UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-K
ANNUAL REPORT PURSUANT TO REGULATION A
For the fiscal year ended:
December 31, 2021
TROPICAL RACING INC. |
(Exact name of issuer as specified in its charter) |
FLORIDA
(Jurisdiction of incorporation or organization)
82-1034364
(I.R.S. Employer Identification Number)
1740 Grassy Springs Road, Versailles, Kentucky, 40383
(Address of principal executive offices)
(561) 513-8767
(Telephone number, including area code)
Units consisting of shares of Class A common stock, par value $.0001 per share and Warrants to purchase shares of Class A common stock underlying the Warrants
(Title of each class of securities issued pursuant to Regulation A)
PART II
INFORMATION TO BE INCLUDED IN REPORT
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
We make statements in this Annual Report on Form 1-K that are forward-looking statements within the meaning of the federal securities laws. The words “believe,” “estimate,” “expect,” “anticipate,” “intend,” “plan,” “seek,” “may,” and similar expressions or statements regarding future periods are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any predictions of future results, performance or achievements that we express or imply in this Annual Report or in the information incorporated by reference into this Annual Report.
The forward-looking statements included in this Annual Report on Form 1-K are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, taking into account the information currently available to us, we cannot guarantee future transactions, results, performance, achievements or outcomes, and our actual results and performance could differ materially from those set forth in any forward-looking statements. The cautionary statements set forth in this Annual Report on Form 1-K identify important factors which you should consider in evaluating our forward-looking statements. These factors include, without limitation:
Risks Related to our Business and Industry
| · | We are an early-stage company with limited operating history and may never be profitable. |
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| · | Unpredictable events, such as the COVID-19 outbreak, and associated business disruptions could seriously harm our future revenues and financial condition, delay our operations, increase our costs and expenses, and impact our ability to raise capital. |
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| · | We may face litigation in the future. |
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| · | We have entered into transactions with related parties in the past and have an outstanding related-party liability with the Company’s President, Troy Levy for accrued unpaid salary. |
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| · | The Company and our Principal Executive Officer entered into a Stipulation for Consent Order with the State of Colorado. |
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| · | There is substantial doubt about our ability to continue as a going concern. |
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| · | There are few businesses that have pursued a strategy or investment objective similar to the Company’s. |
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| · | Our inability to retain management and key employees could impair the future success of the Company. |
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| · | A significant growth in the number of personnel would place a strain upon the Company’s management and resources. |
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| · | There is no assurance that the Company’s insurance coverage will be sufficient to cover all claims to which the Company may become subject. |
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| · | There can be no assurances that the value of the racehorse (whether it is a Thoroughbred, Quarter Horse or Standardbred) which is owned by the Company will not decrease in the future which may have an adverse impact on the Company’s activities and financial position. |
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| · | The cost of racing is unpredictable and speculative and may negatively impact the Company’s ability to generate revenue. |
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| · | If a horse is unsuccessful in racing, becomes sick or injured, its value will be adversely affected which may have a negative impact of the Company’s valuation and revenue. |
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| · | Horse racing could be subjected to restrictive regulation or banned entirely which could adversely affect the conduct of the Company’s business. |
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| · | The Company may not purchase insurance on its horse which could require Company resources to be spent to cover any losses from the death or injury of a horse. |
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| · | A decrease in average attendance per racing date coupled with increasing costs could jeopardize the continued existence of certain racetracks which could negatively impact the Company’s operations. |
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| · | Industry practices and structures have developed which may not be attributable solely to profit-maximizing, economic decision-making which may have an adverse impact on our Company’s activities business. |
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| · | Investors may only own a minority interest in underlying assets and as a result may not have sufficient control regarding the training or racing of the horse(s). |
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| · | Market shortages may impact the ability of the Company to generate revenue. |
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| · | The Company has no current intention of paying dividend payments, as revenues are irregular, seasonal, and unpredictable. |
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| · | The Company may not raise enough funds or have enough money to purchase the best blood-line champion horses to generate purses. |
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· | · | The Company invested in a play to earn company, Game of Silks, and if the business plan is not successfully executed, we may lose our initial investment |
You are cautioned not to place undue reliance on any forward-looking statements included in this Annual Report. All forward-looking statements are made as of the date of this Annual Report on Form 1-K, and the risk that actual results will differ materially from the expectations expressed in this Annual Report will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements after the date of this Annual Report, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this Annual Report, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Annual Report will be achieved.
Item 1. Business
Overview
The Company is a thoroughbred horse racing company that cultivates and promotes growth of its assets with resources in every face of the thoroughbred racing industry. The Company operates its business primarily through three functions: (i) horse ownership syndication; (ii) horse training, breeding and horse racing; and (iii) pinhooking.
Our Products and Services
The Company offers affordable partnerships into the “Sport of Kings” for people who want to get involved in the fast-paced and exciting world of thoroughbred horse racing. As noted in the overview, the Company operates its business primarily through three revenue streams: (i) horse ownership syndication; (ii) horse training, breeding and horse racing; and (iii) pinhooking. Each of these revenue streams are discussed below:
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| ■ | Horse Ownership Syndication |
Many horse enthusiasts would like to say that they bred the winner of the big race. Owning a racehorse winner and, especially, breeding and raising one, is a passion – a compelling and expensive goal. In the past, the door to ownership was only opened for those of substantial wealth, as the costs of purchasing a racehorse, as well as maintenance, training, feeding, veterinary care, and travel costs are expensive. What was once out-of-reach for many due to the financial obligations of buying a racehorse and maintaining that horse, has now become attainable with the cost-sharing offered by a partnership. Rather than one person purchasing one horse, the Company offers group partnerships where investors can purchase a percentage of one horse or a group of horses, thereby spreading the financial risks and expenses amongst all the partners.
| ■ | Horse Racing |
The Company has a proven track record of horse training, breeding and expert selections in thoroughbred racehorses. Our thoroughbreds race primarily in Florida, and we have also participated in races in New York, New Jersey, and Kentucky. The following are just a few of the most recent, notable wins for the Company:
| · | Toretto - Homebred out of one of our foundation mares, Angry Dragon, earned $31,900 breaking his maiden on September 26, 2021 at Gulfstream Park. |
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| · | Roughly A Diamond – A weanling purchased for $25,000 at the Keeneland Sales Auction broke her maiden in her first lifetime start at Gulfstream Park, earning $27,000. Roughly followed up this victory in an Allowance race on New Year’s Day, January 1, 2022, earning an additional $15,000 at Tampa Racetrack with her second victory. |
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| · | My Man Flint- A weanling purchased at the Keeneland Sales Auction broke his maiden on December 11, 2021 at Gulfstream Park, earning $18,000. |
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| · | Aizu – Homebred out of one of our foundation mares, Red Baroness, finished 3rd at Keeneland on October 24, 2021, earing $6,580. She is a consistent racehorse placing 1st,2nd or 3rd 12 times out of 17 races. We look forward to Aizu joining our broodmare band next year. |
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| · | Mount Rundle – a yearling purchased by Tropical had his first start on April 23, 2022 at Gulfstream Park finishing 2nd and earning $8,600. Mount Rundle is a half-brother to Dura Cuire who is part of our broodmare band. Dura Cuire just had a filly by Upstart whose prodigies are top competitors in the 2022 Kentucky Derby and 2022 Kentucky Oaks races |
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| · | Yafa – Homebred out of one of our foundation mares, Red Baroness, raced on April 4, 202, finishing 2nd and earning $10,340. Yafa has now joined her mother, Red Baroness, on Circle 8 ranch and is in foal to a leading stallion, Lookin At Lucky. |
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| · | California Gigi – Broke her maiden on April 23, 2021 at Gulfstream Park, earning $12,000 |
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| · | Bonheur – Broke her maiden on April 3, 2021, at Gulfstream Park earning $10,800. She is now part of our broodmare band and was bred to Accelerate, the most successful son of Lookin at Lucky. |
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| ■ | Pinhooking |
Pinhooking is the business of purchasing young horses at one stage of their lives and then reselling them for a higher price at a different stage of their lives. For example, weanlings can be purchased at auctions or privately, and then resold as yearlings. Yearlings can be purchased and then trained to be sold as race ready 2 year olds.
In many ways, pinhooking is a science. It is based on instinct, experience, and market trends. When looking for pinhook prospects, the Company compiles all the important factors to choose the absolute best investment, while fitting a profile of what the end users want. The Company looks for elite equine athletes with good conformation, precocious pedigrees, marketable sire and dam lines, and performance. A team of bloodstock agents, veterinarians, and equine conformation, pedigree, and market analysis experts all study each prospect to give investors the advantage of a maximum return on their investments.
The Company not only works with private sellers, but it also targets the major auctions across the globe to increase the ability to pick horses with the most potential. The Company is active at all major thoroughbred yearling sales, including the Keeneland September Sale, Saratoga Yearling Sale, and OBS Yearling Sale.
Once purchased, the yearlings are immediately received at the Circle 8 ranch in Versailles, Kentucky. The farm covers 200 acres, while the yearling complex is perfectly suited to young horses with spacious stalls, turn-out paddocks, and large pastures for abundant grazing and room to relax before their racing careers commence. Next, yearlings enter breaking and training, which takes place at top facilities in the ideal fall/winter climate of Ocala, Florida. The horses are conditioned properly and then positioned properly at the right sale in the right location. For the first six to eight months after horses are purchased, they begin the process of becoming racehorses. When they enter sales preparation, they are conditioned with an exercise and feed program for athletic development that is custom tailored to that horse. Just like people, horses are individuals. Therefore, a “cookie cutter” approach to training and diet is not beneficial to turning out the best racehorses. The Company studies its horses, learns their personalities, and tailors training accordingly to enhance the horses’ abilities to win at the track.
The main sales venues for two-year-old thoroughbreds include Ocala Breeders’ Sales Company (Florida), Keeneland (Kentucky), Fasig-Tipton (Florida, Maryland, California), and Barretts (California). The Circle 8 team sells at the nation’s most prominent training sales: OBS March, Fasig-Tipton March at Gulfstream and OBS April. It is at these sales that many of the nation’s top owners and trainers find their next racehorses, the very runners who go on to achieve success at the highest levels, including the Triple Crown races and Breeders’ Cup races.
The Company is an ongoing business, and it buys and sells horses during public auctions and when private sales present themselves.
The horses noted below are owned by the Company as of the date of this annual report:
| Name | State – Bred | Birth Year | Type |
1 | Angry Dragon | Kentucky | 2008 | Broodmare |
2 | Red Baroness | Kentucky | 2008 | Broodmare |
3 | Celtic Moonlight | Florida | 2014 | Broodmare |
4 | Dura Cuire | Kentucky | 2017 | Broodmare |
5 | Time for Harlan | Kentucky | 2011 | Broodmare |
6 | Longstocking | Pennsylvania | 2012 | Broodmare |
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7 | Precocious Miss | Florida | 2016 | Broodmare |
8 | Schmiss | Kentucky | 2014 | Broodmare |
9 | Blue Whale | Kentucky | 2015 | Broodmare |
10 | Countless Fun | Kentucky | 2017 | Broodmare |
11 | Istan Again | Kentucky | 2016 | Broodmare |
12 | Rosy Scenario | Kentucky | 2017 | Broodmare |
13 | More Royalty | Florida | 2013 | Broodmare |
14 | Dreaming As Always | Kentucky | 2011 | Broodmare |
15 | Dream Spinner | Kentucky | 2016 | Broodmare |
16 | Tizemotionalgold | Kentucky | 2017 | Broodmare |
17 | Winy | Chile | 2016 | Broodmare |
18 | Yafa | Florida | 2018 | Broodmare |
19 | Regal Serenade | Illinois | 2015 | Broodmare |
20 | Shesomajestic | Kentucky | 2016 | Broodmare |
21 | Chips and Salsa | Florida | 2018 | Broodmare |
22 | 2022 Dreaming as Always | Kentucky | 2022 | Weanlings |
23 | 2022 Schmiss | Kentucky | 2022 | Weanlings |
24 | 2022 Precocious Miss | Kentucky | 2022 | Weanlings |
25 | 2022 Longstocking | Kentucky | 2022 | Weanlings |
26 | 2022 Rosy Scenario | Kentucky | 2022 | Weanlings |
27 | 2022 Regal Serenade | Kentucky | 2022 | Weanlings |
28 | 2022 Five Star Factor | Kentucky | 2022 | Weanlings |
29 | 2022 Do the Dance | Kentucky | 2022 | Weanlings |
30 | 2022 Hot n Hectic | Kentucky | 2022 | Weanlings |
31 | 2022 Out of Danger | Kentucky | 2022 | Weanlings |
32 | 2022 Pledge Mom | Kentucky | 2022 | Weanlings |
33 | 2022 Sara Sara | Kentucky | 2022 | Weanlings |
34 | 2022 Agent Romanoff | Kentucky | 2022 | Weanlings |
35 | 2022 Up for Grabs | Kentucky | 2022 | Weanlings |
36 | 2021 Saudia | Kentucky | 2021 | Yearlings |
37 | 2021 Castellani | Kentucky | 2021 | Yearlings |
38 | 2021 Quite A Nightmare | California | 2021 | Yearlings |
39 | 2021 Precocious Miss | Kentucky | 2021 | Yearlings |
40 | 2021 Rosy Scenario | Kentucky | 2021 | Yearlings |
41 | 2021 Dreaming as Always | Kentucky | 2021 | Yearlings |
42 | 2021 Schmiss | Kentucky | 2021 | Yearlings |
43 | 2021 Blue Whale | Kentucky | 2021 | Yearlings |
44 | My Name is Dragon | Kentucky | 2021 | Yearlings |
45 | 2021 Red Baroness | Kentucky | 2021 | Yearlings |
46 | 2021 Istan Again | Kentucky | 2021 | Yearlings |
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47 | Brooklyns Finest | Kentucky | 2020 | Two Year Old |
48 | Xtrasaucewelldone | Kentucky | 2020 | Two Year Old |
49 | Dragons Back | Kentucky | 2020 | Two Year Old |
50 | Razzaluna | Kentucky | 2020 | Two Year Old |
51 | Raceday Filly 2020 | Kentucky | 2020 | Two Year Old |
52 | California Gigi | Kentucky | 2019 | Three Year Old |
53 | Imoto | Florida | 2019 | Three Year Old |
54 | Madelyns Heat | Kentucky | 2019 | Three Year Old |
55 | Mount Rundle | Kentucky | 2019 | Three Year Old |
56 | Roughly A Diamond | Kentucky | 2019 | Three Year Old |
57 | Suegaar | Florida | 2019 | Three Year Old |
58 | Volaize | Kentucky | 2019 | Three Year Old |
59 | Always Above | Kentucky | 2018 | Four Year Old |
60 | Bonheur | Kentucky | 2018 | Four Year Old |
61 | My Man Flint | Kentucky | 2018 | Four Year Old |
62 | Toretto | Kentucky | 2018 | Four Year Old |
63 | Aizu | Florida | 2017 | Five Year Old |
64 | Saving Sophie | Kentucky | 2018 | Six Year Old |
Competition
We believe that our main competitors in the thoroughbred racing business include, but are not limited to, Stonestreet Farms, WinStar Farms and Calumet Farm, each of which owns many stallion shares, broodmares, and races. Many of our competitors are better capitalized than we are. We may have insufficient funds to meet our operating expenses. As a result of the foregoing or for other reasons, we may be required to sell one or more of our horses prior to the time of our anticipated liquidation to fund our cash needs.
The trend towards the acceptance of partnerships as opposed to individual or farm owners is positive with the Company as a leader. Owning horses is expensive and the competition for prize money via purses is strong. Pooling resources has proven to be a viable method for individuals to compete in the current marketplace. The Company is entering a crowded market; however, many available partnerships are redundant, often lacking professional management or goals. Redundancy is a common theme, as truly little is typically offered to investors outside of a small percentage of ownership in individual horses. By contrast, the Company offers its investors the opportunity to own the entire business, which includes the success of the syndicated horses.
Horse racing also competes against all other forms of entertainment such as professional football, baseball, hockey, soccer, basketball, other gaming, and outdoor activities. According to an IBISWorld Industry Report (Horse Racing Tracks), these indirect competitors may pull much of the available time and money from this sport. Additionally, the horse racing industry is subject to competition from other gambling activities, including electronic gaming, sports betting and arbitrage betting. While thoroughbred racing in the United States, like many other industries, slumped following the economic downturn of 2008, there have been positive signs of recovery, with betting handle (the amount of money in wagers accepted over a specific period) rising in 2015 and the first six months of 2016 after several years of declines. Other forward trending signs include the increase in the number of horses being produced on a year to year basis and prices for unraced horses at auction also going up.
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Legal Proceedings
Other than as set forth below, we are not presently a party to, and none of our property is the subject of, any pending legal proceedings. To our knowledge, no governmental authority is contemplating any such proceedings.
The Company and our Principal Executive Officer, Troy Levy (the “Respondents”), entered into a Stipulation for Consent Order, Case No. 2019 CDS035, on November 27, 2019 (the “Order”) in lieu of a hearing, following receipt of a subpoena duces tecum from the Colorado Division of Securities. The Order recited that the Commissioner had reviewed allegations of the staff of the Securities Commissioner of Colorado which had alleged unregistered securities of the Company were sold by Respondents in the State of Colorado in violate on of Section 11-51-301 of the C.R.S. which securities had not been determined to be exempt from registration requirements. As had been agreed by Respondents, the Order, in summary, required the Respondents to rescind a securities purchase transaction with a Colorado resident through payment in the amount of $6,049 for the Colorado investor’s securities, to not take any action or make a public statement denying or creating the impression that the Order lacked a factual basis, and to comply with the Colorado Securities Act with regard to all future offers and sales of securities covered by the Colorado Securities Act.
Employees
As of the date of this report, we have three (8) full-time employees and three (3) part-time employees. We do not currently have any pension, health, annuity, insurance, or similar employee benefit plans, although we may choose to adopt such plans in the future. Each of our executive officers and directors are eligible to receive equity compensation at the discretion of our Board pursuant to the 2020 Equity Incentive Plan.
Corporate Information
The Company was incorporated on March 31, 2017 in the State of Florida and was authorized to do business in the State of Kentucky on February 19, 2019.
The Company’s principal office is located at 1740 Grassy Springs Road, Versailles, Kentucky 40383. The Company’s telephone number is +1 (561) 513-8767 and website address is https://www.tropicalracing.com/.
Pursuant to the Company’s Amended and Restated Articles of Incorporation (the “Articles of Incorporation”), dated January 10, 2020, the Company is authorized to issue Two Hundred Fifty Million (250,000,000) shares which consist of the following: (i) Two Hundred Million (200,000,000) shares of Class A Common Stock; (ii) Twenty-Five Million (25,000,000) shares of Class B Common Stock; and (iii) Twenty-Five Million (25,000,000) shares of Preferred Stock. As of the date of this annual report, the Company has (i) 52,199,976 shares of Class A Common Stock outstanding; (ii) 10,000,000 shares of Class B Common Stock of the Company outstanding; and (iii) no shares of Preferred Stock of the Company outstanding.
Recent Developments
Acquisition of Circle 8 Ranch
On April 1, 2019, the Company entered into a Lease and Purchase Option Agreement (the “Lease and Purchase Option Agreement”) with Grassy Springs, LLC, a Kentucky limited liability company, for the lease and purchase option of 200 acres of agricultural land located at 1740 Grassy Springs Road, Versailles, Kentucky 40383 (the “Circle 8 Ranch”). The Company paid $8,500 in monthly rent and made a cash payment of $100,000 as an option to purchase the farm for $2,945,000. The land includes several structures, including a farm house, out buildings, and a main barn with 23 stalls, tack rooms, wash stalls and lab area, in addition to executive offices. The residence on the land is 2,450 square feet of newly renovated living space. The buildings include an equipment barn, shop, and farm implement storage. The land also includes 14 plank fenced paddocks, 6 large fields, a 5/8-mile grass training track, and a pond situated on more than one acre.
On February 10, 2022, the Company executed the option under the Lease and Purchase Option Agreement, purchasing the Circle 8 Ranch for $2,945,000 to include both the real estate and equipment.
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Acquisition of Ownership Interest in Game of Silks
On December 10, 2021, the Company announced by press release that it is a lead investor and strategic partner in newly-formed Game of Silks, Inc., a Delaware corporation.
Over the last year management believes the Company has made great strides expanding the Company’s foothold in the thoroughbred industry increasing potential revenue streams and asset bases in technology by acquiring an ownership interest in a Web 3.0 (metaverse) in a Play to Earn game called the Game of Silks. Through the Company’s multifaceted investment strategy in all aspects of the thoroughbred industry, Tropical Racing became a lead investor in Game of Silks – a pioneer derivative gaming platform that intends to leverage a blockchain-enabled metaverse to parallel the real world of thoroughbred horse racing. The Silks metaverse will be powered by a play-to-earn (P2E) gaming economy where anyone can experience the thrill of owning racehorses and horse farms, while reaping valuable tokens through skilled gameplay and contributions to the ecosystem. The Silks community is expected to have the ability to acquire, collect, trade, and interact with digital assets that represent actual thoroughbred racehorses in the real world.
Development of Bloodstock Division
The Company anticipates developing a Bloodstock division during 2022 which should provide the Company the opportunity to turn over inventory quicker and pinhook many horses through the partnership with consignors in major sales.
Intercorporate Relationships
The Company has one active wholly-owned subsidiary, Circle 8 Ranch Corp. (“Circle 8 Ranch”), a corporation organized under the State of Florida on or about March 9, 2019. The Company’s horses are housed and trained at the Circle 8 ranch, a state-of-the-art facility located 15 minutes from Lexington, Kentucky, which is currently leased by Circle 8 Ranch.
The following chart identifies the Company’s sole active wholly-owned subsidiary, its applicable governing jurisdiction and the percentage of the voting securities which are beneficially owned, or controlled or directed, directly or indirectly, by the Company:
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TROPICAL RACING INC. (FLORIDA)
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CIRCLE 8 RANCH CORP. (FLORIDA)
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Item 2. Management’s Discussion and Analysis of financial condition and results of operations
Overview
The Company was incorporated on March 31, 2017 in the State of Florida and was authorized to do business in the State of Kentucky on February 19, 2019. The Company’s principal office is located at 1740 Grassy Springs Road, Versailles, Kentucky 40383. The Company is a thoroughbred horse racing company, operating its business primarily through three functions: (i) horse ownership syndication; (ii) horse training, breeding and horse racing; and (iii) pinhooking.
Results of Operations
For the Year Ended December 31, 2021 and the Year Ended December 31, 2020
Revenues
Our revenue was $ 337,912 for the year ended December 31, 2021, as compared to $ 316,949 for the year ended December 31, 2020. Our revenues slightly increased during this period due to increased syndication fees. The ranch was established early 2019 and allowed for more training of the horses resulting in better showings at the racetracks. In addition, more horses were purchased during this period resulting in more syndication activities.
Net Loss
Our net loss was $ 3,352,546 for the year ended December 31, 2021, as compared to $ 1,641,186 for year ended December 31, 2020. The increase in net loss was due to increased offering costs for the establishment of the Reg A funds and increased horse and ranch expenses along with higher marketing costs. The purchase of additional horses and its related expenses to train and maintain them also resulted in higher overall costs compared to the revenue generated for the year
Horse and Ranch Expenses
Our horse and ranch expenses were $ 1,586,570 for the year ended December 31, 2021, as compared to $ 979,406 for year ended December 31, 2020. The increase in expenses was mainly due to the increased training and maintenance costs including feed and transportation of the additional horses that were purchased throughout the year. Ranch and horse expenses consisted primarily of training, veterinary, transportation, ranch improvements, and barn expenses.
General, Administrative and Other Expenses
Our general, administrative and other expenses were $ 2,167,812 for the year ended December 31, 2021, as compared to $ 1,174,127 for year ended December 31, 2020. General, administrative and other expenses consisted primarily of personnel, marketing, professional fees, vehicle, office, travel and depreciation expenses. The increase in expenses were due to the purchase of more horses and the filing and reporting of the SEC application resulted in increased audit and legal fees.
Liquidity and Capital Resources
To date, we have generated some cash through purse winnings and syndication of horses, however the Company still has negative cash flows from operating activities. All costs in connection with horse acquisitions, operating expenses and professional fees have been funded mainly by our shareholders, including our founder, President and Chief Executive Officer Troy Levy.
Our future expenditures and capital requirements will depend on numerous factors, including the success of this Offering and the progress and ability to win races by our racehorses, pin-hooking, and syndication efforts.
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Our business does generate cash through purse winnings from races, syndication fees and the sale of horses. We believe that if we raise $49,980,000 (the Maximum Amount) in this Offering, we will have sufficient capital to finance our operations for at least the next five (5) years; however, if we do not raise the Maximum Amount or if our operating and development costs are higher than expected, we will need to obtain additional financing prior to that time. We do not have any track record for self-underwritten Regulation A+ offerings, and there can be no assurance we will raise the Maximum Amount or any other amount. Further, we expect that after such nine-month period, we will be required to raise additional funds to finance our operations until such time that we can conduct revenue-generating activities. However, no assurances can be made that we will be successful obtaining additional equity or debt financing, or that ultimately, we will achieve profitable operations and positive cash flow.
Item 3. Directors and Officers
Directors, Executive Officers and Significant Employees
The table below sets forth our directors and executive officers as of December 31, 2021:
Approximate hours per week | ||||||||
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Name | Position | Age | Term of Office | consultants | ||||
Executive Officers: | ||||||||
Troy Levy |
| President |
| 54 |
| March 2017 - Present |
| N/A |
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Sunny Sharma | Interim Chief Financial Officer | 50 | August 2020 - Present | 10 | ||||
Directors: | ||||||||
Troy Levy |
| President |
| 54 |
| March 2017 - Present |
| N/A |
Ronald Kapphahn | Director | 66 | 2019 - Present | N/A |
Certain Relationships
Except as set forth above and in our discussion below in “Interest of Management and Others in Certain Transactions,” none of our directors or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates, or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
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Business Experience
Troy Levy, President, Chief Executive Officer and Chairman of the Board
Mr. Levy has served as our Chief Executive Officer and President since inception when he founded the Company in March 2017. Prior to Tropical Racing, he founded an obstacle course racing and entertainment company specializing in extreme sporting events. From July 1993 to December 1998, he was engaged in the financial services industry first serving as a Licensed Stockbroker holding Series 7 and 63 licenses and he later served in supervisory positions as a licensed series 24. He has been actively involved in the Thoroughbred horse racing industry for over 30 years. During 2018, Mr. Levy was elected to the nonprofit Florida Horsemen’s Benevolent and Protective Association (FHBPA) board, while also serving on the TRAC committee. A dedicated supporter of the Florida Thoroughbred industry. Mr. Levy contributes his time to improve and promote the equine industry through accountability, responsibility, and integrity for the horses and their caretakers.
Sunny Sharma, Interim Chief Financial Officer
Mr. Sharma has served as our financial consultant and interim chief financial officer since August 2020. He has over 20 years of experience in public, private equity and individual investor backed entities in various sectors including education, healthcare, and technology. Mr. Sharma started out his career in public accounting and later held several Executive positions. Mr. Sharma served as the CEO from September 2012 to November 2017 of Digital Media Arts College (DMAC), and in December 2017 he successfully exited with the sale of the College. In addition, from October 2016 to the present, Mr. Sharma has served as the Chief Financial Officer for an early-stage healthcare technology company. He has also served on several nonprofit boards including Grandview Preparatory School and Juvenile Diabetes Research Foundation. Mr. Sharma has a Bachelor of Commerce in Accounting from Carleton University in Ottawa, Canada, and a Master of Business Administration from the University of Miami.
Family Relationships
There are no family relationships amongst the Executive Officers and Directors.
Involvement in Certain Legal Proceeding
To our knowledge, none of our current directors or executive officers has, during the past ten years:
| · | been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
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| · | had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he or she was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time; |
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| · | been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity; |
|
|
|
| · | been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; |
|
|
|
| · | been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
|
|
|
| · | been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Securities Exchange Act of 1934, as amended), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
12 |
We are not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, we believe will have a material adverse effect on our business, financial condition or operating results.
Compensation of Directors and Executive Officers
The following table represents information regarding the total compensation for the three highest paid executive officers or directors of the Company during the fiscal year ended December 31, 2021:
|
|
| Cash Compensation |
|
| Other Compensation(1) |
|
| Total Compensation |
| ||||
Name |
| Capacity in which compensation was received |
| ($) |
|
| ($) |
|
| ($) |
| |||
Troy Levy(2) |
| President |
| $ | 35,000 |
|
| $ |
|
| $ | 35,000 |
| |
|
|
|
| $ |
|
| $ |
|
| $ |
| |||
Sunny Sharma |
| Interim CFO |
| $ | 27,250 |
|
| $ |
|
| $ | 27,250 |
| |
|
|
|
| $ |
|
|
| $ |
|
|
| $ |
|
|
(1) | Any values reported in the "Other Compensation" column, if applicable, represents the aggregate grant date fair value, computed in accordance with Accounting Standards Codification (ASC) 718 Share Based Payments of grants of stock options to each of our named executive officers and directors. |
|
|
(2) | As of December 31, 2021, Mr. Levy has accrued multiple years of salary which remain unpaid in the amount of $ 492,965. |
Director Compensation
Employment Agreements, Arrangements or Plans
Except as disclosed herein, there were no agreements or arrangements under which compensation was provided during the most recently completed financial year or is payable in respect of services provided to the Company or any of its subsidiaries that were: (a) performed by a director or named executive officer; or (b) performed by any other party but are services typically provided by a director or a named executive officer.
On February 22, 2022, the Company entered into an amended and restated executive employment agreement with Troy Levy (the “Amended and Restated Levy Employment Agreement”). The terms of the Amended and Restated Levy Employment Agreement provide for an initial base salary of $260,000 per calendar year, with the opportunity for a cash bonus, at the sole discretion of the Board. The Amended and Restated Levy Employment Agreement also provides for automobile allowance for lease or purchase of an automobile, including insurance, parking, taxes, fuel, and any other automobile-related expenses, of $1800 per month. This allowance may be increased by the Board but may not be reduced unless there is across-the-board salary and/or expense reduction for other employees of the Company. Additionally, the Amended and Restated Levy Employment Agreement provides that in the event of a change in control, pursuant to which there is a change in the majority ownership of the Company or a change in the effective control of the Company, or a change in the ownership of a substantial portion of the Company’s assets, the Company shall pay Mr. Levy a bonus equal to 104 weeks’ Base Salary within thirty (30) days of the change in control, provided Mr. Levy is not terminated with Cause and does not resign prior to date the bonus is scheduled to be paid.
13 |
The Company entered into an Engagement Agreement with Sunny Sharma (the “Engagement Agreement”). Pursuant to the Engagement Agreement, Mr. Sharma serves as part-time, Interim Chief Financial Officer of the Company, and the Company will pay Mr. Sharma for those services at a rate of $100 per hour. The engagement centers around, but is not limited to, working to complete the Offering, improving the Company’s system of financial reporting, developing, and implementing systems to project and monitor cash flow, and providing detailed analysis of revenue stream growth opportunities, all with the objective of improving operational practices, profitability and cash flows.
Item 4. Security Ownership of Management and Certain Securityholders
The following table shows the beneficial ownership of our Common Shares, as of April 28, 2022, held by (i) each person known to us to be the beneficial owner of more than 10% of any class of our voting securities; (ii) each director who is the beneficial owner of more than 10% of any class of our voting securities; (iii) each executive officer who is the beneficial owner of more than 10% of any class of our voting securities; and (iv) all directors and executive officers as a group. As of April 28, 2022, there were 52,199,976 Common Shares issued and outstanding.
Beneficial ownership is determined in accordance with the rules of the SEC, and generally includes voting power and/or investment power with respect to the securities held. Common Shares subject to convertible securities, options, warrants and other rights which are currently exercisable or which may become exercisable within 60 days of the date hereof, are deemed outstanding and beneficially owned by the person holding such convertible securities, options, warrants or other rights for purposes of computing the number of shares and percentage beneficially owned by such person, but are not deemed outstanding for purposes of computing the percentage beneficially owned by any other person. Except as indicated in the footnotes to this table, the persons or entities named have sole voting and investment power with respect to all Common Shares shown as beneficially owned by them.
The percentages below are based on fully diluted Common Shares as of the date of this Annual Report. Unless otherwise indicated, the business address of each person listed is c/o Tropical Racing, Inc., 1740 Grassy Springs Road, Versailles, Kentucky 40383.
Name and Address of Beneficial Owner |
| Amount and Nature of Beneficial Ownership |
|
| Amount and Nature of Beneficial Ownership Acquirable |
|
| Percent of Class (1) |
| |||
Directors and Officers: |
|
|
|
|
|
|
|
|
| |||
Troy Levy(2) |
|
| 48,957,143 |
|
|
| - |
|
|
| 78.71 | % |
Ronald Kapphahn |
|
| 2,300,000 |
|
|
| - |
|
|
| 3.70 | % |
All executive officers and directors as a group |
|
| 51,257,143 |
|
|
| - |
|
|
| 82.41 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than 10% Securityholders: |
|
|
|
|
|
|
|
|
|
|
|
|
Troy Levy(2) |
|
| 48,957,143 |
|
|
| - |
|
|
| 78.71 | % |
| (1) | This Annual Report does not contemplate that any of our current listed shareholders will acquire any shares of our Class A common stock as part of the Regulation A, Tier 2 offering. |
|
|
|
| (2) | Includes Mr. Levy’s ownership of 38,957,143 shares of Class A common stock and his ownership of 10,000,000 shares of Class B common stock. |
14 |
Item 5. Interest of Management and Others in Certain Transactions
Transactions with Related Persons
Except as described below and except for employment arrangements which are described under “Compensation of Directors and Executive Officers” above, since December 31, 2021, there has not been, nor is there currently proposed, any transaction in which (i) the Company is or was a participant, (ii) the amount involved exceeds the lesser of $120,000 or 1% of the average of the Company’s total assets at year-end for the last two completed fiscal years, and (iii) any of our directors, executive officers, holders of more than 10% of our Common Stock, or any immediate family member of any of the foregoing, had or will have a direct or indirect material interest.
We intend to enter into indemnification agreements with each of our directors and executive officers. In general, these indemnification agreements require the Company to indemnify a director to the fullest extent permitted by law against liabilities that may arise by reason of his or her service for the Company.
The Company engages Michelle Nihei Racing Stables LLC (“Nihei Stables”) to provide training services. Ms. Nihei is the spouse of Troy Levy, the Company’s President. The Company incurred expenses of $ 541,000 to Nihei Stables for the year ended December 31, 2021, as compared to $ 283,437 for the year ended December 31, 2020.
In order to finance certain equipment and vehicles, the Company entered into (i) SBA Loan #64991967906, dated effective as of March 16, 2020, with the Small Business Administration, as the secured lender, and the Company, as the borrower, in the principal amount of $88,400; (ii) SBA Loan #7175647906 dated effective as of June 17, 2020, with the Small Business Administration, as the secured lender, and the Circle 8 Ranch, as the borrower, in the principal amount of $14,000. In addition, the Company has financed vehicles from Kubota Corporation for the original amount of $ 27,031, loan # 69970432 and loan # 85698934, South East Toyota for $ 58,427, loan # 4070730 and Huntington National Bank for $ 56,365, loan # 73715. All such equipment and vehicles are secured by the Company’s majority shareholder and President, Troy Levy.
Review, Approval and Ratification of Related Party Transactions
Given our small size and limited financial resources, we have not adopted formal policies and procedures for the review, approval, or ratification of transactions, such as those described above, with our executive officers, directors, and significant stockholders. We intend to establish formal policies and procedures in the future, once we have sufficient resources and have appointed additional directors, so that such transactions will be subject to the review, approval or ratification of our Board, or an appropriate committee thereof. On a moving forward basis, our directors will continue to approve any related party transactions. The Board has not yet established an Audit Committee, Compensation Committee or a Nominating Committee, or any committee performing a similar function.
Item 6. Other Information
None.
15 |
Item 7. Financial Statements
TROPICAL RACING, INC.
AND SUBSIDIARY
Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
F-1 |
TROPICAL RACING, INC. AND SUBSIDIARY
|
| PAGE(S) |
|
| F-3 to F-4 |
| |
CONSOLIDATED: |
|
|
|
| F-5 |
| |
| F-6 |
| |
| F-7 |
| |
| F-8 |
| |
| F-9 to F-17 |
|
F-2 |
Board of Directors
Tropical Racing, Inc.
Versailles, Kentucky 40383
Opinion
We have audited the accompanying consolidated financial statements of Tropical Racing, Inc. and Subsidiary (the Company ) which comprise the consolidated balance sheets as of December 31, 2021 and 2020, and the related consolidated statements of operations, shareholders equity, and cash flows for the years then ended and the related notes to the consolidated financial statements.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company 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 Auditors Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company 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 the Company s ability to continue as a going concern within one year after the date that the financial statements are available to be issued.
Auditors 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 auditors 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, including omissions, 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.
F-3 |
Table of Contents |
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 the Company 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 the Company 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.
Substantial Doubt about the Company's Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.
| Friedman CPA Group Certified Public Accountants |
April 28, 2022 Plantation, Florida |
|
F-4 |
Table of Contents |
TROPICAL RACING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2021 AND 2020
|
| 2021 |
|
| 2020 |
| ||
ASSETS |
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 336,431 |
|
| $ | 166,914 |
|
Accounts receivable, net |
|
| 22,790 |
|
|
| 16,209 |
|
Prepaid expenses |
|
| 10,000 |
|
|
| 15,000 |
|
Contributions receivable |
|
| 403,886 |
|
|
| - |
|
Total current assets |
|
| 773,107 |
|
|
| 198,123 |
|
|
|
|
|
|
|
|
|
|
Property and equipment |
|
| 171,440 |
|
|
| 206,483 |
|
Racehorses |
|
| 447,100 |
|
|
| 388,562 |
|
Stallion shares |
|
| 56,667 |
|
|
| 85,000 |
|
Investment in Game of Silks |
|
| 955,607 |
|
|
| - |
|
Finance lease right-of-use assets |
|
| 2,862,894 |
|
|
| 2,895,570 |
|
Total assets |
| $ | 5,266,815 |
|
| $ | 3,773,738 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
| $ | 393,494 |
|
| $ | 307,269 |
|
Current portion of notes payable |
|
| 75,806 |
|
|
| 74,816 |
|
Current portion of finance lease liability |
|
| 2,644,056 |
|
|
| 94,996 |
|
Contributions received in advance |
|
| 500,000 |
|
|
| - |
|
Due to Game of Silks |
|
| 300,000 |
|
|
| - |
|
Total current liabilities |
|
| 3,913,356 |
|
|
| 477,081 |
|
|
|
|
|
|
|
|
|
|
Notes payable |
|
| 171,231 |
|
|
| 193,334 |
|
Finance lease liability |
|
| - |
|
|
| 2,644,056 |
|
Due to shareholder |
|
| 492,965 |
|
|
| 358,070 |
|
Total liabilities |
|
| 4,577,552 |
|
|
| 3,672,541 |
|
|
|
|
|
|
|
|
|
|
Shareholders' Equity Common stock and paid-in capital |
|
| 9,018,577 |
|
|
| 5,077,965 |
|
Retained deficit |
|
| (8,329,314 | ) |
|
| (4,976,768 | ) |
Total shareholders' equity |
|
| 689,263 |
|
|
| 101,197 |
|
Total liabilities and shareholders' equity |
| $ | 5,266,815 |
|
| $ | 3,773,738 |
|
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS’ REPORT.
F-5 |
Table of Contents |
TROPICAL RACING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
| 2021 |
|
| 2020 |
| |||
REVENUES |
|
|
|
|
|
| ||
Purse winnings |
| $ | 170,249 |
|
| $ | 226,798 |
|
Syndication fees |
|
| 167,663 |
|
|
| 90,151 |
|
Total revenues |
|
| 337,912 |
|
|
| 316,949 |
|
|
|
|
|
|
|
|
|
|
EXPENSES |
|
|
|
|
|
|
|
|
Racehorses |
|
| 1,369,225 |
|
|
| 859,245 |
|
Professional fees |
|
| 942,878 |
|
|
| 528,172 |
|
Salaries and benefits |
|
| 156,000 |
|
|
| 157,558 |
|
Ranch |
|
| 217,345 |
|
|
| 120,161 |
|
Marketing and promotions |
|
| 441,013 |
|
|
| 90,303 |
|
Depreciation |
|
| 280,980 |
|
|
| 143,347 |
|
Interest |
|
| 120,645 |
|
|
| 124,552 |
|
Travel and entertainment |
|
| 58,234 |
|
|
| 39,383 |
|
General and administrative |
|
| 125,527 |
|
|
| 49,382 |
|
Amortization of ROU asset - finance lease |
|
| 32,676 |
|
|
| 32,676 |
|
Vehicles |
|
| 9,859 |
|
|
| 8,754 |
|
Total expenses |
|
| 3,754,382 |
|
|
| 2,153,533 |
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
| (3,416,470 | ) |
|
| (1,836,584 | ) |
|
|
|
|
|
|
|
|
|
Gain on sale of racehorses |
|
| 90,069 |
|
|
| 184,930 |
|
Loss from investment in Game of Silks |
|
| (44,393 | ) |
|
| - |
|
Other income |
|
| 18,248 |
|
|
| 10,468 |
|
Loss before income taxes |
|
| (3,352,546 | ) |
|
| (1,641,186 | ) |
Income taxes |
|
| - |
|
|
| - |
|
Net loss |
| $ | (3,352,546 | ) |
| $ | (1,641,186 | ) |
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS’ REPORT.
F-6 |
Table of Contents |
TROPICAL RACING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
| 2021 |
|
| 2020 |
| |||
Common stock |
|
|
|
|
|
| ||
Balance, beginning of year |
| $ | 4,819 |
|
| $ | 4,330 |
|
Common stock issued |
|
| 145 |
|
|
| 489 |
|
Balance, end of year |
|
| 4,964 |
|
|
| 4,819 |
|
|
|
|
|
|
|
|
|
|
Paid-in capital | ||||||||
Balance, beginning of year |
|
| 5,073,146 |
|
|
| 3,397,407 |
|
Common stock issued |
|
| 3,940,467 |
|
|
| 1,675,739 |
|
Balance, end of year |
|
| 9,013,613 |
|
|
| 5,073,146 |
|
|
|
|
|
|
|
|
|
|
Retained deficit | ||||||||
Balance, beginning of year |
|
| (4,976,768 | ) |
|
| (3,335,582 | ) |
Net loss |
|
| (3,352,546 | ) |
|
| (1,641,186 | ) |
Balance, end of year |
|
| (8,329,314 | ) |
|
| (4,976,768 | ) |
|
|
|
|
|
|
|
|
|
Total shareholders' equity |
| $ | 689,263 |
|
| $ | 101,197 |
|
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS’ REPORT.
F-7 |
Table of Contents |
TROPICAL RACING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
| 2021 |
|
| 2020 |
| |||
OPERATING ACTIVITIES |
|
|
|
|
|
| ||
Net loss |
| $ | (3,352,546 | ) |
| $ | (1,641,186 | ) |
Adjustments to reconcile net loss to net cash used in operations: |
|
|
|
|
|
| ||
|
|
|
|
|
| |||
Depreciation and amortization |
|
| 313,656 |
|
|
| 176,023 |
|
Gain on disposal |
|
| (90,069 | ) |
|
| (184,930 | ) |
Loss from Investment in Game of Silks |
|
| 44,393 |
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (6,581 | ) |
|
| (16,209 | ) |
Prepaid expenses |
|
| 5,000 |
|
|
| (15,000 | ) |
Contributions receivable |
|
| (403,886 | ) |
|
| - |
|
Accounts payable and accrued liabilities |
|
| 86,225 |
|
|
| 185,715 |
|
Contributions received in advance |
|
| 500,000 |
|
|
| - |
|
Due to Game of Silks |
|
| 300,000 |
|
|
| - |
|
Net cash used in operations |
|
| (2,603,808 | ) |
|
| (1,495,587 | ) |
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Proceeds from issuance of debt |
|
| 13,613 |
|
|
| 224,077 |
|
Payments of principal of notes payable |
|
| (34,726 | ) |
|
| (19,729 | ) |
Proceeds from shareholder loans |
|
| 134,895 |
|
|
| 145,552 |
|
Payments of principal on finance lease liability |
|
| (94,996 | ) |
|
| (98,727 | ) |
Issuance of common stock |
|
| 3,940,612 |
|
|
| 1,676,228 |
|
Net cash provided by financing activities |
|
| 3,959,398 |
|
|
| 1,927,401 |
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
| (14,591 | ) |
|
| (127,045 | ) |
Purchases of racehorses |
|
| (508,799 | ) |
|
| (436,385 | ) |
Investment in stallion shares |
|
| - |
|
|
| (85,000 | ) |
Investment in Game of Silks |
|
| (1,000,000 | ) |
|
| - |
|
Proceeds from sales of racehorses |
|
| 337,317 |
|
|
| 288,629 |
|
Net cash used in investing activities |
|
| (1,186,073 | ) |
|
| (359,801 | ) |
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
| 169,517 |
|
|
| 72,013 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year |
|
| 166,914 |
|
|
| 94,901 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
| $ | 336,431 |
|
| $ | 166,914 |
|
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS’ REPORT.
F-8 |
Table of Contents |
TROPICAL RACING, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
NOTE 1 - NATURE OF OPERATIONS
Description of Organization and Business Operations
Tropical Racing, Inc. (the Company ) was incorporated on March 31, 2017 in the State of Florida. The Company was authorized to do business in Kentucky on February 19, 2019. The Company is a horseracing-based group ownership business that breeds and syndicates thoroughbred racehorses.
The Company has one subsidiary, Circle 8 Ranch Corp. ("Circle 8") Circle 8 is a corporation organized under the State of Florida on February 28, 2019. Circle 8 was formed to manage racing activities of the Company s horses. The entity is wholly-owned by the Company.
Substantial Doubt about the Company s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has not generated profits since its inception and has sustained a net loss of $ 3,352,546 and $ 1,641,186 for the years ended December 31, 2021 and 2020, respectively.
The Company has financed its business activities through capital contributions from investors since inception and expects to continue to have access to ample capital financing going forward, however, no assurances can be made regarding the Company's ability to do so.
The financial statements do not include any adjustments that might be necessary if the Company is not able to continue as a going concern.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.
Basis of Presentation
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). In the opinion of management, all material adjustments considered necessary for the fair presentation of the consolidated financial statements for the periods presented have been included.
Basis of Consolidation
The consolidated financial statements reflect the Company s activities along with its subsidiary. The Company eliminates all material intercompany transactions and balances from its consolidated financial statements.
F-9 |
Table of Contents |
Cash and Cash Equivalents
Cash and cash equivalents consist of cash deposits held with banks, and other highly liquid short-term interest-bearing securities with maturities at the date of purchase of three months or less. From time to time, the Company maintains balances with financial institutions in excess of federally insured limits.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Significant expenditures, which extend the useful lives of assets, are capitalized. The residual values and useful lives of property and equipment are reviewed by management, and adjusted as appropriate, at each balance sheet date.
The Company reviews the carrying value of racehorses for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. The factors considered by management in performing this assessment include current operating results, trends and prospects, the use of the property, and the effects of health, demand, competition, and other economic factors.
The estimated useful lives of the class of assets for the current and comparative periods are as follows:
Classification |
| Useful live |
Vehicles |
| 5 years |
Equipment |
| 7 years |
Racehorses and Stallion shares
Racehorses and Stallion shares are recorded at cost. The cost of the racehorses includes the purchase price, sourcing fees and brokerage fees. Racehorses and Stallion shares are depreciated using the straight-line method over 36 months with no estimated salvage value. A racehorse is treated as placed in service upon its acquisition by the Company.
Revenue Recognition
The Company adopted Topic 606 on January 1, 2018. Topic 606 requires an entity to perform a five-step assessment for each contract with customers which includes identifying the contract, identifying the performance obligations, determining the transaction price, allocating the transaction price, and recognizing revenue when the performance obligations are satisfied. Purse winnings represent revenues earned from winning thoroughbred races, and syndication fees represent revenues earned for monthly maintenance fees of syndicated horses.
Advertising
Advertising costs are expensed as they are incurred. These expenses totaled $ 56,297 and $ 55,100 for the years ended 2021 and 2020, respectively.
F-10 |
Table of Contents |
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the consolidated financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from the Company’s estimates.
Risks and Uncertainties
Operational risk – The ability of the Company to generate net earnings and become profitable is based, in part, on its ability to win races. Failure to execute on its strategy to hire experienced trainers and purchase quality horses could have a material adverse effect on the financial condition of the Company.
Concentration risk – The Company’s main sources of income are purse winnings and syndication fees. If the market for horse racing declines, the Company may be unable to return positive results or attract additional sources of capital to continue its operations.
COVID 19 risk – The ongoing COVID-19 pandemic has caused a broad impact globally. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to access or predict, the pandemic and any resulting recession or economic slowdown could reduce the Company’s ability to generate net income.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) issues updates to amend the authoritative literature in ASC. There have been several updates to date that amend the original text of ASC. Management believes that those issued to date either (i) provide supplemental guidance, (ii) are technical corrections,(iii) are not applicable or (iv) are not expected to have a significant impact on the financial statements, except those disclosed below.
F-11 |
Table of Contents |
NOTE 3 – REVENUE RECOGNITION
Disaggregation of Revenues
Revenues are disaggregated by timing of satisfaction of performance obligations for the periods ended December 31, as follows:
|
| 2021 |
|
| 2020 |
| ||
Performance obligations satisfied at a point of time |
| $ | 337,912 |
|
| $ | 316,949 |
|
Performance obligations satisfied over time |
|
| - |
|
|
| - |
|
Total Revenues |
| $ | 337,912 |
|
| $ | 316,949 |
|
Revenues from performance obligations satisfied at a point in time consist of purse winnings and syndication fees. The Company does not have revenues from performance obligations satisfied over time.
Contract Balances
As of December 31, 2021 and 2020, there were no contract assets or liabilities related to the timing of revenue transactions.
Performance Obligations
For purse winnings, the Company determined that there is one performance obligation, and revenues are recognized at the point in time when the service has been delivered and the performance obligation has been met which is generally determined at the completion of each race.
NOTE 4 – INCOME TAXES
The Company complies with FASB ASC 740 for accounting for uncertainty in income taxes recognized in a company’s financial statements, which 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. FASB ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s consolidated financial statements. The Company believes that its income tax positions would be sustained on audit and does not anticipate any adjustments that would result in a material change to its financial position.
Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
F-12 |
Table of Contents |
In assessing its ability to realize its deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled projected future taxable income and tax planning strategies in making this assessment. Based upon this analysis, management determined that a full valuation allowance was required at each year-end.
Major components of deferred tax assets and liabilities consist of the following at December 31, 2021 and 2020:
|
| 2021 |
|
| 2020 |
| ||
Unused net operating loss carryforward |
| $ | 2,151,000 |
|
| $ | 1,156,000 |
|
Less: valuation allowance |
|
| (2,151,000 | ) |
|
| (1,156,000 | ) |
Deferred tax asset, net |
| $ | - |
|
| $ | - |
|
For the years ended December 31, 2021 and 2020, the Company has no current income tax expense or benefit.
NOTE 5 – RELATED PARTY TRANSACTIONS
The Company engages Michelle Nihei Racing Stables LLC (“Nihei Stables”) to provide training services. Ms. Nihei is the spouse of the Company’s President. The Company incurred training expenses with Nihei stables of $ 541,000 and $ 283,437 for the years ended December 31, 2021 and 2020 respectively.
As of December 31, 2021, and 2020, the Company has no amounts payable to or receivable from any related party, except as discussed in Note 11.
NOTE 6 – LONG-TERM ASSETS
Long-term assets consist of the following at December 31, 2021 and 2020 as follows:
|
| 2021 |
|
| 2020 |
| ||
Racehorses: |
|
|
|
|
|
| ||
Acquisition cost |
| $ | 720,861 |
|
| $ | 563,350 |
|
Accumulated depreciation |
|
| (273,167 | ) |
|
| (174,788 | ) |
Net book value |
| $ | 447,100 |
|
| $ | 388,562 |
|
Property and Equipment: |
|
|
|
|
|
|
|
|
Acquisition cost |
| $ | 264,061 |
|
| $ | 249,472 |
|
Accumulated depreciation |
|
| (92,621 | ) |
|
| (42,989 | ) |
Net book value |
| $ | 171,440 |
|
| $ | 206,483 |
|
Depreciation expense totaled $ 280,980 and $ 143,347 for the years ended December 31, 2021 and 2020, respectively.
F-13 |
Table of Contents |
NOTE 7 – STALLION SHARES
In November 2020, the Company invested $ 85,000 for a fractional interest for the stallion, Global Campaign. The amount was funded by an initial cash payment of $ 42,500 and the remaining was financed with a note due in November 2021. The note was subsequently repaid in January 2022. As a fractional owner, the Company is obligated to pay its proportionate share of expenses to maintain the stallion. Additionally, the Company is entitled to a proportionate share of profits and losses. The net Stallion Shares as at December 31, 2021 and 2020 is as follows:
|
| 2021 |
|
| 2020 |
| ||
Global Campaign: |
|
|
|
|
|
| ||
Acquisition cost |
| $ | 85,000 |
|
| $ | 85,000 |
|
Accumulated depreciation |
|
| (28,333 | ) |
| ( - | ) | |
Net book value |
| $ | 56,667 |
|
| $ | 85,000 |
|
NOTE 8 – INVESTMENT IN GAME OF SILKS
On December 10, 2021, the Company announced by press release that it is a lead investor and strategic partner in newly formed Game of Silks, Inc., a Delaware corporation. The Silks ecosystem will be powered by a play-to-earn (P2E) gaming economy where anyone can experience the thrill of owning racehorses and horse farms, while reaping tokens through skilled gameplay and contributions to the ecosystem. The Silks community is designed to have the ability to acquire, collect, trade, and interact with digital assets that represent actual thoroughbred racehorses in the real world.
The Company invested a total of $1,000,000 paid in two instalments consisting of $700,000 in December 2021 and the remaining balance of $300,000 in January 2022. The investment results in a 40% ownership stake in Game of Silks.
For the year ended December 31, 2021, the Company’s share of net loss related to the investment was $44,393.
NOTE 9 – LEASES
The Company maintains a finance lease for use of their ranch. The Company is the lessee in a lease contract when it obtains the right to control the asset. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Leases with a lease term of 12 months or less at inception are not recorded on the consolidated balance sheets and are expensed on a straight-line basis over the lease term in the consolidated statements of operations.
The Company determines the lease term by assuming the exercise of renewal options that are reasonably certain. As most of the Company’s leases do not provide an implicit interest rate, the Company uses local incremental borrowing rates based on the information available at the commencement date in determining the present value of future payments. When the Company’s contracts contain lease and non-lease components, it accounts for both components as a single lease component.
F-14 |
Table of Contents |
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, other current liabilities, and operating lease liabilities in the Company’s consolidated balance sheets. Finance leases are included in property and equipment, and other long-term liabilities in its consolidated balance sheets.
Components and supplemental information for the years ended December 31, 2021 and 2020 are as follows:
|
| 2021 |
|
| 2020 |
| ||
Components of lease expense: |
|
|
|
|
|
| ||
Finance lease cost |
|
|
|
|
|
| ||
Amortization of right-of-use assets |
| $ | 32,676 |
|
| $ | 32,676 |
|
Interest on lease liabilities |
| $ | 107,004 |
|
| $ | 110,273 |
|
Supplemental cash flow information relating to leases: |
|
|
|
|
|
|
|
|
Cash paid for amounts in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
Operating cash flows from finance leases |
| $ | 107,004 |
|
| $ | 110,273 |
|
Financing cash flows from finance leases |
| $ | 94,996 |
|
| $ | 98,927 |
|
Right-of-use assets obtained in exchange for lease obligations: |
|
|
|
|
|
|
|
|
Finance leases |
| $ | 2,960,922 |
|
| $ | 2,960,922 |
|
Remaining lease terms: |
|
|
|
|
|
|
|
|
Finance leases |
| 3 months |
|
| 15 months |
| ||
Weighted average discount rate: |
|
|
|
|
|
|
|
|
Finance leases |
|
| 4 | % |
|
| 4 | % |
Maturities of liabilities:
|
|
| ||
For the years ending December 31, |
| Finance lease |
| |
2022 |
| $ | 2,670,500 |
|
2023 |
|
| - |
|
2024 |
|
| - |
|
2025 |
|
| - |
|
Total lease payments |
| $ | 2,670,500 |
|
Less: imputed interest |
|
| (26,444 | ) |
|
| $ | 2,644,056 |
|
F-15 |
Table of Contents |
NOTE 10 – NOTES PAYABLE
Notes payable at December 31, 2021 and 2020 consist of the following:
|
| 2021 |
|
| 2020 |
| ||
Note payable to Kubota Credit Corp secured by a vehicle due in monthly installments of $ 231 including interest of 0% |
| $ | 3,656 |
|
| $ | 6,447 |
|
Note payable to Kubota Credit Corp secured by a vehicle due in monthly installments of $ 333 including interest of 0% |
|
| 11,970 |
|
|
| 15,961 |
|
Note payable to Marlin Bank secured by equipment due in monthly installments of $ 69 including interest of 18.32% |
|
| 653 |
|
|
| 1,486 |
|
Note payable to U.S Small Business Administration secured by Substantially all of the assets of the Company due 12 months from The date of promissory note in monthly installments of $ 500 Including interest of 3.75% |
|
| 102,300 |
|
|
| 102,300 |
|
Note payable to U.S Small Business Administration’s Paycheck Protection Program. Any portion not forgiven includes interest of 1.0% |
|
| - |
|
|
| 6,951 |
|
Note payable to Sheffeld financial secured by a lawnmower due in monthly installments of $ 283 including 0% and personally guaranteed by the Company’s President |
|
| 11,628 |
|
|
| - |
|
Note payable to Winstar Farms LLC due in one installment of $ 42,500 on or before November 1, 2021 including interest of 4.0% |
|
| 42,500 |
|
|
| 42,500 |
|
Note payable to Huntington National Bank secured by a vehicle due In monthly installments of $ 882 including interest of 5.3% Personally guaranteed by the Company’s President |
|
| 43,606 |
|
|
| 51,635 |
|
Note payable to SE Toyota secured by a vehicle due in monthly Installments of $ 918 including interest of 5.5% personally Guaranteed by the Company |
|
| 30,724 |
|
|
| 40,870 |
|
|
|
| 247,037 |
|
|
| 268,150 |
|
Less current maturities |
|
| 75,806 |
|
|
| 74,816 |
|
Total Long term maturities |
| $ | 171,231 |
|
|
| 193,334 |
|
Annual principal payments for years subsequent to 2021 on notes payables are as follows:
2022 |
| $ | 75,806 |
|
2023 |
|
| 33,418 |
|
2024 |
|
| 32,215 |
|
2025 |
|
| 20,812 |
|
2026 and beyond |
|
| 84,786 |
|
|
| $ | 247,037 |
|
Interest expense related to notes payable for the years ended December 31, 2021 and 2020 amounted to $ 13,641 and $ 13,779, respectively.
F-16 |
Table of Contents |
NOTE 11 – DUE TO SHAREHOLDER
The amounts due to shareholder are owed to the Company’s President. These represent unpaid salary and non-interest-bearing loans. The loans are considered long-term and classified accordingly. The balances at December 31, 2021 and 2020 were $492,965 and $358,070, respectively.
NOTE 12 – SHARES OF STOCK
The Company is authorized to issue 250,000,000 shares (par value of $ 0.0001) which consists of 200,000,000 Class A common shares, 25,000,000 Class B common shares and 25,000,000 shares of preferred stock. The shares are issued to both accredited investors under Regulation D and sophisticated investors with access to information through a subscription agreement.
The balances at December 31, 2021 and 2020 as follows:
Class A common shares:
|
| 2021 |
|
| 2020 |
| ||
Balance, beginning of year |
|
| 48,195,443 |
|
|
| 43,298,793 |
|
Issued |
|
| 443,431 |
|
|
| 4,986,650 |
|
Repurchased |
|
| - |
|
|
| - |
|
Balance, end of year |
|
| 49,638,874 |
|
|
| 48,195,443 |
|
Average shares outstanding |
|
| 48,917,159 |
|
|
| 45,747,118 |
|
Earnings (loss) per share |
| $ | (0.07 | ) |
| $ | (0.04 | ) |
There were 10,000,000 Class B common shares issued to the Company's President and no preferred shares issued and outstanding as at December 31, 2021 and 2020.
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Legal Matters - Company is not currently involved with and does not know of any pending or threatening litigation against the Company or its management.
NOTE 14 – CORONAVIRUS
In March 2020, the World Health Organization declared the coronavirus disease (COVID-19) a global pandemic. This highly contagious disease has spread worldwide affecting workforces, customers, economies, and financial markets globally, potentially leading to an economic downturn. It has also disrupted the normal operations of many businesses. As governments and private sectors respond to this evolving threat, their actions, and restrictions they have or may impose, could further adversely impact business operations.
NOTE 15 - SUBSEQUENT EVENTS
Management has evaluated subsequent events through April 28, 2022 the date the financial statements were available for issuance. Based on this evaluation, other than the disclosure below, no additional material events were identified which require adjustment or disclosure in the financial statements.
On February 10, 2022, the Company executed its option to purchase the Circle 8 Ranch in cash for $2,945,000 to include both the real estate and equipment.
As of April 28, 2022, the Company has received $ 8,963,857 in additional capital contributions during 2022 through a Regulation A+ Offering.
F-17 |
PART III – EXHIBITS
† Filed herewith.
# Previously filed
16 |
SIGNATURES
Pursuant to the requirements of Regulation A, the issuer had duly caused this Annual Report on Form 1-K to be signed on its behalf by the undersigned, thereunto duly authorized, on April 29, 2022.
| TROPICAL RACING INC. |
| |
|
|
| |
| By: | /s/ Troy Levy |
|
|
| Name: Troy Levy |
|
|
| Title: President (Principal Executive Officer) |
|
Pursuant to the requirements of Regulation A, this report has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated.
By: /s/ Troy Levy |
| Date: April 29, 2022 |
|
Name: Troy Levy Title: Director |
|
|
|
|
|
|
|
By: /s/ Sunny Sharma |
| Date: April 29, 2022 |
|
Name: Sunny Sharma Title: Interim Chief Financial Officer (Principal Financial Officer) |
|
|
|
By: /s/ Ronald Kapphahn |
| Date: April 29, 2022 |
|
Name: Ronald Kapphahn Title: Director |
|
|
|
17 |