchase price considerations, up to a residual $19,000,000, are based on S5D and the Company’s achievement of revenue growth milestones in the three years post-Closing, the payment of which shall be made up to $2,000,000 in cash and the remainder in common shares of the Company, priced at the date of the future potential share issuance subject to a common stock price floor as defined in the Agreement.
On February 1, 2022 (the “Closing Date”), the Company announced the Closing of its acquisition of S5D and paid the Initial Payment consisting of (i) an aggregate issuance of 277,201 shares of the Company’s common stock (the “Shares”); and (ii) an aggregate cash payment equal to $4,000,000. Any transfer of the Shares by the Sellers remains subject to a twelve-month lock up restriction from the Closing Date. On the Closing Date, the Company also placed in escrow $2,000,000 cash, the cash portion of potential future purchase price consideration.
The unaudited pro forma condensed combined financial information was derived from the historical financial statements of Glimpse and S5D. The following unaudited pro forma condensed combined balance sheet as of December 31, 2021, is presented as if the acquisition had occurred on December 31, 2021. The unaudited pro forma combined condensed statement of operations for the six months ended December 31, 2021 and the year ended June 30, 2021 are presented as if the acquisition had occurred on July 1, 2020.
The unaudited pro forma condensed combined financial statements reflect pro forma adjustments that are based upon available information and certain assumptions that management believes are reasonable. The unaudited pro forma condensed combined financial statements do not reflect any operating efficiencies and/or cost savings that Glimpse may achieve, or any additional expenses that it may incur, with respect to the combined companies. The unaudited pro forma condensed combined financial statements do not purport to represent Glimpse’s results of operations or financial position that would have resulted had the transactions, to which pro forma effects are given, been consummated as of the date or for the periods indicated.
The acquisition has been accounted for in accordance with ASC Topic 805, “Business Combinations”. Accordingly, the total purchase price has been allocated on a preliminary basis to assets acquired, liabilities assumed, identified intangible assets and goodwill based upon their estimated fair values as of the date of the acquisition. These allocations reflect various preliminary estimates that were available at the time of the preparation of this Current Report on Form 8-K/A, and are subject to change during the measurement period, as valuations are finalized.
There were no material differences between the accounting policies of Glimpse and S5D. No adjustments were necessary to eliminate intercompany transactions and balances in the unaudited pro forma condensed combined financial statements, as there were no transactions or balances between Glimpse and S5D.
The unaudited pro forma condensed combined financial statements and accompanying notes should be read in conjunction with the historical audited financial statements of Glimpse contained in its Annual Report on Form 10-K for the fiscal year ended June 30, 2021, as filed with the Securities and Exchange Commission (“SEC”) on September 28, 2021, its Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2021, as filed with the SEC on February 14, 2022, and the audited historical financial statements of S5D filed with this Current Report on Form 8-K/A.
THE GLIMPSE GROUP, INC.
Unaudited Pro Forma Condensed Combined Balance Sheet
At December 31, 2021
| Glimpse | S5D | Pro Forma Adjustments | Pro Forma Combined | ||||||||||||||
| ASSETS | |||||||||||||||||
| Cash and cash equivalents | $ | 24,828,043 | $ | 798,220 | $ | (4,000,000 | ) | (A) | $ | 21,626,263 | |||||||
| Accounts receivable | 1,287,735 | 375,010 | - | 1,662,745 | |||||||||||||
| Acquisition escrow | 4,000,000 | - | (4,000,000 | ) | (B, C) | - | |||||||||||
| Other current assets | 747,972 | 37,677 | - | 785,649 | |||||||||||||
| Total current assets | 30,863,750 | 1,210,907 | (8,000,000 | ) | 24,074,657 | ||||||||||||
| Property and equipment, net | 76,899 | 153,520 | - | 230,419 | |||||||||||||
| Intangible assets, net | 712,501 | - | 2,820,000 | (D) | 3,532,501 | ||||||||||||
| Goodwill | 550,000 | - | 11,905,316 | (D) | 12,455,316 | ||||||||||||
| Other assets | 64,000 | 9,246 | - | 73,246 | |||||||||||||
| Total assets | $ | 32,267,150 | $ | 1,373,673 | $ | 6,725,316 | $ | 40,366,139 | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||
| Accounts payable and accrued expenses | $ | 1,114,934 | $ | 172,625 | $ | - | $ | 1,287,559 | |||||||||
| Deferred revenue/contract liabilities | 98,736 | 459,864 | - | 558,600 | |||||||||||||
| Contingent consideration for S5D acquisition - short term | 2,060,300 | (E) | 2,060,300 | ||||||||||||||
| Total current liabilities | 1,213,670 | 632,489 | 2,060,300 | 3,906,459 | |||||||||||||
| Long term liabilities | |||||||||||||||||
| Paycheck Protection Program loan | 623,828 | - | - | 623,828 | |||||||||||||
| Contingent consideration for S5D acquisition - long term | - | - | 7,108,900 | (E) | 7,108,900 | ||||||||||||
| Total liabilities | 1,837,498 | 632,489 | 9,169,200 | 11,639,187 | |||||||||||||
| Stockholders’ Equity | |||||||||||||||||
| Members’ equity | - | 741,184 | (741,184 | ) | (D) | - | |||||||||||
| Preferred Stock | - | - | - | - | |||||||||||||
| Common Stock | 12,480 | - | - | 12,480 | |||||||||||||
| Additional paid-in capital | 55,764,735 | - | (1,702,700 | ) | (C) | 54,062,035 | |||||||||||
| Accumulated deficit | (25,347,563 | ) | - | - | (25,347,563 | ) | |||||||||||
| Total stockholders’ equity | 30,429,652 | 741,184 | (2,443,884 | ) | 28,726,952 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 32,267,150 | $ | 1,373,673 | $ | 6,725,316 | $ | 40,366,139 | |||||||||
THE GLIMPSE GROUP, INC.
Unaudited Pro Forma Condensed Combined Statement of Operations
For the six months ended December 31, 2021
| Glimpse | S5D | Pro Forma Adjustments | Pro Forma Combined | ||||||||||||||
| Revenue | $ | 2,712,535 | $ | 2,282,270 | $ | - | $ | 4,994,805 | |||||||||
| Cost of goods sold | 357,641 | 816,898 | - | 1,174,539 | |||||||||||||
| Gross Profit | 2,354,894 | 1,465,372 | - | 3,820,266 | |||||||||||||
| Operating expenses | 5,327,076 | 1,423,448 | 282,000 | (F) | 7,032,524 | ||||||||||||
| Net income (loss) from operations before other income (expense) | (2,972,182 | ) | 41,924 | (282,000 | ) | (3,212,258 | ) | ||||||||||
| Other income (expense) | (259,973 | ) | 457,794 | - | 197,821 | ||||||||||||
| Net Income (Loss) | $ | (3,232,155 | ) | $ | 499,718 | $ | (282,000 | ) | $ | (3,014,437 | ) | ||||||
| Basic and diluted net loss per share | $ | (0.30 | ) | $ | (0.27 | ) | |||||||||||
| Weighted-average shares used to compute basic and diluted net loss per share | 10,802,570 | 232,005 | (G) | 11,034,575 | |||||||||||||
THE GLIMPSE GROUP, INC.
Unaudited Pro Forma Condensed Combined Statement of Operations
For the year ended June 30, 2021
| Glimpse | S5D | Pro Forma Adjustments | Pro Forma Combined | ||||||||||||||
| Revenue | $ | 3,421,495 | $ | 2,551,249 | $ | - | $ | 5,972,744 | |||||||||
| Cost of goods sold | 1,461,210 | 1,014,118 | - | 2,475,328 | |||||||||||||
| Gross Profit | 1,960,285 | 1,537,131 | - | 3,497,416 | |||||||||||||
| Operating expenses | 6,670,954 | 2,047,108 | 564,000 | (F) | 9,282,062 | ||||||||||||
| Net loss from operations before other income (expense) | (4,710,669 | ) | (509,977 | ) | (564,000 | ) | (5,784,646 | ) | |||||||||
| Other income (expense) | (1,381,018 | ) | 480,410 | - | (900,608 | ) | |||||||||||
| Net Loss | $ | (6,091,687 | ) | $ | (29,567 | ) | $ | (564,000 | ) | $ | (6,685,254 | ) | |||||
| Basic and diluted net loss per share | $ | (0.84 | ) | $ | (0.89 | ) | |||||||||||
| Weighted-average shares used to compute basic and diluted net loss per share | 7,259,249 | 277,201 | (G) | 7,536,450 | |||||||||||||
THE GLIMPSE GROUP, INC.
NOTES TO UNAUDITED PROFORMA CONDENSED COMBINED FINANCIAL INFORMATION
As of and for the six months ended December 31, 2021, and for the year ended June 30, 2021
NOTE 1. BASIS OF PRESENTATION
The unaudited pro forma condensed combined financial information set forth herein is based upon the consolidated financial statements of The Glimpse Group, Inc. (“Glimpse” or the “Company”) and the financial statements of Sector 5 Digital, LLC, a Texas limited liability company (“S5D”). The unaudited proforma condensed combined financial information is presented as if the transaction had been completed on December 31, 2021 in respect of the unaudited pro forma condensed combined balance sheet; and July 1, 2020 with respect to the unaudited pro forma condensed combined statements of operations for each of the six months ended December 31, 2021 and for the year ended June 30, 2021.
The unaudited pro forma condensed combined financial information is presented for informational purposes only and is not necessarily indicative of the combined financial position or results of operations had the transaction occurred as of the dates indicated, nor is it meant to be indicative of any anticipated combined financial position or future results of operations that the combined company will experience after the completion of the transactions.
Glimpse has accounted for the acquisition in this unaudited pro forma condensed combined financial information using the acquisition method of accounting, in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 805 “Business Combinations” (“ASC 805’’). In accordance with ASC 805, Glimpse uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date.
Goodwill as of the acquisition date is measured as the excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired.
Pro forma adjustments reflected in the unaudited pro forma condensed combined balance sheet are based on items that are factually supportable and directly attributable to the transaction. Pro forma adjustments reflected in the pro forma condensed combined statement of operations are based on items that are factually supportable, directly attributable to the transaction and expected to have a continuing impact on the combined results. The unaudited proforma condensed combined financial information does not reflect the cost of any integration activities or benefits from the transaction, including potential synergies that may be generated in future periods.
NOTE 2. DESCRIPTION OF THE TRANSACTION
On December 2, 2021, Glimpse entered into a Membership Interest Sale Agreement (the “Agreement”), with S5D and each of the equity holders of S5D named therein (collectively, the “Members”). On February 1, 2022, Glimpse consummated the transaction contemplated by the Agreement.
Acquisition of S5D; Purchase Consideration
Subject to the terms and conditions set forth in the Agreement, S5D became a wholly-owned subsidiary of Glimpse.
The aggregate consideration to the Members per the Agreement consisted of: (a) $4,000,000 cash paid at February 1, 2022 closing (the “Closing”); (b) 277,201 shares of the Company’s common stock valued at the date of acquisition (escrowed and valued at $4,000,000 at the time the Agreement was entered) and released from escrow to the Members at Closing; and (c) future purchase price considerations payable to the Members, up to a residual of $19,000,000. The $19,000,000 is based and payable on S5D’s and the Company’s achievement of certain revenue growth milestones at points in time and cumulatively during the three years post-Closing, the payment of which shall be made up to $2,000,000 in cash and the remainder in common shares of the Company, priced at the dates of the future potential share issuance subject to a common stock price floor as defined in the Agreement.
NOTE 3. FAIR VALUE ESTIMATES OF PURCHASE PRICE ALLOCATION
The preliminary fair value allocation for the purchase price consideration paid at close, under the assumption that the Acquisition was consummated on December 31, 2021, is as follows:
| Purchase price consideration: | ||||
| Cash paid to members at closing | $ | 4,000,000 | ||
| Company common stock, fair valued at Closing | 2,297,300 | |||
| Fair value of contingent consideration to be achieved | 9,169,200 | |||
| Total purchase price | $ | 15,466,500 | ||
| Fair value allocation of purchase price: | ||||
| Cash and cash equivalents | $ | 798,220 | ||
| Accounts receivable | 375,010 | |||
| Other current assets | 37,677 | |||
| Property and equipment, net | 153,520 | |||
| Other assets | 9,246 | |||
| Accounts payable and accrued expenses | (172,625 | ) | ||
| Contract liabilities | (459,864 | ) | ||
| Intangible assets - customer relationships | 2,820,000 | |||
| Goodwill | 11,905,316 | |||
| Total fair value allocation of purchase price | $ | 15,466,500 |
The estimated fair value allocation for the purchase price consideration paid at the actual Close Date of February 1, 2022 approximates the amounts above, except for Goodwill which is greater by approximately $600,000 and cash and cash equivalents which are less by approximately $600,000. Any further subsequent adjustments to the initial fair value estimates occurring during the measurement period will result in an adjustment to the carrying value of goodwill.
The Company’s fair value estimate of the contingent consideration for the S5D acquisition was determined using a Monte Carlo simulation method which accounts for the probabilities of various outcomes. The Company’s fair value estimate related to the identified intangible asset of customer relationships was determined using the Multi-Period Excess Earnings Method. This valuation method requires management to project revenues, customer attrition and cash flows for the reporting unit over a multiyear period, as well as determine the weighted average cost of capital to be used as a discount rate.
The Company amortizes its intangible assets assuming no residual value over the estimated period in which the economic benefit of these assets is consumed (five years).
NOTE 4. PRO FORMA ADJUSTMENTS
The following pro forma adjustments were applied to Glimpse’s historical financial statements and those of S5D to arrive at the pro forma condensed combined financial statement information:
A - Cash consideration paid to Members at Closing.
B – 277,201 shares of Company common stock, escrowed when Agreement entered, released at Closing to Members.
C – To record the adjusted fair value of the common shares released to the Members and valued at the Closing Date.
D - To record the estimated fair value of the identified intangible assets and residual goodwill.
E - To record the estimated contingent consideration for the S5D acquisition.
F - To record the estimated identified intangible asset amortization expense for the six months ended December 31, 2021 and the year ended June 30, 2021.
G – To record the issuance of common stock to the Members as of July 1, 2020. The weighted average shares pro forma adjustment for the six months ended December 31, 2021 reflects the weighted average effect of shares (45,196) escrowed at time of entering into the Agreement on December 2, 2021 and included in the Glimpse six months ended December 31, 2021 amount.