UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20192020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-30653
Galaxy Gaming, Inc.
(Exact name of small business issuer as specified in its charter)
Nevada |
| 20-8143439 |
(State or other jurisdiction of incorporation or organization) |
| (IRS Employer Identification No.) |
|
|
|
6767 Spencer Street, Las Vegas, NV 89119 | ||
(Address of principal executive offices) | ||
| ||
(702) 939-3254 | ||
(Issuer’s telephone number) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading symbol |
| Name of exchange on which registered |
Common stock |
| GLXZ |
| OTCQB marketplace |
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the issuer has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.
Large accelerated filer |
| ☐ |
| Accelerated filer |
| ☐ |
|
|
|
| |||
Non-accelerated filer |
|
|
| Smaller reporting company |
| ☒ |
|
|
|
|
|
|
|
Emerging growth company |
| ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. ☐
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 17,910,34421,582,638 common shares as of November 10, 2019.12, 2020.
GALAXY GAMING, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 20192020
TABLE OF CONTENTS
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| PART I
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Item 1: |
| |
Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3: |
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Item 4: |
| |
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PART II
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Item 1: |
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Item 2: |
| |
Item 6: |
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2
PART I - FINANCIAL INFORMATION
Our financial statements included in this Form 10-Q are as follows:
3
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS |
| September 30, 2019 |
|
| December 31, 2018 |
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||||
Current assets: |
| (Unaudited) |
|
|
|
|
|
| (Unaudited) |
|
|
|
|
| ||
Cash, cash equivalents and restricted cash |
| $ | 8,577,296 |
|
| $ | 6,311,563 |
| ||||||||
Accounts receivable, net of allowance of $82,936 and $54,136, respectively |
|
| 3,225,242 |
|
|
| 2,849,861 |
| ||||||||
Cash and cash equivalents |
| $ | 2,668,906 |
|
| $ | 9,686,698 |
| ||||||||
Accounts receivable, net of allowance of $129,587 and $77,433, respectively |
|
| 2,183,744 |
|
|
| 3,099,586 |
| ||||||||
Inventory, net |
|
| 689,767 |
|
|
| 531,814 |
|
|
| 761,345 |
|
|
| 665,654 |
|
Income tax receivable |
|
| 337,292 |
|
|
| — |
|
|
| 350,244 |
|
|
| 260,347 |
|
Prepaid expense |
|
| 550,340 |
|
|
| 510,254 |
| ||||||||
Other current assets |
|
| 4,541 |
|
|
| 3,352 |
| ||||||||
Prepaid expense and other current assets |
|
| 704,557 |
|
|
| 761,650 |
| ||||||||
Total current assets |
|
| 13,384,478 |
|
|
| 10,206,844 |
|
|
| 6,668,796 |
|
|
| 14,473,935 |
|
Property and equipment, net |
|
| 137,349 |
|
|
| 199,585 |
|
|
| 116,152 |
|
|
| 144,909 |
|
Operating lease right-of-use assets |
|
| 101,958 |
|
|
| — |
|
|
| 1,482,534 |
|
|
| 306,859 |
|
Assets deployed at client locations, net |
|
| 419,035 |
|
|
| 471,562 |
|
|
| 258,856 |
|
|
| 405,522 |
|
Goodwill |
|
| 1,091,000 |
|
|
| 1,091,000 |
|
|
| 1,091,000 |
|
|
| 1,091,000 |
|
Other intangible assets, net |
|
| 7,782,892 |
|
|
| 8,890,252 |
|
|
| 16,610,045 |
|
|
| 7,430,643 |
|
Deferred tax assets, net |
|
| 338,676 |
|
|
| 334,482 |
|
|
| 892,090 |
|
|
| 399,283 |
|
Other assets, net |
|
| 27,305 |
|
|
| — |
| ||||||||
Total assets |
| $ | 23,255,388 |
|
| $ | 21,193,725 |
|
| $ | 27,146,778 |
|
| $ | 24,252,151 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
|
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|
|
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|
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|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 1,014,502 |
|
| $ | 681,936 |
|
| $ | 2,099,180 |
|
| $ | 766,305 |
|
Accrued expenses |
|
| 1,285,310 |
|
|
| 1,295,570 |
|
|
| 844,146 |
|
|
| 1,450,879 |
|
Income taxes payable |
|
| — |
|
|
| 82,091 |
| ||||||||
Revenue contract liability |
|
| 1,294,680 |
|
|
| 1,438,492 |
|
|
| 587,094 |
|
|
| 1,294,265 |
|
Deferred rent, current portion |
|
| — |
|
|
| 14,025 |
| ||||||||
Current portion of long-term debt |
|
| 1,437,950 |
|
|
| 1,456,847 |
|
|
| 2,530,149 |
|
|
| 1,634,527 |
|
Current portion of operating lease liabilities |
|
| 83,953 |
|
|
| — |
|
|
| 197,067 |
|
|
| 276,963 |
|
Other current liabilities |
|
| — |
|
|
| 21,654 |
| ||||||||
Total current liabilities |
|
| 5,116,395 |
|
|
| 4,990,615 |
|
|
| 6,257,636 |
|
|
| 5,422,939 |
|
Long-term operating lease liabilities |
|
| 23,074 |
|
|
| — |
|
|
| 1,266,215 |
|
|
| 30,325 |
|
Long-term debt, net |
|
| 46,680,702 |
|
|
| 8,649,828 |
| ||||||||
Long-term liabilities, net |
|
| 45,991,154 |
|
|
| 46,291,014 |
| ||||||||
Interest rate swap liability |
|
| 174,621 |
|
|
| 96,181 |
|
|
| 118,846 |
|
|
| 140,495 |
|
Total liabilities |
|
| 51,994,792 |
|
|
| 13,736,624 |
|
|
| 53,633,851 |
|
|
| 51,884,773 |
|
Commitments and Contingencies (See Note 11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity (deficit) |
|
|
|
|
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|
|
|
|
|
|
|
|
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|
Preferred stock, 10,000,000 shares authorized, $0.001 par value; 0 shares issued and outstanding, respectively |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Common stock, 65,000,000 shares authorized; $0.001 par value; 17,910,344 and 39,921,591 shares issued and outstanding, respectively |
|
| 17,910 |
|
|
| 39,922 |
| ||||||||
Common stock, 65,000,000 shares authorized; $0.001 par value; 21,582,638 and 18,017,944 shares issued and outstanding, respectively |
|
| 21,582 |
|
|
| 18,018 |
| ||||||||
Additional paid-in capital |
|
| 5,536,497 |
|
|
| 4,733,701 |
|
|
| 10,344,181 |
|
|
| 5,795,636 |
|
Accumulated earnings (deficit) |
|
| (34,293,811 | ) |
|
| 2,683,478 |
| ||||||||
Total stockholders’ equity (deficit) |
|
| (28,739,404 | ) |
|
| 7,457,101 |
| ||||||||
Total liabilities and stockholders’ equity (deficit) |
| $ | 23,255,388 |
|
| $ | 21,193,725 |
| ||||||||
Accumulated deficit |
|
| (36,833,752 | ) |
|
| (33,446,276 | ) | ||||||||
Accumulated other comprehensive loss |
|
| (19,084 | ) |
|
| — |
| ||||||||
Total stockholders’ deficit |
|
| (26,487,073 | ) |
|
| (27,632,622 | ) | ||||||||
Total liabilities and stockholders’ deficit |
| $ | 27,146,778 |
|
| $ | 24,252,151 |
|
The accompanying notes are an integral part of the financial statements.
4
CONDENSED STATEMENTSCONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(Unaudited)
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||
|
| September 30, 2019 |
|
| September 30, 2018 |
|
| September 30, 2019 |
|
| September 30, 2018 |
|
| September 30, 2020 |
|
| September 30, 2019 |
|
| September 30, 2020 |
|
| September 30, 2019 |
| ||||||||
Revenue: |
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
Product leases and royalties |
| $ | 5,371,450 |
|
| $ | 4,775,754 |
|
| $ | 16,116,533 |
|
| $ | 13,672,459 |
| ||||||||||||||||
Product sales and service |
|
| 196 |
|
|
| 30 |
|
|
| 1,050 |
|
|
| 191 |
| ||||||||||||||||
Product leases, royalties and other |
| $ | 1,797,833 |
|
| $ | 5,371,646 |
|
| $ | 6,956,122 |
|
| $ | 16,117,583 |
| ||||||||||||||||
Total revenue |
|
| 5,371,646 |
|
|
| 4,775,784 |
|
|
| 16,117,583 |
|
|
| 13,672,650 |
|
| $ | 1,797,833 |
|
| $ | 5,371,646 |
|
|
| 6,956,122 |
|
| $ | 16,117,583 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of ancillary products and assembled components |
|
| 37,674 |
|
|
| 47,828 |
|
|
| 167,009 |
|
|
| 107,215 |
|
|
| 11,142 |
|
|
| 37,674 |
|
|
| 40,855 |
|
|
| 167,009 |
|
Selling, general and administrative |
|
| 3,460,319 |
|
|
| 2,559,056 |
|
|
| 9,941,029 |
|
|
| 7,741,213 |
|
|
| 1,833,723 |
|
|
| 3,645,319 |
|
|
| 7,264,410 |
|
|
| 10,126,029 |
|
Research and development |
|
| 208,253 |
|
|
| 373,456 |
|
|
| 685,693 |
|
|
| 816,657 |
|
|
| 97,081 |
|
|
| 208,253 |
|
|
| 391,333 |
|
|
| 685,693 |
|
Depreciation and amortization |
|
| 476,112 |
|
|
| 462,402 |
|
|
| 1,439,220 |
|
|
| 1,372,752 |
|
|
| 575,637 |
|
|
| 476,112 |
|
|
| 1,499,927 |
|
|
| 1,439,220 |
|
Share-based compensation |
|
| 242,016 |
|
|
| 192,998 |
|
|
| 678,199 |
|
|
| 550,588 |
|
|
| 178,553 |
|
|
| 242,016 |
|
|
| 512,818 |
|
|
| 678,199 |
|
Total costs and expenses |
|
| 4,424,374 |
|
|
| 3,635,740 |
|
|
| 12,911,150 |
|
|
| 10,588,425 |
|
|
| 2,696,136 |
|
|
| 4,609,374 |
|
|
| 9,709,343 |
|
|
| 13,096,150 |
|
Income from operations |
|
| 947,272 |
|
|
| 1,140,044 |
|
|
| 3,206,433 |
|
|
| 3,084,225 |
| ||||||||||||||||
(Loss) income from operations |
|
| (898,303 | ) |
|
| 762,272 |
|
|
| (2,753,221 | ) |
|
| 3,021,433 |
| ||||||||||||||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
| 1,412 |
|
|
| 25,326 |
|
|
| 25,313 |
|
|
| 45,891 |
| ||||||||||||||||
Interest expense |
|
| (361,188 | ) |
|
| (206,425 | ) |
|
| (818,555 | ) |
|
| (819,837 | ) |
|
| (162,082 | ) |
|
| (165,706 | ) |
|
| (506,922 | ) |
|
| (503,262 | ) |
Foreign currency exchange loss |
|
| (69,470 | ) |
|
| (22,095 | ) |
|
| (57,299 | ) |
|
| (542 | ) | ||||||||||||||||
Share redemption consideration |
|
| (195,482 | ) |
|
| (195,482 | ) |
|
| (586,446 | ) |
|
| (315,293 | ) | ||||||||||||||||
Foreign currency exchange gain (loss) |
|
| 20,014 |
|
|
| (69,470 | ) |
|
| (95,976 | ) |
|
| (57,299 | ) | ||||||||||||||||
Change in estimated fair value of interest rate swap liability |
|
| 13,162 |
|
|
| 48,528 |
|
|
| (78,440 | ) |
|
| (28,707 | ) |
|
| 55,330 |
|
|
| 13,162 |
|
|
| 21,650 |
|
|
| (78,440 | ) |
Loss on extinguishment of debt |
|
| — |
|
|
| (1,765 | ) |
|
| — |
|
|
| (1,349,271 | ) | ||||||||||||||||
Non-recurring severance expense |
|
| (185,000 | ) |
|
| — |
|
|
| (185,000 | ) |
|
| — |
| ||||||||||||||||
Interest income |
|
| 25,326 |
|
|
| 343 |
|
|
| 45,891 |
|
|
| 974 |
| ||||||||||||||||
Other non-recurring income |
|
| 15,320 |
|
|
| — |
|
|
| 15,320 |
|
|
| — |
| ||||||||||||||||
Total other expense |
|
| (577,170 | ) |
|
| (181,414 | ) |
|
| (1,093,403 | ) |
|
| (2,197,383 | ) |
|
| (265,488 | ) |
|
| (392,170 | ) |
|
| (1,127,061 | ) |
|
| (908,403 | ) |
Income before benefit (provision) for income taxes |
|
| 370,102 |
|
|
| 958,630 |
|
|
| 2,113,030 |
|
|
| 886,842 |
| ||||||||||||||||
(Loss) income before benefit (provision) for income taxes |
|
| (1,163,791 | ) |
|
| 370,102 |
|
|
| (3,880,282 | ) |
|
| 2,113,030 |
| ||||||||||||||||
Benefit (provision) for income taxes |
|
| 210,132 |
|
|
| (166,662 | ) |
|
| (17,189 | ) |
|
| (154,799 | ) |
|
| (133,708 | ) |
|
| 210,132 |
|
|
| 492,807 |
|
|
| (17,189 | ) |
Net income |
| $ | 580,234 |
|
| $ | 791,968 |
|
| $ | 2,095,841 |
|
| $ | 732,043 |
| ||||||||||||||||
Net (loss) income |
| $ | (1,297,499 | ) |
| $ | 580,234 |
|
| $ | (3,387,475 | ) |
| $ | 2,095,841 |
| ||||||||||||||||
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|
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|
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|
|
|
|
|
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|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Basic |
| $ | 0.03 |
|
| $ | 0.02 |
|
| $ | 0.07 |
|
| $ | 0.02 |
|
| $ | (0.07 | ) |
| $ | 0.03 |
|
| $ | (0.18 | ) |
| $ | 0.07 |
|
Diluted |
| $ | 0.03 |
|
| $ | 0.02 |
|
| $ | 0.07 |
|
| $ | 0.02 |
|
| $ | (0.06 | ) |
| $ | 0.03 |
|
| $ | (0.17 | ) |
| $ | 0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 17,774,022 |
|
|
| 39,844,863 |
|
|
| 28,083,665 |
|
|
| 39,805,144 |
|
|
| 19,745,525 |
|
|
| 17,774,022 |
|
|
| 18,675,769 |
|
|
| 28,083,665 |
|
Diluted |
|
| 19,102,709 |
|
|
| 41,184,368 |
|
|
| 29,672,645 |
|
|
| 41,059,384 |
|
|
| 20,475,085 |
|
|
| 19,102,709 |
|
|
| 19,483,464 |
|
|
| 29,672,645 |
|
The accompanying notes are an integral part of the financial statements.
5
CONDENSED STATEMENTSCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
|
| Common Stock |
|
| Additional Paid in |
|
| Accumulated Earnings |
|
| Total Shareholders' |
| ||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| (Deficit) |
|
| Equity (Deficit) |
| |||||
Beginning balance, December 31, 2018 |
|
| 39,921,591 |
|
| $ | 39,922 |
|
| $ | 4,733,701 |
|
| $ | 2,683,478 |
|
| $ | 7,457,101 |
|
Common stock redemption |
|
| (23,271,667 | ) |
|
| (23,271 | ) |
|
| — |
|
|
| (39,073,130 | ) |
|
| (39,096,401 | ) |
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,515,607 |
|
|
| 1,515,607 |
|
Stock options exercised |
|
| 556,220 |
|
|
| 556 |
|
|
| 96,051 |
|
|
| — |
|
|
| 96,607 |
|
Share based compensation expense |
|
| 546,600 |
|
|
| 546 |
|
|
| 435,636 |
|
|
| — |
|
|
| 436,182 |
|
Balance, June 30, 2019 |
|
| 17,752,744 |
|
|
| 17,753 |
|
|
| 5,265,388 |
|
|
| (34,874,045 | ) |
|
| (29,590,904 | ) |
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 580,234 |
|
|
| 580,234 |
|
Stock options exercised |
|
| 75,000 |
|
|
| 75 |
|
|
| 29,175 |
|
|
| — |
|
|
| 29,250 |
|
Share based compensation expense |
|
| 82,600 |
|
|
| 82 |
|
|
| 241,934 |
|
|
| — |
|
|
| 242,016 |
|
Balance, September 30, 2019 |
|
| 17,910,344 |
|
| $ | 17,910 |
|
| $ | 5,536,497 |
|
| $ | (34,293,811 | ) |
| $ | (28,739,404 | ) |
|
| Common Stock |
|
| Additional Paid in |
|
| Accumulated Earnings |
|
| Accumulated Other |
|
| Total Shareholders' |
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| (Deficit) |
|
| Comprehensive Income |
|
| Deficit |
| ||||||
Beginning balance, December 31, 2019 |
|
| 18,017,944 |
|
| $ | 18,018 |
|
| $ | 5,795,636 |
|
| $ | (33,446,276 | ) |
| $ | — |
|
| $ | (27,632,622 | ) |
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 116,605 |
|
|
| — |
|
|
| 116,605 |
|
Stock options exercised |
|
| 25,000 |
|
|
| 25 |
|
|
| 7,475 |
|
|
| — |
|
|
| — |
|
|
| 7,500 |
|
Share-based compensation |
|
| 63,333 |
|
|
| 63 |
|
|
| 157,533 |
|
|
| — |
|
|
| — |
|
|
| 157,596 |
|
Balance, March 31, 2020 |
|
| 18,106,277 |
|
| $ | 18,106 |
|
| $ | 5,960,644 |
|
| $ | (33,329,671 | ) |
| $ | — |
|
| $ | (27,350,921 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,206,582 | ) |
|
| — |
|
|
| (2,206,582 | ) |
Stock options exercised |
|
| 150,000 |
|
|
| 150 |
|
|
| 30,113 |
|
|
| — |
|
|
| — |
|
|
| 30,263 |
|
Share-based compensation |
|
| 80,000 |
|
|
| 80 |
|
|
| 176,589 |
|
|
| — |
|
|
| — |
|
|
| 176,669 |
|
Balance, June 30, 2020 |
|
| 18,336,277 |
|
| $ | 18,336 |
|
| $ | 6,167,346 |
|
| $ | (35,536,253 | ) |
| $ | — |
|
| $ | (29,350,571 | ) |
Shares issued in connection with PGP asset acquisition |
|
| 3,141,361 |
|
|
| 3,141 |
|
| $ | 3,986,387 |
|
|
| — |
|
|
| — |
|
|
| 3,989,528 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,297,499 | ) |
|
| — |
|
|
| (1,297,499 | ) |
Foreign currency translation adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (19,084 | ) |
|
| (19,084 | ) |
Stock options exercised |
|
| 50,000 |
|
|
| 50 |
|
|
| 11,950 |
|
|
| — |
|
|
| — |
|
|
| 12,000 |
|
Share-based compensation |
|
| 55,000 |
|
|
| 55 |
|
|
| 178,498 |
|
|
| — |
|
|
| — |
|
|
| 178,553 |
|
Balance, September 30, 2020 |
|
| 21,582,638 |
|
| $ | 21,582 |
|
| $ | 10,344,181 |
|
| $ | (36,833,752 | ) |
| $ | (19,084 | ) |
| $ | (26,487,073 | ) |
|
| Common Stock |
|
| Additional Paid in |
|
|
|
|
|
| Total Shareholders' |
| |||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Accumulated Earnings |
|
| Equity |
| |||||
Beginning balance, December 31, 2017 |
|
| 39,565,591 |
|
| $ | 39,566 |
|
| $ | 3,957,703 |
|
| $ | 1,465,599 |
|
| $ | 5,462,868 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (59,595 | ) |
|
| (59,595 | ) |
Share based compensation expense |
|
| 278,000 |
|
|
| 278 |
|
|
| 357,312 |
|
|
| — |
|
|
| 357,590 |
|
Balance, June 30, 2018 |
|
| 39,843,591 |
|
|
| 39,844 |
|
|
| 4,315,015 |
|
|
| 1,406,004 |
|
|
| 5,760,863 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 791,968 |
|
|
| 791,968 |
|
Share based compensation expense |
|
| 39,000 |
|
|
| 39 |
|
|
| 192,959 |
|
|
| — |
|
|
| 192,998 |
|
Balance, September 30, 2018 |
|
| 39,882,591 | �� |
| $ | 39,883 |
|
| $ | 4,507,974 |
|
| $ | 2,197,972 |
|
| $ | 6,745,829 |
|
|
| Common Stock |
|
| Additional Paid in |
|
| Accumulated Earnings |
|
| Accumulated Other |
|
| Total Shareholders' |
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| (Deficit) |
|
| Comprehensive Income |
|
| Equity (Deficit) |
| ||||||
Beginning balance, December 31, 2018 |
|
| 39,921,591 |
|
| $ | 39,922 |
|
| $ | 4,733,701 |
|
| $ | 2,683,478 |
|
| $ | — |
|
| $ | 7,457,101 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 460,664 |
|
|
| — |
|
|
| 460,664 |
|
Stock options exercised |
|
| 98,332 |
|
|
| 98 |
|
|
| 36,134 |
|
|
| — |
|
|
| — |
|
|
| 36,232 |
|
Share-based compensation |
|
| 470,200 |
|
|
| 470 |
|
|
| 223,134 |
|
|
| — |
|
|
| — |
|
|
| 223,604 |
|
Balance, March 31, 2019 |
|
| 40,490,123 |
|
| $ | 40,490 |
|
| $ | 4,992,969 |
|
| $ | 3,144,142 |
|
| $ | — |
|
| $ | 8,177,601 |
|
Common stock redemption |
|
| (23,271,667 | ) |
|
| (23,271 | ) |
|
| — |
|
|
| (39,073,130 | ) |
|
| — |
|
|
| (39,096,401 | ) |
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,054,943 |
|
|
| — |
|
|
| 1,054,943 |
|
Stock options exercised |
|
| 457,888 |
|
|
| 458 |
|
|
| 59,917 |
|
|
| — |
|
|
| — |
|
|
| 60,375 |
|
Share-based compensation |
|
| 76,400 |
|
|
| 76 |
|
|
| 212,502 |
|
|
| — |
|
|
| — |
|
|
| 212,578 |
|
Balance, June 30, 2019 |
|
| 17,752,744 |
|
| $ | 17,753 |
|
| $ | 5,265,388 |
|
| $ | (34,874,045 | ) |
| $ | — |
|
| $ | (29,590,904 | ) |
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 580,234 |
|
|
| — |
|
|
| 580,234 |
|
Stock options exercised |
|
| 75,000 |
|
|
| 75 |
|
|
| 29,175 |
|
|
| — |
|
|
| — |
|
|
| 29,250 |
|
Share-based compensation |
|
| 82,600 |
|
|
| 82 |
|
|
| 241,934 |
|
|
| — |
|
|
| — |
|
|
| 242,016 |
|
Balance, September 30, 2019 |
|
| 17,910,344 |
|
| $ | 17,910 |
|
| $ | 5,536,497 |
|
| $ | (34,293,811 | ) |
| $ | — |
|
| $ | (28,739,404 | ) |
The accompanying notes are an integral part of the financial statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| Nine Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, 2019 |
|
| September 30, 2018 |
|
| September 30, 2020 |
|
| September 30, 2019 |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 2,095,841 |
|
| $ | 732,043 |
| ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Net income (loss) |
| $ | (3,387,475 | ) |
| $ | 2,095,841 |
| ||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
| ||||||||
Depreciation and amortization of intangible assets |
|
| 1,424,934 |
|
|
| 1,372,752 |
|
|
| 1,499,927 |
|
|
| 1,424,934 |
|
Amortization of lease right-of-use assets |
|
| 203,205 |
|
|
| — |
| ||||||||
Non-cash lease expense |
|
| 207,378 |
|
|
| 203,205 |
| ||||||||
Amortization of debt issuance costs and debt discount |
|
| 25,584 |
|
|
| 119,809 |
|
|
| 26,935 |
|
|
| 25,584 |
|
Loss on extinguishment of debt |
|
| — |
|
|
| 1,349,271 |
| ||||||||
Bad debt expense |
|
| 101,938 |
|
|
| 38,374 |
|
|
| 166,002 |
|
|
| 101,938 |
|
Change in estimated fair value of interest rate swap liability |
|
| 78,440 |
|
|
| 28,707 |
|
|
| (21,650 | ) |
|
| 78,440 |
|
Deferred income tax benefit |
|
| (4,194 | ) |
|
| — |
|
|
| (492,807 | ) |
|
| (4,194 | ) |
Share-based compensation |
|
| 678,199 |
|
|
| 550,588 |
|
|
| 512,818 |
|
|
| 678,199 |
|
Unrealized foreign exchange gains on cash, cash equivalents and restricted cash |
|
| 33,291 |
|
|
| (24,601 | ) | ||||||||
Unrealized foreign exchange loss |
|
| 84,757 |
|
|
| 33,291 |
| ||||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (477,319 | ) |
|
| (187,445 | ) |
|
| 1,333,515 |
|
|
| (477,319 | ) |
Inventory |
|
| (315,155 | ) |
|
| (317,978 | ) |
|
| (123,359 | ) |
|
| (315,155 | ) |
Prepaid expenses |
|
| (40,086 | ) |
|
| (74,165 | ) | ||||||||
Other current assets |
|
| — |
|
|
| 20,156 |
| ||||||||
Income tax receivable/payable |
|
| (14,379 | ) |
|
| (414,817 | ) | ||||||||
Prepaid expenses and other current assets |
|
| 54,953 |
|
|
| (40,086 | ) | ||||||||
Accounts payable |
|
| 332,566 |
|
|
| (524,503 | ) |
|
| 552,166 |
|
|
| 332,566 |
|
Accrued expenses |
|
| (14,826 | ) |
|
| 335,838 |
|
|
| (698,380 | ) |
|
| (14,826 | ) |
Income taxes receivable/payable |
|
| (414,817 | ) |
|
| (625,788 | ) | ||||||||
Revenue contract liability |
|
| (143,812 | ) |
|
| 137,619 |
|
|
| (707,171 | ) |
|
| (143,812 | ) |
Operating lease liabilities |
|
| (197,875 | ) |
|
| — |
|
|
| (254,363 | ) |
|
| (197,875 | ) |
Other current liabilities |
|
| (71,581 | ) |
|
| (107,054 | ) |
|
| — |
|
|
| (71,581 | ) |
Deferred rent |
|
| — |
|
|
| (16,666 | ) | ||||||||
Net cash provided by operating activities |
|
| 3,294,333 |
|
|
| 2,806,957 |
| ||||||||
Net cash (used in) provided by operating activities |
|
| (1,261,133 | ) |
|
| 3,294,333 |
| ||||||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in intangible assets |
|
| (27,400 | ) |
|
| (33,048 | ) |
|
| — |
|
|
| (27,400 | ) |
Acquisition of PGP assets, net of cash acquired |
|
| (6,266,335 | ) |
|
| — |
| ||||||||
Acquisition of property and equipment |
|
| (32,495 | ) |
|
| (67,050 | ) |
|
| (38,712 | ) |
|
| (32,495 | ) |
Net cash used in investing activities |
|
| (59,895 | ) |
|
| (100,098 | ) |
|
| (6,305,047 | ) |
|
| (59,895 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt issued |
|
| — |
|
|
| 11,098,986 |
| ||||||||
Proceeds from draw on revolving loan |
|
| 1,000,000 |
|
|
| — |
| ||||||||
Proceeds from Paycheck Protection Program |
|
| 835,300 |
|
|
| — |
| ||||||||
Proceeds from stock option exercises |
|
| 189,981 |
|
|
| — |
|
|
| 49,750 |
|
|
| 189,981 |
|
Payments of debt issuance costs |
|
| (5,736 | ) |
|
| (136,162 | ) |
|
| — |
|
|
| (5,736 | ) |
Payment of warrant liability |
|
| — |
|
|
| (1,333,333 | ) | ||||||||
Principal payments on finance lease obligations |
|
| (14,198 | ) |
|
| (24,415 | ) |
|
| — |
|
|
| (14,198 | ) |
Principal payments on long-term debt |
|
| (1,105,461 | ) |
|
| (10,296,900 | ) |
|
| (1,264,322 | ) |
|
| (1,105,461 | ) |
Payments of long-term debt redemption premium |
|
| — |
|
|
| (374,500 | ) | ||||||||
Net cash used in financing activities |
|
| (935,414 | ) |
|
| (1,066,324 | ) | ||||||||
Net cash provided by (used in) financing activities |
|
| 620,728 |
|
|
| (935,414 | ) | ||||||||
Effect of exchange rate changes on cash |
|
| (33,291 | ) |
|
| 24,601 |
|
|
| (72,340 | ) |
|
| (33,291 | ) |
Net increase in cash, cash equivalents and restricted cash |
|
| 2,265,733 |
|
|
| 1,665,136 |
| ||||||||
Cash, cash equivalents and restricted cash – beginning of period |
|
| 6,311,563 |
|
|
| 3,581,209 |
| ||||||||
Cash, cash equivalents and restricted cash – end of period |
| $ | 8,577,296 |
|
| $ | 5,246,345 |
| ||||||||
Net (decrease) increase in cash and cash equivalents |
|
| (7,017,792 | ) |
|
| 2,265,733 |
| ||||||||
Cash and cash equivalents – beginning of period |
|
| 9,686,698 |
|
|
| 6,311,563 |
| ||||||||
Cash and cash equivalents – end of period |
| $ | 2,668,906 |
|
| $ | 8,577,296 |
| ||||||||
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 502,764 |
|
| $ | 700,027 |
|
| $ | 462,959 |
|
| $ | 502,764 |
|
Cash paid for income taxes |
| $ | 436,200 |
|
| $ | 795,818 |
|
| $ | 77,465 |
|
| $ | 436,200 |
|
Supplemental schedule of non-cash activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock redemption in exchange for promissory note |
| $ | 39,096,401 |
|
| $ | — |
| ||||||||
Common stock redemption in exchange for share redemption consideration obligation |
| $ | — |
|
| $ | 39,096,401 |
| ||||||||
Shares issued in connection with PGP asset acquisition |
| $ | 3,989,528 |
|
| $ | — |
| ||||||||
Right-of-use assets obtained in exchange for lease liabilities |
| $ | 305,163 |
|
| $ | — |
|
| $ | 1,383,052 |
|
| $ | 305,163 |
|
Inventory transferred to assets deployed at client locations |
| $ | 157,202 |
|
| $ | 147,434 |
|
| $ | 27,668 |
|
| $ | 157,202 |
|
The accompanying notes are an integral part of the financial statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS AND RECENT DEVELOPMENTS
Unless the context indicates otherwise, references to “Galaxy Gaming, Inc.,” “we,” “us,” “our,” or the “Company,” refer to Galaxy Gaming, Inc., a Nevada corporation (“Galaxy Gaming”).
We are an established global gaming company specializing in the design, development, assembly, marketing and acquisition of proprietary casino table games and associated technology, platforms and systems for the casino gaming industry. Casinos use our proprietary products and services to enhance their gaming floor operations and improve their profitability, productivity and security, as well as to offer popular cutting-edge gaming entertainment content and technology to their players. We market our products and services to online casinos worldwide and to land-based and riverboatcasino gaming companies located in North America, the Caribbean, Central America, the British Isles, Europe and Africa and to cruise ship companiescompanies. We license our products and internetservices for use solely in legalized gaming sites worldwide. markets.
On March 14, 2019, we announced the completion of our previously disclosed strategic alternatives review. After a thorough evaluation of aShare Redemption. range of strategic alternatives, including a sale of the Company, we have decided to continue our existing plan of product line and geographic expansions as an independent company.
On May 6, 2019, we redeemed all 23,271,667 shares of our common stock held by Triangulum Partners, LLC (“Triangulum”), an entity controlled by Robert B. Saucier, Galaxy Gaming's founder, and, prior to the redemption, the holder of a majority of our outstanding common stock. The redemption of Triangulum’s shares was given effect pursuant to ourOur Articles of Incorporation (the “Articles”), which expressly provide that if certain events occur in relation to a stockholder that is required to undergo a gaming suitability review or similar investigative process, we have the option to purchase all or any part of such stockholder’s shares at a price per share that is equal to the average closing share price over the thirty calendar days preceding the purchase. The average closing share price over the thirty calendar days preceding the redemption was $1.68 per share.
As
The consideration owed to Triangulum for the redemption we issued a promissory note payable to Triangulum in the face amount ofis $39,096,401 (the “Triangulum Promissory Note”“Redemption Consideration”). See Note 10.
Furthermore, we filed a lawsuit on May 6, 2019 seeking (i) a declaratory judgment that we acted lawfullyThere is ongoing litigation between the Company and in full compliance with the Articles when we redeemed the Triangulum shares and (ii) certain remedies for breach of fiduciary duty and breach of contract by Triangulum and its Managing Member, Mr. Saucier (the “Triangulum Lawsuit”). The suit alleges thatrelated to the redemption and the other relief sought by us are appropriate and in accordance with the Articles of Incorporation (matters. See Note 11.
Membership Interest Purchase Agreement. On February 25, 2020, Galaxy Gaming Inc. v. Triangulum Partners, LLC, Robert B. Saucier,Clark County, Nevada district court (Case No. A-19-794293-B)).
The defendants to that lawsuit responded to the complaint, and Triangulum filed counterclaims based on a theory of wrongful redemption by us. The defendants also filed a Motion for Preliminary Injunction seeking the redeemed shares be held in a constructive trust. On July 11, 2019, the Court denied the defendants’ Motion for Preliminary Injunction and all related relief. On September 6, 2019, Defendants appealed the denial of the Motion for Preliminary Injunction to the Nevada Supreme Court. We will oppose the appeal, but a briefing schedule has not yet been set by the Supreme Court. Separately, Triangulum filed amended counterclaims, which we moved to dismiss on a number of legal grounds. The Court denied the motion, stating that the amended complaint was sufficiently plead. The Company will file a Petition for a Writ of Mandamus challenging the ruling.
On October 18, 2019, Saucier also filed counterclaims centered similarly on a theory of wrongful redemption, and also claims that for breach of contract and quantum meruit, alleging Galaxy Gaming was obligated to pay Saucier his year-end bonuses, despite his resignation. We will file a timely response, disputing these claims.
Effective June 3, 2019, our Board of Directors (the “Board”) appointed Michael Gavin Isaacs as an independent director. Upon joining the Board, Mr. Isaacs entered into a BoardMembership Interest Purchase Agreement, dated February 25, 2020 (the “Purchase Agreement”), between the Company and the membership interest holders of Directors ServicesProgressive Games Partners LLC (“PGP”).
On August 21, 2020, the Company entered into a First Amendment to the Purchase Agreement pursuant to which,between the Company and the membership interest holders of PGP. The First Amendment, among other things, Mr. Isaacs shall receive 75,000fixed the cash portion of the purchase price at $6.425 million and established that the stock portion would be satisfied through the issuance of 3,141,361 shares of our restrictedthe Company’s common stock with a value of $1.27 per share on the date of the acquisition. The entirety of the purchase price ($10,414,528) has been allocated to customer relationships and is included in Other intangible assets, net, on the Company’s balance sheet. See Note 7. The Company also acquired net working capital of $581,885 (including cash of $158,665), all of which vestis payable to the sellers of PGP.
Management has determined that the PGP transaction does not meet the definition of a business combination and therefore has been accounted for as an asset acquisition.
COVID-19.On March 11, 2020, the World Health Organization declared a pandemic related to the COVID-19 outbreak, which led to a global health emergency. The public-health impact of the outbreak continues to remain largely unknown and still evolving. The related health crisis could continue to adversely affect the global economy, resulting in three annual installmentscontinued economic downturn that could impact demand for our products.
On March 17, 2020, the Company announced that it suspended billing to customers who had closed their doors due to the COVID-19 outbreak. As a result, we did not earn revenue for the use of our games by our physical casino customers during the time that they were closed. In general, the online gaming customers who license our games through our distributor remained and continue to remain in operation in spite of the COVID-19 crisis. We earned revenue from them during the crisis and expect to continue to do so, but potentially at levels that may be lower than we previously received.
As of the date of this filing, many land-based casinos have begun to re-open with significantly reduced occupancy and other limitations. As they reopen, it will take additional time for their operations to return to pre-crisis levels. Given the uncertainties around casino re-openings, we instituted a phased billing approach for our clients through fiscal year 2020, which will result in us realizing substantially less revenue than we might otherwise expect. In addition, because of COVID-19-related financial pressures on our physical casino customers, there can be no assurance that our accounts receivable we will be paid timely (or at all) for revenues earned prior to the shutdowns. Finally, some of our casino clients have notified vendors (including us) that they will lengthen payment terms for a period of time after reopening as they attempt to preserve their own liquidity.
8
We also rely on third-party suppliers and manufacturers in China, many of whom were shut down or severely cut back production during the shutdown. Although this has not had a material effect on our supply chain, any future disruption of our suppliers and their contract manufacturers may impact our sales and operating results going forward.
Because of the uncertainties of COVID-19, the Company drew on its Revolving Loan in the amount of $1,000,000 on March 12, 2020. Also, on April 17, 2020, the Company obtained an unsecured loan of $835,300 through Zions Bancorporation, N.A. dba Nevada State Bank under the Paycheck Protection Program (the “PPP Loan”) pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the Paycheck Protection Program Flexibility Act (the “Flexibility Act”). Pursuant to the CARES Act, the Federal Reserve created the Main Street Lending Program to provide financing for small and medium-sized businesses. On October 26, 2020, the Company borrowed $4 million from Zions Bancorporation N.A., dba Nevada State Bank under the Main Street Lending Program (the “Main Street Loan”). The Main Street Loan bears interest at a rate of three-month US dollar LIBOR plus 300 basis points (initially 3.215%), and interest payments during the first year are deferred and added to the loan balance. The Main Street Loan may be prepaid at any time and matures on the fifth anniversary of the date it was funded, with 15% of principal amortizing in each of the first three anniversary datesthird and fourth years the loan is outstanding. See Note 10.
As of the services agreement. Mr. Isaacs shall also receive quarterly grantsdate of 12,400 common shares (vesting immediately at grant date) for his continued servicethis filing, the Company believes that it has adequate liquidity to meet its short-term obligations. If the effects of the COVID-19 crisis endure or there is a second period of casino closures (Note 16), we may be required to reassess our obligations, including our ability to pay employee compensation and benefits.
The COVID-19 crisis may change the behavior of gaming patrons. Most of our clients operate places of public accommodation, and their patrons may reduce visitation and play as a directorprecaution. Further, governmental authorities may continue to impose reduced hours of operation or limit the capacity of such places of public accommodation. A long-term reduction in play could have a material adverse impact on our results of operations. Depending on the length and shall receive $42,000severity of any such adverse impact, we may fail to comply with our obligations, including covenants in cash compensation annually, paid monthly in arrears. As a non-employee director, he will be entitledour credit agreement, and we may need to receive any other annual cash and equity compensation payable toreassess the carrying value of our other non-employee directors from time to time.assets.
On August 28, 2019, the Company held its Annual Shareholder meeting. The detailed results are available for review as previously reported on Form 8-K. The Company’s current Board of Directors were reelected to stand for the next period.
8
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. The accompanying condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited interim condensed financial statements contain all necessary adjustments (including all those of a recurring nature and those necessary in order for the financial statements to be not misleading) and all disclosures to present fairly our financial position and the results of our operations and cash flows for the periods presented. As permitted by the rules and regulations of the SEC, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations.
These unaudited interim condensed financial statements should be read in conjunction with the financial statements and the related notes thereto included in our Form 10-K for the fiscal year ended December 31, 2018,2019, filed with the SEC on April 1, 2019March 30, 2020 (the “2018“2019 10-K”).
The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
Basis of accounting. The financial statements have been prepared on the accrual basis of accounting in conformity with U.S. GAAP. Revenues are recognized as income when earned and expenses are recognized when they are incurred. We do not have significant categories of cost of revenues. Expenses such as wages, consulting expenses, legal, regulatory and professional fees and rent are recorded when the expense is incurred.
Use of estimates and assumptions. We are required to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our companyCompany and the industry as a whole, and information available from other outside sources. Our estimates affect reported amounts for assets, liabilities, revenues, expenses and related disclosures. Actual results may differ from initial estimates.
Consolidation. The financial statements are presented on a consolidated basis, including the results of the Company and its wholly owned subsidiary, PGP. All intercompany transactions and balances have been eliminated in consolidation.
Impairment considerations. We considered whether the impact of the current COVID-19 pandemic on operations and financial results is an indicator that impairment may exist related to the Company’s inventory (Note 4), property and equipment (Note 5), assets deployed at client locations (Note 6) and intangible assets (Note 7). As a result of its impairment assessments, management has determined that its assets are not currently impaired. We considered the following:
Inventory. We considered whether additional write-offs or reserves were necessary to our inventory balance as a result of the impact of COVID-19. The vast majority of our Inventory is not sold to customers but, rather, is used to support new installations and repairs of our electronic table game systems which we account for as Assets Deployed at Client Locations. Based on our assessment, we
9
determined additional write-offs and reserves were not required. We are in the process of developing a new generation of electronic table game systems and, once that new generation of system is available for customer installation, we will review inventory to determine how much of existing Inventory can be used in the next generation of systems. To the extent that there is Inventory that 1) cannot be used in the new generation of systems and 2) is in excess of what we might expect to need for repair of older generation systems that we expect to remain in the field, we may incur an impairment charge with respect to Inventory that is obsolete.
Long-lived assets. Our long-lived assets include property and equipment, assets deployed at client locations, and intangible assets. We assessed whether there was an indication of impairment of each asset group due to COVID-19 noting that based on the current contracts, including the lengthened payment terms noted above, the carrying value of our long-lived asset groups were recoverable.
Goodwill. We performed a qualitative assessment and determined that it was not more likely than not that the carrying value of the reporting unit was impaired. As part of our qualitative assessment, we considered our previous forecasts and assumptions based on our current projections, which are subject to various risks and uncertainties, including projected revenue, projected operating income, terminal growth rates, and the cost of capital.
Reclassifications. Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period financial statement presentations.
Other Significant Accounting Policies.significant accounting policies. SeeSee Note 32 in Item 8. “Financial Statements and Supplementary Data”Financial Information” included in our 20182019 10-K.
Recently adopted accounting standards
Leases.Fair Value Measurement. In February 2016,August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASC 842”). The amended guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. We have adopted the new standard effective January 1, 2019, using the modified retrospective transition approach and recognized $161,310 of right-of-use operating lease assets and $175,335 of operating lease liabilities on our balance sheets upon adoption (Note 9). In addition, we eliminated leasehold improvements related to a finance lease from fixed assets, recognized $14,286 of right-of-use finance lease assets and maintained the finance lease liability at the carrying cost of the previous capital lease liability of $14,198 upon adoption. The adoption has increased our total assets and liabilities as of January 1, 2019. Lessor accounting related to our enhanced table system remains unchanged.
New accounting standards not yet adopted
Fair Value Measurement. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 addresses the required disclosures around fair value measurement, removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. TheWe have adopted the new standard is effective January 1, 2020, which did not have a material effect on our financial statements or related disclosures.
New accounting standards not yet adopted
Financial Instruments – Credit Losses. In February 2020, the FASB issued ASU No. 2020-02, Financial Instruments – Credit Losses (Topic 326). ASU 2020-02 provides updated guidance on how an entity should measure credit losses on financial instruments and delayed the effective date of Topic 326 for annual periodscertain smaller reporting companies until fiscal years beginning after December 15, 2019, including interim periods within those annual periods.2022. Early adoption is permitted. We do not believe the adoption of this guidance will have a material impact on our financial statements.statements or related disclosures.
Internal-Use Software. In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15. This new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption (including early adoption in any interim period) permitted. We do not believe the adoption of this guidance will have a material impact on our financial statements.
9
NOTE 3. REVENUE RECOGNITION
Revenue recognition. We generate revenue primarily from the licensing of our intellectual property. We also, occasionally, receive a one-time sale of certain products and/or reimbursement of our equipment.
License fees. We derive product lease and royalty revenue from negotiated recurring fee license agreements and the performance of our products. We account for these agreements as month-to-month contracts and recognize revenue each month as we satisfy our performance obligations by granting access to intellectual property to our clients.obligations. In addition, revenue associated with performance-based agreements is recognized during the month that the usage of the product or intellectual property occurs.
Some of our intellectual property requires the installation of certain equipment and both the intellectual property and the related equipment are licensed in one bundled package. We have determined that the equipment is not distinct from the intellectual property and, therefore, we have only one performance obligation and, as a result, the allocation of the transaction price to different performance obligations is not necessary.
Product sales. Occasionally, we sell certain incidental products or receive reimbursement of our equipment after the commencement of the new license agreement. Revenue from such sales is recognized as a separate performance obligation when we ship the items.
10
The following table disaggregates our revenue by geographic location for the following periods:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
North America and Caribbean |
| $ | 3,891,875 |
|
| $ | 3,622,729 |
|
| $ | 11,644,353 |
|
| $ | 10,568,129 |
|
| $ | 971,147 |
|
| $ | 3,891,875 |
|
| $ | 4,262,408 |
|
| $ | 11,644,353 |
|
Europe |
|
| 1,479,771 |
|
|
| 1,153,055 |
|
|
| 4,473,230 |
|
|
| 3,104,521 |
| ||||||||||||||||
Europe, Middle East and Africa |
|
| 826,686 |
|
|
| 1,479,771 |
|
|
| 2,693,714 |
|
|
| 4,473,230 |
| ||||||||||||||||
Total revenue |
| $ | 5,371,646 |
|
| $ | 4,775,784 |
|
| $ | 16,117,583 |
|
| $ | 13,672,650 |
|
| $ | 1,797,833 |
|
| $ | 5,371,646 |
|
| $ | 6,956,122 |
|
| $ | 16,117,583 |
|
Revenue contract liability
For a portion of our business, we invoice our clients monthly in advance for unlimited use of our intellectual property licenses and recognize a revenue contract liability that represents such advanced billing to our clients for unsatisfied performance. We reduce the revenue contract liability and recognize revenue when we transfer those goods or services and, therefore, satisfy our performance obligation.
The table below summarizes changes in the revenue contract liability during the nine months ended September 30, 2019:2020:
Beginning balance – January 1, 2019 |
| $ | 1,438,492 |
| ||||
Beginning balance – January 1, 2020 |
| $ | 1,294,265 |
| ||||
Increase (advanced billings) |
|
| 11,547,925 |
|
|
| 7,199,100 |
|
Decrease (revenue recognition) |
|
| (11,691,737 | ) |
|
| (7,906,271 | ) |
Ending balance – September 30, 2019 |
| $ | 1,294,680 |
| ||||
Ending balance – September 30, 2020 |
| $ | 587,094 |
|
Revenue recognized during the three and nine months ended September 30, 20192020 that was included in the beginning balance of revenue contract liability above was $1,436,410.
$6,250 and $1,292,182, respectively.
NOTE 4. INVENTORY
Inventory, net consisted of the following at:
|
| September 30, |
|
| December 31, |
|
| September 30, |
|
| December 31, |
| ||||
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||
Raw materials and component parts |
| $ | 361,433 |
|
| $ | 267,517 |
|
| $ | 379,711 |
|
| $ | 359,349 |
|
Finished goods |
|
| 358,333 |
|
|
| 306,335 |
|
|
| 428,103 |
|
|
| 343,305 |
|
Inventory, gross |
|
| 719,766 |
|
|
| 573,852 |
|
|
| 807,814 |
|
|
| 702,654 |
|
Less: inventory reserve |
|
| (29,999 | ) |
|
| (42,038 | ) |
|
| (46,469 | ) |
|
| (37,000 | ) |
Inventory, net |
| $ | 689,767 |
|
| $ | 531,814 |
|
| $ | 761,345 |
|
| $ | 665,654 |
|
10
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following at:
|
| September 30, |
|
| December 31, |
|
| September 30, |
|
| December 31, |
| ||||
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||
Furniture and fixtures |
| $ | 312,640 |
|
| $ | 312,640 |
|
| $ | 312,640 |
|
| $ | 312,639 |
|
Automotive vehicles |
|
| 215,127 |
|
|
| 215,127 |
|
|
| 215,127 |
|
|
| 215,127 |
|
Office and computer equipment |
|
| 329,296 |
|
|
| 302,296 |
| ||||||||
Leasehold improvements |
|
| 9,883 |
|
|
| 156,843 |
|
|
| 18,554 |
|
|
| 6,843 |
|
Computer equipment |
|
| 189,294 |
|
|
| 159,838 |
| ||||||||
Office equipment |
|
| 53,483 |
|
|
| 53,484 |
| ||||||||
Property and equipment, gross |
|
| 780,427 |
|
|
| 897,932 |
|
|
| 875,617 |
|
|
| 836,905 |
|
Less: accumulated depreciation |
|
| (643,078 | ) |
|
| (698,347 | ) |
|
| (759,465 | ) |
|
| (691,996 | ) |
Property and equipment, net |
| $ | 137,349 |
|
| $ | 199,585 |
|
| $ | 116,152 |
|
| $ | 144,909 |
|
Property and equipment, net included $150,000 of leasehold improvements acquired under capital leases and $135,714 of related accumulated depreciation as of December 31, 2018, both of which were reclassified to finance lease right-of-use assets upon the adoption of ASC 842 on January 1, 2019 (Note 9).
For the ninethree months ended September 30, 20192020 and 2018,2019, depreciation expense related to property and equipment was $22,153 and $26,467, respectively. For the nine months ended September 30, 2020 and 2019, depreciation expense related to property and equipment was $67,469 and $80,445, and $99,944, respectively.
11
NOTE 6. ASSETS DEPLOYED AT CLIENT LOCATIONS
Assets deployed at client locations, net consisted of the following at:
|
| September 30, |
|
| December 31, |
|
| September 30, |
|
| December 31, |
| ||||
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||
Enhanced table systems |
| $ | 1,042,997 |
|
| $ | 946,237 |
|
| $ | 908,295 |
|
| $ | 993,127 |
|
Less: accumulated depreciation |
|
| (623,962 | ) |
|
| (474,675 | ) |
|
| (649,439 | ) |
|
| (587,605 | ) |
Assets deployed at client locations, net |
| $ | 419,035 |
|
| $ | 471,562 |
|
| $ | 258,856 |
|
| $ | 405,522 |
|
For the three months ended September 30, 2020 and 2019, depreciation expense related to assets deployed at client locations was $51,778 and $70,145, respectively. For the nine months ended September 30, 20192020 and 2018,2019, depreciation expense related to assets deployed at client locations was $174,334 and $209,729, and $145,419, respectively.
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill. A goodwill balance of $1,091,000 was created as a result of an asset acquisitiona transaction completed in October 2011 fromwith Prime Table Games, LLC.LLC (“PTG”).
Other intangible assets, net. Other intangible assets, net consisted of the following at:
|
| September 30, |
|
| December 31, |
|
| September 30, |
|
| December 31, |
| ||||
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||
Patents |
| $ | 13,485,000 |
|
| $ | 13,485,000 |
|
| $ | 13,507,997 |
|
| $ | 13,485,000 |
|
Customer relationships |
|
| 3,400,000 |
|
|
| 3,400,000 |
|
|
| 13,814,528 |
|
|
| 3,400,000 |
|
Trademarks |
|
| 2,880,967 |
|
|
| 2,880,967 |
|
|
| 2,880,967 |
|
|
| 2,880,967 |
|
Non-compete agreements |
|
| 660,000 |
|
|
| 660,000 |
|
|
| 660,000 |
|
|
| 660,000 |
|
Internally-developed software |
|
| 153,415 |
|
|
| 126,015 |
|
|
| 183,416 |
|
|
| 183,415 |
|
Other intangible assets, gross |
|
| 20,579,382 |
|
|
| 20,551,982 |
|
|
| 31,046,908 |
|
|
| 20,609,382 |
|
Less: accumulated amortization |
|
| (12,796,490 | ) |
|
| (11,661,730 | ) |
|
| (14,436,863 | ) |
|
| (13,178,739 | ) |
Other intangible assets, net |
| $ | 7,782,892 |
|
| $ | 8,890,252 |
|
| $ | 16,610,045 |
|
| $ | 7,430,643 |
|
For the three months ended September 30, 2020 and 2019, amortization expense related to other intangibles was $501,706 and $379,499, respectively. For the nine months ended September 30, 20192020 and 2018,2019, amortization expense related to the other intangible assets was $1,134,760$1,258,124 and $1,127,388,$1,134,760, respectively.
11The increase in customer relationships was result of acquiring customer contracts/agreements valued at $10.4 million in connection with the closing on the Purchase Agreement in August 2020.
Estimated future amortization expense is as follows:
Twelve Months Ending September 30, |
| Total |
|
| Total |
| ||
2020 |
| $ | 1,500,836 |
| ||||
2021 |
|
| 1,410,341 |
|
| $ | 2,582,511 |
|
2022 |
|
| 1,398,822 |
|
|
| 2,570,659 |
|
2023 |
|
| 253,507 |
|
|
| 1,417,510 |
|
2024 |
|
| 252,930 |
|
|
| 1,414,600 |
|
2025 |
|
| 1,410,100 |
| ||||
Thereafter |
|
| 2,966,456 |
|
|
| 7,214,665 |
|
Total amortization |
| $ | 7,782,892 |
|
| $ | 16,610,045 |
|
NOTE 8. ACCRUED EXPENSES
Accrued expenses consisted of the following at:
|
| September 30, |
|
| December 31, |
|
| September 30, |
|
| December 31, |
| ||||
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||
Payroll and related |
| $ | 889,137 |
|
| $ | 1,136,808 |
|
| $ | 249,902 |
|
| $ | 747,458 |
|
Interest |
|
| 322,249 |
|
|
| — |
|
|
| 26,924 |
|
|
| 9,895 |
|
Share redemption consideration |
|
| 315,293 |
|
|
| 510,776 |
| ||||||||
Commissions and royalties |
|
| 45,482 |
|
|
| 113,462 |
|
|
| 148,098 |
|
|
| 78,528 |
|
Income tax payable |
|
| — |
|
|
| 64,832 |
| ||||||||
Other |
|
| 28,442 |
|
|
| 45,300 |
|
|
| 103,929 |
|
|
| 39,390 |
|
Total accrued expenses |
| $ | 1,285,310 |
|
| $ | 1,295,570 |
|
| $ | 844,146 |
|
| $ | 1,450,879 |
|
NOTE 9. LEASES
Lessee
We have operating leases for our corporate office, two satellite facilities in the state of Washington, and for certain equipment. We account for lease components (such as rent payments) separately from the non-lease components (such as common-area maintenance costs, real estate and sales taxes and insurance costs). DiscountThe discount rate represents the interest rate implicit in each lease or our incremental borrowing rate at lease commencement date.
On January 28, 2019, we executed a first amendment to the corporate office lease to amend the lease expiration date from September 30, 2019 to December 31, 2019, with monthly base rents of $20,508 from July 1, 2019 to December 31, 2019. As a result of the amendment, we recorded a $117,755 increase to operating lease right-of-use assets and operating lease liabilities. In connection with negotiating the original corporate office lease in 2014, the landlord agreed to finance tenant improvements of $150,000. Upon adoption of ASC 842 (effective January 1, 2019), the remaining amount was classified as a finance lease on the condensed balance sheet, which was paid in full by June 30, 2019.
As of September 30, 2019,2020, our leases have remaining lease terms ranging from three months to 3375 months. Gross right-of-use assets recorded under finance leases and operating leases were $14,286 and $290,877, respectively, and the related accumulated amortization was $14,286 and $188,919, respectively.
12
Supplemental balance sheet information related to leases is as follows:
|
| As of September 30, 2019 |
| As of September 30, 2020 | ||||||||
|
| Amount |
|
| Classification |
| Amount |
|
| Classification | ||
Operating leases: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use lease assets |
| $ | 101,958 |
|
|
|
| $ | 1,482,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease current liabilities |
| $ | 83,953 |
|
| Current portion of operating lease liabilities |
| $ | 197,067 |
|
| Current portion of operating lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease long-term liabilities |
|
| 23,074 |
|
| Long-term operating lease liabilities |
|
| 1,266,215 |
|
| Long-term operating lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating lease liabilities |
| $ | 107,027 |
|
|
|
| $ | 1,463,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
| 1.1 years |
|
|
|
| 5.9 years |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
| 5.8 | % |
|
|
|
| 4.3 | % |
|
|
The components of lease expense are as follows:
|
| Three Months Ended September 30, 2019 | ||||
|
| Amount |
|
| Classification | |
Finance lease cost: |
|
|
|
|
|
|
Amortization of right-of-use assets |
| $ | — |
|
| Depreciation and amortization |
Interest on lease liabilities |
|
| — |
|
| Interest expense |
Total finance lease cost |
| $ | — |
|
|
|
|
|
|
|
|
|
|
Operating lease cost |
| $ | 66,303 |
|
| Selling, general and administrative expense |
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, 2019 | ||||
|
| Amount |
|
| Classification | |
Finance lease cost: |
|
|
|
|
|
|
Amortization of right-of-use assets |
| $ | 14,286 |
|
| Depreciation and amortization |
Interest on lease liabilities |
|
| 195 |
|
| Interest expense |
Total finance lease cost |
| $ | 14,481 |
|
|
|
|
|
|
|
|
|
|
Operating lease cost |
| $ | 195,234 |
|
| Selling, general and administrative expense |
|
| Three Months Ended September 30, 2020 | ||||
|
| Amount |
|
| Classification | |
Operating lease cost |
| $ | 71,716 |
|
| Selling, general and administrative expense |
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, 2020 | ||||
|
| Amount |
|
| Classification | |
Operating lease cost |
| $ | 215,142 |
|
| Selling, general and administrative expense |
Supplemental cash flow information related to leases is as follows:
|
| Nine Months Ended September 30, 2019 | ||||
|
| Amount |
|
| Classification | |
Cash paid for amounts included in the measure of lease liabilities: |
|
|
|
|
|
|
Operating cash flows from finance leases |
| $ | 195 |
|
| Net income |
Financing cash flows from finance leases |
| $ | 14,198 |
|
| Principal payments on finance lease obligations |
Operating cash flows from operating leases |
| $ | 195,234 |
|
| Net income |
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease liabilities: |
|
|
|
|
|
|
Finance leases |
| $ | 14,286 |
|
| Supplemental cash flow information |
Operating leases |
| $ | 290,877 |
|
| Supplemental cash flow information |
|
| Nine Months Ended September 30, 2020 | ||||
|
| Amount |
|
| Classification | |
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
Operating cash flows from operating leases |
| $ | 215,142 |
|
| Net income |
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease liabilities: |
|
|
|
|
|
|
Operating leases |
| $ | 1,383,052 |
|
| Supplemental cash flow information |
13
As of September 30, 2019,2020, future maturities of our operating lease liabilities are as follows:
Twelve Months Ending September 30, |
| Amount |
|
| Amount |
| ||
2020 |
| $ | 83,524 |
| ||||
2021 |
|
| 14,730 |
|
| $ | 197,067 |
|
2022 |
|
| 8,773 |
|
|
| 208,249 |
|
2023 |
|
| 215,373 |
| ||||
2024 |
|
| 234,917 |
| ||||
2025 |
|
| 255,707 |
| ||||
Thereafter |
|
| 351,969 |
| ||||
Total lease liabilities |
| $ | 107,027 |
|
| $ | 1,463,282 |
|
Lessor
Our agreements with the casino clientsOn July 3, 2020 we entered into a new 75-month lease for the license of proprietary tables games are outside of the scope of ASC 842 as such agreements are relatedour corporate headquarters in Las Vegas. Pursuant to the licensenew lease, we now occupy approximately 14,000 square feet of intellectual property.
Enhanced table systemsoffice and warehouse space. The lease commenced on October 1, 2020, with rent abated through the remainder of 2020. Early occupancy was granted on September 15, 2020. Therefore, the right-of-use asset and corresponding liability were recorded on this date. Beginning in January 2021, we will commence paying rent and common area charges in an amount that is approximately equal to what we are electronic enhancements used on casino table gamespaying pursuant to add to player appeal and enhance game security. An example in this category is our Bonus Jackpot System (“BJS”), an advanced electronic system installed on gaming tables designed to collect data by detecting player wagers and other game activities. Typically, the BJS system includes a server, an electronic video display known as TableVision, which shows game information designed to generate player interest and to promote various aspects of the game, and other electronic components. Our BJS agreements with clients convey to them the rights to use equipment. However, these agreements are month-to-month and there is no penalty for either party to terminate the agreements without permission from the other party. As a result, these agreements are not considered leases and, therefore, are outside of the scope of ASC 842 as well.
current lease.
NOTE 10. LONG-TERM DEBTLIABILITIES
Long-term debtliabilities consisted of the following at:
|
| September 30, |
|
| December 31, |
|
| September 30, |
|
| December 31, |
| ||||
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||
Nevada State Bank credit agreement |
| $ | 9,041,000 |
|
| $ | 10,042,400 |
|
| $ | 8,629,800 |
|
| $ | 8,699,900 |
|
Triangulum Promissory Note |
|
| 39,096,401 |
|
|
| — |
| ||||||||
Paycheck Protection Program borrowing |
|
| 835,300 |
|
|
| — |
| ||||||||
Share redemption consideration obligation |
|
| 39,096,401 |
|
|
| 39,096,401 |
| ||||||||
Vehicle notes payable |
|
| 54,776 |
|
|
| 85,043 |
|
|
| 28,162 |
|
|
| 44,490 |
|
Insurance notes payable |
|
| — |
|
|
| 73,794 |
|
|
| — |
|
|
| 177,894 |
|
Long-term debt, gross |
|
| 48,192,177 |
|
|
| 10,201,237 |
| ||||||||
Long-term liabilities, gross |
|
| 48,589,663 |
|
|
| 48,018,685 |
| ||||||||
Less: Unamortized debt issuance costs |
|
| (73,525 | ) |
|
| (94,562 | ) |
|
| (68,360 | ) |
|
| (93,144 | ) |
Long-term debt, net |
|
| 48,118,652 |
|
|
| 10,106,675 |
| ||||||||
Long-term liabilities, net of debt issuance costs |
|
| 48,521,303 |
|
|
| 47,925,541 |
| ||||||||
Less: Current portion |
|
| (1,437,950 | ) |
|
| (1,456,847 | ) |
|
| (2,530,149 | ) |
|
| (1,634,527 | ) |
Long-term debt, long-term portion |
| $ | 46,680,702 |
|
| $ | 8,649,828 |
| ||||||||
Long-term liabilities, net |
| $ | 45,991,154 |
|
| $ | 46,291,014 |
|
Amendments to the Nevada State Bank (“NSB”) Credit Agreement. On May 6, 2019, we entered into a Second Amendment to the Nevada State Bank (“NSB”) Credit Agreement. The Company is party to (i) provide an additional $10 milliona Credit Agreement with Zions Bancorporation, N.A. dba Nevada State Bank (as amended, the “Credit Agreement”), which was last amended on October 26, 2020. The Credit Agreement provided for a Term Loan B availabilityin the initial amount of $11,000,000 and a Revolving Loan in the amount of $1,000,000. On March 12, 2020, the Company drew down $1,000,000 on the Revolving Loan component of the Credit Agreement. At September 30, 2020, the principal amount outstanding under the Term Loan; and (ii) waive for a periodLoan component of 180 days the breach of any covenant in the Credit Agreement resulting ofwas $7,629,800, bringing the redemption of common stock held by Triangulum.total amount outstanding under the Credit Agreement at September 30, 2020, to $8,629,800.
On August 16, 2019, we entered into a Third Amendment toUnder the NSB Credit Agreement, pursuant to which we agreed to pay a fee on the unused amounts under the revolving portion of the credit agreement at a rate of 0.25% per annum, retroactive to April 22, 2019.
On October 14, 2019, we entered into a Fourth Amendment to the NSB Credit Agreement, which established a Senior Leverage Ratio (as defined in the amended Credit Agreement) of 2.0x for the remaining term of the NSB Credit Agreement. In addition, the Total Leverage Ratio (as defined in the amended Credit Agreement) was set at 7.25x, with semi-annual step-downs of 0.25x every six months, commencing June 30, 2020 through December 31, 2022. Lastly, the $10 million additional Term Loan B availability that was provided in the Second Amendment was eliminated.
Outstandingoutstanding balances under amended NSB Credit Agreement accrue interest based on one-month US dollar London interbank offered rate (“LIBOR”) plus an Applicable Margin of 3.50% or 4.00%, depending on our Total Leverage Ratio (as defined in the amended Credit Agreement).
14
Agreement). Effective December 31, 2021, LIBOR will no longer serve as a reference rate for bank loans, among other investment classes. The Fourth Amendment to the Credit Agreement stipulates that an alternative reference rate will be selected and used in lieu of LIBOR.
The Credit Agreement, as amended, contains affirmative and negative financial covenants and other restrictions customary for borrowings of this nature. In particular, we are required to maintain (i) a minimum trailing-four-quarters Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of 1.25x; (ii) a maximum Total Leverage Ratio (as defined in the Credit Agreement) of 7.25x (with semi-annual step-downs of 0.25x every six months, commencing June 30, 2020 through December 31, 2022 (the current required Total Leverage Ratio is 7.00x) and (iii) a maximum Senior Leverage Ratio (as defined in the Credit Agreement) of 2.00x. We were not in compliance with the Fixed Charge Coverage Ratio, Total Leverage Ratio and Senior Leverage Ratio as of September 30, 2020. Furthermore, because the impact of the COVID-19 crisis on our trailing-four-quarters Adjusted EBITDA into 2021, we think it is likely that we will not be in compliance with one or more of the Fixed Charge Coverage Ratio, Total Leverage Ratio and Senior Leverage Ratio through the first quarter of 2021. In view of that, the Company and NSB entered into a Forbearance and Fifth Amendment to Credit Agreement dated August 14, 2020 (the “Fifth Amendment”). In the Fifth Amendment, NSB agreed to forbear from exercising any of its rights or remedies that result from the aforementioned covenant breaches during the aforementioned period. The Fifth Amendment also imposes a new Minimum EBITDA covenant pursuant to which the Company must demonstrate trailing-four-quarter EBITDA of $2.4 million for the each of the quarters ended September 30, 2020, December 31, 2020 and March 31, 2021 and $3.0 million thereafter. The Company was in compliance with the Minimum EBITDA covenant as of September 30, 2020. On October 26, 2020, the Company and NSB entered into the Sixth Amendment to Credit Agreement dated August 14, 2018 (the “Sixth Amendment”) in connection with the Company’s borrowing under the Main Street Loan Program (see Note 16 Subsequent Events). The Sixth Amendment added a Minimum Liquidity covenant requiring that the Company have cash and cash equivalents of no less than $1.5 million at quarter ends through and including June 30, 2021, and $2.5 million thereafter. The Company was in compliance with the Minimum Liquidity covenant as of September 30, 2020. On November 16, 2020, the Company entered into a Seventh Amendment to the Credit Agreement with Zions Bancorporation N.A., dba Nevada State Bank. The Seventh Amendment changed the trailing-four-quarter Minimum EBITDA covenant from $3.0 million to $2.4 million for each fiscal quarter ending September 30, 2020 and thereafter.
Paycheck Protection Program BorrowingsTriangulum Promissory Note.. On April 17, 2020, the Company obtained an unsecured loan of $835,300 through Zions Bancorporation, N.A. dba Nevada State Bank under the Paycheck Protection Program pursuant to the CARES Act and the Flexibility Act. The Paycheck Protection Program is administered by the United States Small Business Administration. In accordance with the requirements of the CARES Act, the Company used proceeds from the PPP Loan primarily for payroll costs. Under the terms of the CARES and Flexibility Acts, PPP Loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the Paycheck Protection Program. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payroll costs and mortgage interest, rent and utility costs.
On July 16, 2020, the Company filed an application and supporting documentation for forgiveness in full of the PPP Loan. The review of the Company’s forgiveness application could take as long as five months, and there is no assurance that the PPP Loan will be forgiven in full or in any amount. The application for these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the pending application for forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our adherence to the forgiveness criteria.
Share Redemption Consideration Obligation. On May 6, 2019, we issued the Triangulum Promissory Notea promissory note in the face amount of $39,096,401.$39,096,401 to Triangulum in connection with the share redemption disclosed in Note 1. In the litigation that followed the share redemption (Note 11), Triangulum is disputing, among other things, the validity of the note and has not accepted its terms. Since no agreement on terms exists between the Company and Triangulum, the promissory note has not been given accounting effect in the Company’s financial statements. The Company has instead recorded a long-term obligation payable to Triangulum, Promissory Note hasbased on the redemption value specified in our Articles of Incorporation. The obligation is classified as long-term because we do not expect that a final agreement with respect to the litigation will be reached between the parties in the next twelve months. We may repay the Redemption Consideration Obligation at any time but no mandatory amortization, matureslater than May 6, 2029; however, there can be no assurance that Triangulum will accept such payments. Additional share redemption consideration is being accrued at 2% on the redemption obligation, and we paid the first annual payment on May 5, 2029, and bears interest at a rate2020 in the amount of 2% per annum, with accrued interest payable annually in arrears. It$781,928, which was accepted by Triangulum. The share redemption consideration obligation is unsecured and is subordinated to our existing and future indebtedness in accordance with its terms. We may prepay principal and any accrued interest in full or in part at any time.indebtedness.
15
As of September 30, 2019,2020, future maturities of our long-term debt obligationsliabilities are as follows:
Twelve Months Ending September 30, |
| Total |
|
| Total |
| ||
2020 |
| $ | 1,437,950 |
| ||||
2021 |
|
| 1,530,149 |
|
| $ | 2,530,307 |
|
2022 |
|
| 1,616,655 |
|
|
| 1,616,655 |
|
2023 |
|
| 4,511,022 |
|
|
| 4,511,000 |
|
2024 |
|
| — |
|
|
| — |
|
2025 |
|
| 835,300 |
| ||||
Thereafter |
|
| 39,096,401 |
|
|
| 39,096,401 |
|
Long-term debt, gross |
|
| 48,192,177 |
| ||||
Less: |
|
|
|
| ||||
Unamortized debt issuance costs |
|
| (73,525 | ) | ||||
Long-term debt, net |
| $ | 48,118,652 |
| ||||
Long-term liabilities, gross |
| $ | 48,589,663 |
|
NOTE 11. COMMITMENTS AND CONTINGENCIES
Concentration of risk. We are exposed to risks associated with clients who represent a significant portion of total revenues. For the nine months ended September 30, 20192020 and 2018,2019, respectively, we had the following client revenue concentration:
|
| Location |
| 2019 Revenue |
|
| 2018 Revenue |
|
| Accounts Receivable September 30, 2019 |
|
| Accounts Receivable December 31, 2018 |
| ||||
Client A |
| North America |
|
| 9.4 | % |
|
| 11.0 | % |
| $ | 213,642 |
|
| $ | 207,343 |
|
Client B |
| Europe |
|
| 9.9 | % |
|
| 9.8 | % |
| $ | 171,935 |
|
| $ | 156,478 |
|
|
| Location |
| 2020 Revenue |
|
| 2019 Revenue |
|
| Accounts Receivable September 30, 2020 |
|
| Accounts Receivable December 31, 2019 |
| ||||
Client A |
| Europe |
|
| 17.0 | % |
|
| 6.2 | % |
| $ | 308,794 |
|
| $ | 101,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal proceedings (also see Note 1).proceedings. In the ordinary course of conducting our business, we are, from time to time, involved in various legal proceedings, administrative proceedings, regulatory government investigations and other matters, including those in which we are a plaintiff or defendant, that are complex in nature and have outcomes that are difficult to predict.
As discussed in Note 1, we redeemed the shares of our common stock held by Triangulum, an entity controlled by Robert B. Saucier, Galaxy Gaming's founder, and, prior to the redemption, the holder of a majority of our outstanding common stock. On May 6, 2019, we filed a lawsuit seeking (i) a declaratory judgment that we acted lawfully and in full compliance with the Articles when we redeemed the Triangulum shares and (ii) certain remedies for breach of fiduciary duty and breach of contract by Triangulum and its Managing Member, Mr. Saucier (the “Triangulum Lawsuit”). The suit alleges that the redemption and the other relief sought by us are appropriate and in accordance with the Articles.
The defendants to that lawsuit responded to the complaint, and Triangulum filed counterclaims. Triangulum also filed a Motion seeking the redeemed shares be held in a constructive trust. On July 11, 2019, the Court denied Triangulum’s Motion. On September 6, 2019, Triangulum appealed the denial of the Motion to the Nevada Supreme Court. We submitted our brief in opposition, and Triangulum filed its reply brief on June 17, 2020. Separately, Triangulum filed amended counterclaims, which we moved to dismiss on a number of legal grounds. The Court denied the motion. The Company filed a writ petition challenging the ruling, which the Supreme Court denied on January 23, 2020.
On October 18, 2019, Saucier also filed counterclaims, including a claim of breach of contract alleging Galaxy Gaming was obligated to pay Saucier his year-end bonuses, despite his resignation. We filed an answer disputing these claims.
As a result of the effects of Coronavirus, the Court issued a revised Scheduling Order extending time frames for discovery and setting a new trial date in April of 2021.
On May 6, 2020, Saucier made a demand of the Company under our Bylaws and an Indemnity Agreement between Saucier and the Company, for indemnity and advancement of funds seeking repayment of his lawyer’s fees and expenses he allegedly incurred in connection with the Company’s claims against him in the Triangulum Lawsuit. An independent counsel, selected per the terms of the Indemnification Agreement, concluded that Saucier was entitled to a small amount of indemnity funds related to the time he was employed by the Company, but denied an entitlement to indemnification thereafter.
On May 19, 2020, Saucier commenced a separate action in Nevada district court, by filing a complaint he verified as true, seeking advancement of indemnification fees to which he claims an entitlement under the Bylaws and an Indemnification Agreement. The Company filed its opposition on June 4, 2020. Saucier’s Motion was denied in a hearing that occurred on June 24, 2020. Saucier filed a notice of his appeal of the decision to the Nevada Supreme Court on August 10, 2020.
On July 22, 2020 Galaxy and its Directors, filed an Anti-SLAPP motion seeking to dismiss certain claims made against Galaxy and its Directors. The Anti-SLAPP motion was denied by the court. Galaxy has appealed the denial of that motion to the Nevada Supreme Court. The appeal will stay most aspects of the litigation, pending outcome of the appeal.
16
The appeals to the Nevada Supreme Court by Saucier and by Galaxy, have also been referred to the Supreme Court’s Settlement Program where they are pending. A mandatory settlement conference is scheduled for November 16, 2020.
We remain in the discovery phase of the Triangulum Lawsuit, with discovery set to close on December 31, 2020.
In September 2018, we were served with a complaint by TableMax Corporation (“TMAX”) regarding the TMAX Agreement. We filed an answer denying the allegations and filed a partial motion for summary judgment seeking dismissal of the plaintiff’s claims. The suit was dismissed, subject to the right of the plaintiff to file an amended complaint on or before March 20, 2019. The plaintiff did not file an amended complaint within the time period set by the Judge. After that time, the Company considered the matter closed. TMAX filed a Motion for Leave to Amend their Complaint, which was granted by the Judge on May 11, 2020. On May 26, 2020 TMAX filed an Amended Complaint against the Company and other Co-Defendants. The Company will respond to the Amended Complaint denying the allegations.
An unexpected adverse judgment in any pending litigation could cause a material impact on our business operations, intellectual property, results of operations or financial position. Unless otherwise expressly stated, we believe costs associated with litigation will not have a material impact on our financial position or liquidity but may be material to the results of operations in any given period.
On May 31, 2019period and June 6, 2019 respectively, Derek Webb and Hannah O’Donnell together filed a complaint and a related Motionaccordingly, no provision for Order Granting Request to Compel an Annual Meeting, orloss has been reflected in the Alternative for a Writ of Mandamus and Injunctive Relief (the “Motion”). The Motion sought the Courtaccompanying financial statements related to compel us to hold an Annual Shareholder’s Meeting in 2019 and also sought related relief: that we not issue shares or redeem any shares or amend its Bylaws in any manner that could affect the obligation to hold the meeting or elect directors at the meeting. On June 6, 2019, we notified the public of the holding of an Annual Meeting to take place on August 28, 2019 for shareholders of record of July 17, 2019. During a hearing held on July 11, 2019, the Court denied Webb and O’Donnell’s Motion and all related relief. The Annual Meeting took place on August 28, 2019. On October 17, 2019, the Court dismissed the case as a result of a stipulation of the parties.these matters.
NOTE 12. STOCKHOLDERS’ EQUITY (DEFICIT)
During the nine months ended September 30, 2019,2020, we issued an aggregate of 229,200173,333 restricted shares of our common stock valued at $388,919,$187,186, to our board members in consideration of their service on the Board. These shares vested immediately on the grant date.
On May 6, 2019, we redeemed all 23,271,667 shares of our common stock held by Triangulum.
15
Our forecasted annual effective tax rate (“ETR”AETR”) at September 30, 20192020 was 16.5%12.0%, as compared to 17.5%16.5% at September 30, 2018.2019. This decrease was primarily due to the global intangible low-taxed income (“GILTI”) inclusion related to the PGP acquisition and other changes in permanent book-to-tax differences for the nine months ended September 30, 2019.2020.
For the nine months ended September 30, 2020 and 2019, our effective tax rate (“ETR”) was 12.7% and 2018, our ETR was 0.8% and 17.5%, respectively. The following discrete items duringincrease in the ETR for the nine months ended September 30, 2019 caused the year-to-date effective tax rate to be significantly different from our historical ETR: (i) we recorded an income tax benefit of approximately $150,000 as2020 is a result of a priorfavorable discrete items from the comparable prior-year period changethat are not recurring in estimate related to the foreign-derived intangible income (“FDII”) special deduction under Section 250 of the Internal Revenue Code, which reduced the ETR by 7.1% and (ii) we recorded an income tax benefit of approximately $180,000 as a result of tax benefits related to non-qualified stock options exercised during the period, which reduced the ETR by 8.5%.
current period.
NOTE 14. STOCK OPTIONS
On May 10, 2018, the Board ratified and confirmed the 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan is a broad-based plan under which 5,550,750 shares of our common stock are authorized for issuance for awards, including stock options, stock appreciation rights, restricted stock, and cash incentive awards to members of our Board, executive officers, employees and independent contractors. As of September 30, 2019, 177,6342020, a total of 6,550,750 shares of our common stock were authorized for issuance. As of September 30, 2020, 381,701 shares remained available for issuance as new awards under the 2014 Plan.
Stock options. During the nine months ended September 30, 20192020 and 2018,2019, we issued 320,000465,000 and 270,000320,000 options to purchase our common stock, respectively, to members of our Board, executive officers, employees and independent contractors. The fair value of all stock options granted for the nine months ended September 30, 20192020 and 20182019 was determined to be $564,450$435,639 and $169,807,$564,450, respectively, using the Black-Scholes option pricing model with the following assumptions:
|
| Options Issued 2019 |
|
| Options Issued 2018 |
|
| Options Issued 2020 |
|
| Options Issued 2019 |
| ||||
Dividend yield |
|
| 0 | % |
|
| 0 | % |
|
| 0 | % |
|
| 0 | % |
Expected volatility |
| 71.61% - 72.11 | % |
| 78 | % |
| 70.98% - 76.97% |
|
| 71.61% - 72.11% |
| ||||
Risk free interest rate |
| 1.37% - 2.51 | % |
| 2.46% - 2.73 | % |
| 0.27% - 1.39% |
|
| 1.37% - 2.51% |
| ||||
Expected life (years) |
|
| 5.00 |
|
|
| 5.00 |
|
|
| 5.00 |
|
|
| 5.00 |
|
On February 21, 2019, we amended the employment agreement between the Company and Todd Cravens, our President and Chief Executive Officer.Officer (“Mr. Cravens”). Among other things, this amendment grants Mr. Cravens an option to purchase 150,000 shares of our common stock (the “2020 Option”). The 2020 Option, which vests on August 1, 2020 so long as Mr. Cravens remains a full-time employee of the Company on August 1, 2020, has an exercise price equal to the price per share of our common stock as reported on OTC Markets on August 1, 2020 (or the nearest trading date thereafter). If Mr. Cravens is terminated as a result of a change of control of the Company prior to August 1, 2020, the 2020 Option vests in full upon his termination at an exercise price of $1.90 per share, (our common stock closingwhich vested on August 1, 2020.
On February 17, 2020, we entered into Amendment No. #2 to the employment agreement with Mr. Cravens. Among other things, Amendment No. #2 provides that Mr. Cravens receive a grant of 225,000 options at a strike price of $1.93 and vest as follows: 88,000 shares on February 21, 2019).July 26, 2021, 87,000 shares on July 26, 2022 and 50,000 shares on July 26, 2023.
17
A summary of stock option activity is as follows:
|
| Common Stock Options |
|
| Weighted- Average Exercise Price |
|
| Aggregate Intrinsic Value |
|
| Weighted- Average Remaining Contractual Term (Years) |
| ||||
Outstanding – December 31, 2018 |
|
| 3,496,250 |
|
| $ | 0.66 |
|
| $ | 2,608,329 |
|
|
| 3.04 |
|
Issued |
|
| 320,000 |
|
|
| 1.76 |
|
|
| — |
|
|
| — |
|
Exercised |
|
| (712,916 | ) |
|
| 0.37 |
|
|
| — |
|
|
| — |
|
Forfeited or expired |
|
| (103,334 | ) |
|
| 0.94 |
|
|
| — |
|
|
| — |
|
Outstanding – September 30, 2019 |
|
| 3,000,000 |
|
| $ | 0.84 |
|
| $ | 2,992,800 |
|
|
| 2.88 |
|
Exercisable – September 30, 2019 |
|
| 1,988,333 |
|
| $ | 0.62 |
|
| $ | 2,426,025 |
|
|
| 3.65 |
|
|
| Common Stock Options |
|
| Weighted- Average Exercise Price |
|
| Aggregate Intrinsic Value |
|
| Weighted- Average Remaining Contractual Term (Years) |
| ||||
Outstanding – December 31, 2019 |
|
| 3,175,000 |
|
| $ | 0.92 |
|
| $ | 2,692,025 |
|
|
| 2.79 |
|
Issued |
|
| 465,000 |
|
|
| 1.57 |
|
|
| — |
|
|
| — |
|
Exercised |
|
| (225,000 | ) |
|
| 0.22 |
|
|
| — |
|
|
| — |
|
Forfeited |
|
| (100,000 | ) |
|
| 1.57 |
|
|
| — |
|
|
| — |
|
Outstanding – September 30, 2020 |
|
| 3,315,000 |
|
| $ | 1.04 |
|
| $ | 144,450 |
|
|
| 2.49 |
|
Exercisable – September 30, 2020 |
|
| 2,245,000 |
|
| $ | 0.81 |
|
| $ | 614,750 |
|
|
| 1.81 |
|
16
A summary of unvested stock option activity is as follows:
|
| Common Stock Options |
|
| Weighted- Average Exercise Price |
|
| Aggregate Intrinsic Value |
|
| Weighted- Average Remaining Contractual Term (Years) |
| ||||
Unvested – December 31, 2018 |
|
| 1,161,666 |
|
| $ | 0.95 |
|
| $ | 535,475 |
|
|
| 4.15 |
|
Granted |
|
| 320,000 |
|
|
| 1.76 |
|
|
| — |
|
|
| — |
|
Vested |
|
| (373,333 | ) |
|
| 0.76 |
|
|
| — |
|
|
| — |
|
Forfeited or expired |
|
| (96,666 | ) |
|
| 0.93 |
|
|
| — |
|
|
| — |
|
Unvested – September 30, 2019 |
|
| 1,011,667 |
|
| $ | 1.17 |
|
| $ | 680,526 |
|
|
| 4.39 |
|
|
| Common Stock Options |
|
| Weighted- Average Exercise Price |
|
| Aggregate Intrinsic Value |
|
| Weighted- Average Remaining Contractual Term (Years) |
| ||||
Unvested – December 31, 2019 |
|
| 1,053,333 |
|
| $ | 1.43 |
|
| $ | 357,734 |
|
|
| 3.92 |
|
Granted |
|
| 465,000 |
|
|
| 1.57 |
|
|
| — |
|
|
| — |
|
Vested |
|
| (348,333 | ) |
|
| 1.29 |
|
|
| — |
|
|
| — |
|
Forfeited |
|
| (100,000 | ) |
|
| 1.57 |
|
|
| — |
|
|
| — |
|
Unvested – September 30, 2020 |
|
| 1,070,000 |
|
| $ | 1.52 |
|
| $ | (470,300 | ) |
|
| 3.92 |
|
As of September 30, 2019,2020, our unrecognized share-based compensation expense associated with the stock options issued was $506,330,$708,698, which will be amortized over a weighted-average of 2.042.24 years.
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
We estimate fair value for financial assets and liabilities in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”). ASC 820 defines fair value, provides guidance for measuring fair value, requires certain disclosures and discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). ASC 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
The estimated fair value of cash equivalents, restricted cash, accounts receivable and accounts payable approximates their carrying amount due to their short-term nature. The estimated fair value of our long-term debt and lease obligations approximates their carrying value based upon our expected borrowing rate for debt with similar remaining maturities and comparable risk. As of September 30, 20192020, the interest rate swap agreement was the only financial instrument measured at estimated fair value on a recurring basis based on valuation reports provided by counterparties, which are classified as level 2 inputs.
18
We evaluate subsequent events through the date of issuance of the financial statements. There have been no subsequent events that occurred during such period that would require adjustment to or disclosure in the financial statements as of and for the quarter ended September 30, 20192020 except as follows disclosed in Note 1 and Note 11 and as follows:
OnAs discussed in Note 1, on October 10, 201926, 2020, the Company entered into a business loan agreement with Zions Bancorporation N.A., dba Nevada State Bank for a secured loan in the amount of $4 million under Main Street Priority Loan Facility as established by the Board of Directors authorizedGovernors of the Federal Reserve System Section 13(3) of the Federal Reserve Act. Among other things, the Main Street Loan has a one million share increase infive-year maturity, bears interest at a rate of three-month US dollar LIBOR plus 300 basis points and has deferred interest payments during the numberfirst year which will be added to the loan balance.
Also, on October 26, 2020, the Company entered into a Sixth Amendment to the Credit Agreement between Zions Bancorporation N.A., dba Nevada State Bank. The Sixth Amendment permits the Company to accept the Main Street Loan, establishes a minimum liquidity covenant through the term of shares availablethe Credit Agreement and permits the security interest under the 2014 Plan. Main Street Loan to be pari passu with the Lender’s security interest under the Credit Agreement.
On October 22, 2019 weNovember 16, 2020, the Company entered into a Seventh Amendment #3 to the employment agreementCredit Agreement with our Chief Financial Officer (“Mr. Hagerty”). Among other things,Zions Bancorporation N.A., dba Nevada State Bank. The Seventh Amendment #3 provides (i) that Mr. Hagerty’s base salary will remain atchanged the annual ratetrailing-four-quarter Minimum EBITDA covenant from $3.0 million to $2.4 million for each fiscal quarter ending September 30, 2020 and thereafter.
Cases of $200,000.00; (ii) that Mr. Hagerty receive a grant of 200,000 options at a strike price of $1.972, vest as follows: 66,666 shares on October 22, 2020, 66,666 shares on October 22, 2021, and 66,668 shares on April 30, 2022; (iii) that the end dateCOVID-19 infection have been rising in many of the termmarkets we serve. As a result, there have been restrictions put in place on the opening hours of employment be extended from April 30, 2020casinos in those markets. In the United Kingdom in particular, casinos have been forced to April 30, 2022.close for a period of at least one month beginning on November 5, 2020. Other jurisdictions in which we operate may also decide to order closures of casinos in an effort to reduce transmission of the virus.
1719
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following is a discussion and analysis of theour financial condition, and results of operations and liquidity and capital resources as of and for the Companythree and nine months ended September 30, 2020 and 2019. This discussion should be read in conjunctiontogether with the condensedour audited consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaningItem 8. Financial Statements and Supplementary Data. Some of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act, and is subject to the safe harbors created by those sections. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. Such forward-looking statements speak only as of the date of this report; we undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us in this report, as well as the disclosures made in the 2018 10-K, and other filings we make with the Securities and Exchange Commission, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, operating results, financial condition and stock price.
Due to possible uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statementsinformation contained in this Quarterly Report, which speak only as of the date of this Quarterly Report, or to make predictions about future performance based solely on historical financial performance. We disclaim any obligation to updatediscussion includes forward-looking statements containedthat involve risks and uncertainties; therefore our “Special Note Regarding Forward-Looking Statements” should be reviewed for a discussion of important factors that could cause actual results to differ materially from the results described in, this Quarterly Report.or implied by, such forward-looking statements.
OVERVIEW
We develop, acquire, assemble and market technology and entertainment-based products and services for the gaming industry for placement on the casino floor and legal internet gaming sites. Our products and services primarily relate to licensed casino operators’ table games activities and focus on either increasing their profitability, productivity and security or expanding their gaming entertainment offerings in the form of proprietary table games, electronically enhanced table game platforms, fully automated electronic tables and other ancillary equipment. In addition, we license intellectual property to legal internet gaming sites. Our products and services are offered in highly regulated markets throughout the world. Our products are assembled at our headquarters in Las Vegas, Nevada, as well as outsourced for certain sub-assemblies in the United States.
Additional information regarding our products and product categories may be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2018 10-K and on our web site, www.galaxygaming.com. Information found on the web site should not be considered part of this report.
Results of operations for the three months ended September 30, 20192020 and 2018.2019. For the three months ended September 30, 2019,2020, we generated total revenues of $5,371,646$1,797,833 compared to total revenues of $4,775,784$5,371,646 for the comparable prior-year period, representing an increasea decrease of 595,862,$3,573,813, or 12.5%66.5%. This increasedecrease was primarily attributable to higherthe COVID-19 crisis, as some of our land-based casino customers remained closed in the third quarter, and those that were open had reduced capacity or realized reduced visitation which, in turn, resulted in us realizing no revenue from additional placements for: (i) Bonus Jackpot System;those that were closed and (ii) premium Games such as High Card Flush, Heads Up Hold ’em, Cajun Studreduced revenue from those that were open. We continued to realize revenue from licensing our game content to the online gaming market in the third quarter of 2020 and, Super Three Card.with the acquisition of PGP in the third quarter, began to recognize revenue from licensing the newly-acquired game content to the online gaming market.
Selling, general and administrative expenses for the three months ended September 30, 20192020 were $3,460,319$1,833,723 compared to $2,559,056$3,645,319 for the comparable priorprior-year period,, representing an increasea decrease of $901,263,$1,811,596, or 35.2%49.7%. This increasedecrease was primarily due to $469,249a decrease in compensation-related expenses directly related to the COVID-19 crisis (reduction in workforce, removal of bonuses and lower commissions and distributor fees). Lower legal fees contributed to the decrease as well. Prior year legal expenses included expenses associated with our strategic review, the Triangulum Lawsuit and the related contested proxy campaigncampaign. Also, travel and $82,650 inentertainment-related expenses relatedand professional and compliance-related expenses (consulting and regulatory) decreased due to rebranding. Excluding such expenses, selling, general and administrative expenses as a percentage of total revenue were 54.1% in the three months ended September 30, 2019 as compared to 53.6% in the comparable prior-year period.COVID-19 crisis.
Research and development expenses for the three months ended September 30, 20192020 were $208,253,$97,081, compared to $373,456$208,253 for the comparable prior-year period, representing a decrease of $165,203,$111,172, or 44.2%53.4%. This decrease was primarily due to lower payrolla reduction in consulting expenses related to a third-party research and related costs asdevelopment firm no longer used by the Company and a result of the departure of our founder and former Executive Vice President of Business Developmentdecrease in November 2018 and the former Chief Technology Officer in July 2019.compensation-related expenses.
Share-based compensation expenses for the three months ended September 30, 2019 was $242,016,2020 were $178,553, as compared to $192,998$242,016 for the comparable prior-year period, representing an increasea decrease of $49,018,$63,463, or 25.4%26.2%. This increasedecrease was mainly due to additional grantsfewer restricted shares issued to membersand at a lower stock price than the comparable prior-year period.
As a result of the Board, executive officers, employees and independent contractors.
Incomechanges described above, income from operations decreased $192,772$1,660,575 or 16.9%217.8% to $947,272a loss of $898,303 for the three months ended September 30, 2019,2020, compared to $1,140,044income of $762,272 for the comparable prior-year period. This decrease was primarily attributable to higher selling, general and administrative expenses principally related to the Triangulum lawsuit, the contested proxy and the rebranding.
18
Total interest expense increased $154,763,decreased $3,624, or 75.0%2.2%, to $361,188$162,082 for the three months ended September 30, 2019,2020, compared to $206,425$165,706 for the comparable prior-year period. The decrease is attributable to lower balances outstanding under our Term Loan, partially offset by the amount drawn on our Revolving Loan.
Income tax provision was $133,708 for the three months ended September 30, 2020, compared to income tax benefit of $210,132 for the comparable prior-year period. The increase in income tax expense was mainlyprimarily attributable to interest accrued on the Triangulum Promissory Note.
Loss on extinguishment of debt was $0favorable discrete items incurred in the three months ended September 30, 2019, as compared to $1,765 for the comparable prior-year period. The lossperiod not recurring in the comparable prior-year periodcurrent-year period.
Adjusted EBITDA (as defined below) was a result of legal expenses incurred in connection with the payoff of the previous term loan with Breakaway Capital Management, LLC (the “Breakaway Loan”) that was extinguished on April 24, 2018.
Income tax benefit was $210,132$35,703 for the three months ended September 30, 2019,2020, compared to income tax provision of $166,662 for the comparable prior-year period. This change was primarily attributable to (i) the income tax benefit of approximately $150,000 we recorded as a result of a prior period change in estimate related to the foreign-derived intangible income (“FDII”) special deduction under Section 250 of the Internal Revenue Code, which reduced the ETR by 7.1% and (ii) the income tax benefit of approximately $180,000 as a result of tax benefits related to non-qualified stock options exercised during the period, which reduced the ETR by 8.5%.
Adjusted EBITDA (as defined below) was $2,217,299 for the three months ended September 30, 2019, compared to $1,795,444 for the comparable prior-year period, representing an increasea decrease of $421,855,$2,181,596, or 23.5%98.4%. This increasedecrease was primarily attributable to higher earnings after the addbacksignificant decrease in 2019revenue in the quarter not being fully offset by the decreased amount of expenses associated with the Triangulum Lawsuit, the contested proxy campaign, rebranding expenses and severance expense.expenses.
20
Results of operations for the nine months ended September 30, 20192020 and 2018.2019. For the nine months ended September 30, 2019,2020, we generated total revenues of $16,117,583$6,956,122 compared to total revenues of $13,672,650$16,117,583 for the comparable prior-year period, representing an increasea decrease of 2,444,933,$9,161,461, or 17.9%56.8%. This increasedecrease was primarily attributable to higherthe COVID-19 crisis, as some of our land-based casino customers remained closed in the third quarter, and those that were open had reduced capacity or realized reduced visitation which, in turn, resulted in us realizing no revenue from additional placements for: (i) Bonus Jackpot System; (ii) premium Games such as High Card Flush,Heads Up Hold ’em, Cajun Studthose that were closed and Super Three Card;reduced revenue from those that were open. We continued to realize revenue from licensing our game content to the online gaming market in the third quarter of 2020 and, (iii) higher internet-basedwith the acquisition of PGP in the third quarter, began to recognize revenue from licensing the newly-acquired game content to the online gaming activities.market.
Selling, general and administrative expenses for the nine months ended September 30, 20192020 were $9,941,029$7,264,410 compared to $7,741,213$10,126,029 for the comparable priorprior-year period,, representing an increasea decrease of $2,199,816,$2,861,619, or 28.4%28.3%. This increasedecrease was primarily due to $1,235,220a decrease in compensation-related expenses directly related to the COVID-19 crisis (reduction in workforce, removal of bonuses and lower commissions and distributor fees). Lower legal fees contributed to the decrease as well. Prior year legal expenses included expenses associated with our strategic review, the Triangulum Lawsuit and the related contested proxy campaigncampaign. Also, travel and $95,150 of rebrandingentertainment-related expenses incurred duringand consulting expenses decreased due to the nine months ended September 30, 2019. Excluding such costs, selling, general and administrative expenses as a percentage of gross revenue decreased to 53.4% for the nine months ended September 30, 2019 from 56.6% for the comparable prior-year period.COVID-19 crisis.
Research and development expenses for the nine months ended September 30, 20192020 were $685,693,$391,333, compared to $816,657$685,693 for the comparable prior-year period, representing a decrease of $130,964,$294,360, or 16.0%42.9%. This decrease was primarily due to lower payrolla reduction in consulting expenses related to a third-party research and related expenses asdevelopment firm no longer used by the Company and a result of the departure of our founder and former Executive Vice President of Business Developmentdecrease in November 2018 and the former Chief Technology Officer in July 2019.compensation-related expenses.
Share-based compensation expenses for the nine months ended September 30, 2019 was $678,199,2020 were $512,818, as compared to $550,588$678,199 for the comparable prior-year period, representing an increasea decrease of $127,611,$165,381, or 23.2%24.4%. This increasedecrease was mainly due to additional grantsfewer restricted shares issued to membersand at a lower stock price than the comparable prior-year period.
As a result of the Board, executive officers, employees and independent contractors.
Incomechanges described above, income from operations decreased $5,774,654 or 191.1% to a loss of $2,753,221 for the three months ended September 30, 2020, compared to income of $3,021,433 for the comparable prior-year period.
Total interest expense increased $122,208$3,660, or 4.0%0.7%, to $3,206,433$506,922 for the nine months ended September 30, 2019,2020, compared to $3,084,225$503,262 for the comparable prior-year period. This increase was primarily attributable to higher revenue,Interest on lower balances of our Term Loan were offset by higher selling, general and administrative expenses.
Total interest expense decreased $1,282,on our Revolving Loan (which was undrawn in 2019).
Share redemption consideration increased $271,153, or 0.2%86.0%, to $818,555$586,446 for the nine months ended September 30, 2019,2020, compared to $819,837$315,293 for the comparable prior-year period. The increase was attributable to the Triangulum share redemption consideration obligation, which was outstanding for only a portion of the prior-year period.
Income tax benefit was $492,807 for the nine months ended September 30, 2020, compared to income tax provision of $17,189 for the comparable prior-year period. The decrease in income tax expense was mainlyprimarily attributable to a lower interest rate on the Term Loan as comparedreduced operations related to the Breakaway Loan, partiallyCOVID-19 pandemic in the nine-month period resulting in a pre-tax book loss, offset by interest accrued on the Triangulum Promissory Note.
Loss on extinguishment of debt was $0 inGILTI inclusion related to the nine months ended September 30, 2019, as compared to $1,349,271 inPGP acquisition, which reduced the comparable prior-year period. Thetaxable loss in the comparable prior-year periodnine-month period.
Adjusted EBITDA (as defined below) was a result of an early redemption premium paid in connection with the payoff of the previous term loan and the write-off of the associated unamortized debt issuance costs and unamortized fair value of the warrants.
Income tax provision was $17,189$115,997 for the nine months ended September 30, 2019,2020, compared to income tax provision of $154,799 for the comparable prior-year period. This change was primarily attributable to (i) the income tax benefit of approximately $150,000 we recorded as a result of a prior period change in estimate related to the foreign-derived intangible income (“FDII”) special deduction under Section 250 of the Internal Revenue Code, which reduced the ETR by 7.1% and (ii) the income tax benefit of approximately $180,000 as a result of tax benefits related to non-qualified stock options exercised during the period, which reduced the ETR by 8.5%.
19
Adjusted EBITDA (as defined below) was $6,654,222 for the nine months ended September 30, 2019, compared to $5,007,565 for the comparable prior-year period, representing an increasea decrease of $1,646,657,$6,538,225, or 32.9%98.3%. This increasedecrease was primarily attributable to higherthe net income and addbacksloss for the period as a result of the COVID-19 crisis. This decrease was primarily attributable the significant decrease in 2019 for costs associated withrevenue in the strategic alternatives review, the Triangulum Lawsuit, the contested proxy campaign, rebranding expenses and a one-time severance expense of $185,000, partiallyperiod not being fully offset by the addbacks related to the loss on extinguishmentdecreased amount of debt in 2018.expenses.
21
Adjusted EBITDA. Adjusted EBITDA includes adjustments to net income to exclude interest, taxes, depreciation, amortization, share based compensation, loss on extinguishment of debt, foreign currency exchange gains, changechanges in estimated fair value of warrant liability, change inthe estimated fair value of interest rate swap liability, and other non-recurring losses and non-cash charges. Adjusted EBITDA is not a measure of performance defined in accordance with U.S. U.S. GAAP. However, Adjusted EBITDA is used by management to evaluate our operating performance. Management believes that disclosure of the Adjusted EBITDA metric offers investors, regulators and other stakeholders a view of our operations in the same manner management evaluates our performance. When combined with U.S. GAAP results, management believes Adjusted EBITDA provides a comprehensive understanding of our financial results. Adjusted EBITDA should not be considered as an alternative to net income or to net cash provided by operating activities as a measure of operating results or of liquidity. It may not be comparable to similarly titled measures used by other companies, and it excludes financial information that some may consider important in evaluating our performance. A reconciliation of U.S. GAAP net income from operations to Adjusted EBITDA is as follows:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
Adjusted EBITDA Reconciliation: |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Net income |
| $ | 580,234 |
|
| $ | 791,968 |
|
| $ | 2,095,841 |
|
| $ | 732,043 |
|
Interest expense |
|
| 361,188 |
|
|
| 206,425 |
|
|
| 818,555 |
|
|
| 819,837 |
|
Foreign currency exchange loss |
|
| 69,470 |
|
|
| 22,095 |
|
|
| 57,299 |
|
|
| 542 |
|
Change in estimated fair value of interest rate swap liability |
|
| (13,162 | ) |
|
| (48,528 | ) |
|
| 78,440 |
|
|
| 28,707 |
|
Loss on extinguishment of debt |
|
| — |
|
|
| 1,765 |
|
|
| — |
|
|
| 1,349,271 |
|
Income tax provision (benefit) |
|
| (210,132 | ) |
|
| 166,662 |
|
|
| 17,189 |
|
|
| 154,799 |
|
Depreciation and amortization |
|
| 476,112 |
|
|
| 462,402 |
|
|
| 1,439,220 |
|
|
| 1,372,752 |
|
Share based compensation expense |
|
| 242,016 |
|
|
| 192,998 |
|
|
| 678,199 |
|
|
| 550,588 |
|
Non-recurring rebranding expense |
|
| 82,650 |
|
|
| — |
|
|
| 95,150 |
|
|
| — |
|
Non-recurring severance expense |
|
| 185,000 |
|
|
| — |
|
|
| 185,000 |
|
|
| — |
|
Non-recurring special project cost |
|
| 469,249 |
|
|
| — |
|
|
| 1,235,220 |
|
|
| — |
|
Interest income |
|
| (25,326 | ) |
|
| (343 | ) |
|
| (45,891 | ) |
|
| (974 | ) |
Adjusted EBITDA |
| $ | 2,217,299 |
|
| $ | 1,795,444 |
|
| $ | 6,654,222 |
|
| $ | 5,007,565 |
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
Adjusted EBITDA Reconciliation: |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net (loss) income |
| $ | (1,297,499 | ) |
| $ | 580,234 |
|
| $ | (3,387,475 | ) |
| $ | 2,095,841 |
|
Interest expense |
|
| 162,082 |
|
|
| 165,706 |
|
|
| 506,922 |
|
|
| 438,101 |
|
Share redemption consideration |
|
| 195,482 |
|
|
| 195,482 |
|
|
| 586,446 |
|
|
| 380,454 |
|
Interest income |
|
| (1,412 | ) |
|
| (25,326 | ) |
|
| (25,313 | ) |
|
| (45,891 | ) |
Depreciation and amortization |
|
| 575,637 |
|
|
| 476,112 |
|
|
| 1,499,927 |
|
|
| 1,439,220 |
|
Share-based compensation |
|
| 178,553 |
|
|
| 242,016 |
|
|
| 512,818 |
|
|
| 678,199 |
|
Foreign currency exchange (gain) loss |
|
| (20,014 | ) |
|
| 69,470 |
|
|
| 95,976 |
|
|
| 57,299 |
|
Change in estimated fair value of interest rate swap liability |
|
| (55,330 | ) |
|
| (13,162 | ) |
|
| (21,650 | ) |
|
| 78,440 |
|
(Benefit) provision for income taxes |
|
| 133,708 |
|
|
| (210,132 | ) |
|
| (492,807 | ) |
|
| 17,189 |
|
Rebranding expense |
|
| — |
|
|
| 82,650 |
|
|
| — |
|
|
| 95,150 |
|
Other non-recurring income |
|
| (15,320 | ) |
|
| — |
|
|
| (15,320 | ) |
|
| — |
|
Severance expense |
|
| (3,243 | ) |
|
| 185,000 |
|
|
| 20,058 |
|
|
| 185,000 |
|
Special project expense(1) |
|
| 183,059 |
|
|
| 469,249 |
|
|
| 836,415 |
|
|
| 1,235,220 |
|
Adjusted EBITDA |
| $ | 35,703 |
|
| $ | 2,217,299 |
|
| $ | 115,997 |
|
| $ | 6,654,222 |
|
(1) | 2020 includes expenses associated with the Triangulum Lawsuit. 2019 includes expenses associated with our strategic review, the Triangulum Lawsuit and the related contested proxy campaign. |
Liquidity and capital resources. We intendhave generally been able to fund our continuing operations, our investments, and the obligations under our existing borrowings through increased salescash flow from operations. However, the COVID-19 crisis resulted in negative cash provided by operations during the nine months ended September 30, 2020, and we expect modestly negative cash flow.flow from operations in Q4 of 2020. However, based on our forecast of a gradual recovery in the casino gaming industry from the lows of Q2, combined with the $3.92 million in cash we received from the Main Street Loan Facility, we believe we have adequate liquidity to meet our short-term obligations. However, if COVID-19 continues to force casino closures or if the recovery from the closures is slower than we anticipate, the issuance of debt or equity financing arrangements may be required to fund future expenditures or other cash requirements. There can be no assurance that we will be successful in raising additional funding, if necessary, and even if we are successful, it may not be on advantageous terms to us. If we are not able to secure additional funding, the implementation of our business plan could be negatively affected. In addition, we may incur higher capital expenditures in the future to expand our operations. We may from time to time acquire products and businesses complementary to our business. We may also incur significant expenses when applying for new licenses or in complying with current jurisdictional requirements. As a public entity, we may issue shares of our common stock and preferred stock in private or public offerings to obtain financing, capital or to acquire other businesses that can improve our performance and growth. To the extent that we seek to acquire other businesses in exchange for our common stock, fluctuations in our stock price could have a material adverse effect on our ability to complete acquisitions.
As of September 30, 2019,2020, we had total current assets of $13,384,478$6,668,796 and total assets of $23,255,388.$27,146,778. This compares to $10,206,844$14,473,935 and $21,193,725,$24,252,151, respectively, as of December 31, 2018.2019. The increasedecrease in current assets as of September 30, 20192020 was primarily due to a decrease in our Accounts Receivable balance, resulting from the COVID-19 shutdown in Q1 of this year and temporary shutdowns throughout Q2 and Q3. Also, we closed on the Purchase Agreement in August 2020, resulting in a decrease in our Cash balance. The increase in total assets as of September 30, 2020 was primarily due to an increase in cash, cash equivalents and restricted cash, accounts receivable and inventory. our Intangibles balance of $10.4 million, as a result of acquiring customer agreements in connection with the closing on the Purchase Agreement.
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Our total current liabilities as of September 30, 20192020 increased to $5,116,395$6,257,636 from $4,990,615$5,422,939 as of December 31, 2018,2019, primarily due to an increase in accounts payable.our Accounts Payable balance and the Company drawing down on its $1,000,000 Revolving Loan on March 12, 2020. This increase was offset by decreases in Accrued Expenses and our Revenue Contract Liability.
OurDespite the COVID-19 crisis, our business model continues to bewas profitable and wein Q1 2020. However, our business was not profitable in Q2 or Q3 of 2020. We anticipate modestly negative cash from operations in Q4 of 2020. We have sufficient working capital and other options to ensure we are able to meet our short-term and long-term obligations. At September 30, 2019 and atobligations as they become due. Further, we do not currently believe that the filing daterecent casino closures in the United Kingdom will result in an impairment of this Quarterly Report on Form 10-Q, we had $1.0 million availableour assets or a default under the Revolving Loan. See Note 10 to our condensed financial statements included in Item 1 of this report.loan agreements.
We have undertaken certain growth initiativescontinue to expand our recurring revenue base. As such we have made investments in personnel and research related to the development of our enhanced table systems. Additionally, we increased our sales and marketing budget and spent funds on regulatory efforts for the purpose of expanding the jurisdictions in which we can operate in. We have filedfile applications for new or enhanced licenses in several jurisdictions, which may result in significant future legal and regulatory expenses. A significant increase in such expenses may require us to postpone growth initiatives or investments in personnel, inventory and research and development of our products. It is our intention to continue such initiatives and investments. However, to the extent we are not able to achieve our growth objectives or raise additional capital, we will need to evaluate the reduction of operating expenses.
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Our operating activities provided $3,294,333used $1,261,133 in cash for the nine months ended September 30, 2019,2020, compared to $2,806,957cash provided of $3,294,333 for the comparable prior period. The increasedecrease in operating cash flow was primarily due to an increasethe net loss for the period as a result of the COVID-19 crisis. This decrease was partially offset by changes in net income inoperating assets and liabilities such as Accounts Receivable, Accounts Payable and Revenue Contract Liability, as a result of the 2019 period and a January 2018 license fee payment of $774,645.COVID-19 crisis.
Additionally, investingInvesting activities used cash of $59,895$6,305,047 for the nine months ended September 30, 2019,2020, compared to $100,098$59,895 for the comparable prior period. In both periods,This was due to closing of the investments werePurchase Agreement in intangible assets and acquisition of property and equipment. August 2020.
Cash used inprovided by financing activities during the nine months ended September 30, 20192020 was $935,414, $620,728, which was due toresulted from the $1,000,000 draw on our Revolving Loan on March 12, 2020, and $835,300 from the PPP Loan, offset by principal payments on long-term debt and finance leases, partially offset by proceeds from stock option exercises.debt. This compares to $1,066,324$935,414 cash used in financing activities for the comparable prior period.
Significant non-cash activities during the nine months ended September 30, 2019 include the $39,096,401 one-time redemption of Triangulum stock in exchange for the Triangulum Promissory Note. In addition, we recorded $305,163 in right-of-use assets in exchange for finance and operating lease liabilities as a result of the adoption of ASC 842 effective January 1, 2019. Furthermore, we transferred $157,202 and $147,434 from inventory to assets deployed at client locations for the nine months ended September 30, 2019 and 2018, respectively. These amounts represent the value of our enhanced table systems that were newly installed at our casino clients’ premises during the periods presented but are not reflected as cash flows used in investing activities.
Critical accounting policies. The discussion of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with U.S. GAAP. Critical accounting policies are those policies that, in management's view, are most important in the portrayal of our financial condition and results of operations. See Note 3of our financial statements included2 in Item 8. “Financial Statements and Supplementary Data” ofFinancial Information” included in our 20182019 10-K for further detail on these critical accounting policies.
Off-balance sheet arrangements. As of September 30, 2019,2020, there were no off-balance sheet arrangements.
Recently issued accounting pronouncements. We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A smaller reporting company is not required to provide the information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 20192020 our disclosure controls and procedures were effective.
No change in our internal control over financial reporting occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the effectiveness of internal controls
Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives, and our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level. Further, the design of a control system must reflect the fact that there are
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resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
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PART II – OTHEROTHER INFORMATION
In the ordinary course of conducting our business, we are, from time to time, involved in various legal proceedings, administrative proceedings, regulatory government investigations and other matters, including those in which we are a plaintiff, that are complex in nature and have outcomes that are difficult to predict. In accordance with topic ASC Topic 450, Contingencies, we record accruals for such contingencies to the extent that we conclude that it is probable that a liability will be incurred and the amount of the related loss can be reasonably estimated. Our assessment of each matter may change based on future unexpected events. An unexpected adverse judgment in any pending litigation could cause a material impact on our business operations, intellectual property, results of operations or financial position. Unless otherwise expressly stated, we believe costs associated with litigation will not have a material impact on our financial position or liquidity but may be material to the results of operations in any given period. We assume no obligation to update the status of pending litigation, except as may be required by GAAP, applicable law, statute or regulation.
On May 6, 2019, we redeemed all 23,271,667 shares of our common stock held by Triangulum, Partners, LLC (“Triangulum”), an entity controlled by Robert B. Saucier, Galaxy Gaming's founder, and, prior to the redemption, the holder of a majority of our outstanding common stock. The redemption of Triangulum’s shares was given effect pursuant to ourthe Articles, of Incorporation (the “Articles”), which expressly provide that if certain events occur in relation to a stockholder that is required to undergo a gaming suitability review or similar investigative process, we have the option to purchase all or any part of such stockholder’s shares at a price per share that is equal to the average closing share price over the thirty calendar days preceding the purchase. The average closing share price over the thirty calendar days preceding the redemption was $1.68 per share.
As consideration for the redemption, we issued a promissory note payable to Triangulum in the face amount of $39,096,401, (the “Triangulum Promissory Note”).which due to the resulting litigation discussed below, has not been given accounting effect in the Company’s financial statements. The Company has instead recorded a long-term share redemption consideration obligation payable to Triangulum, Promissorybased on the redemption value specified in our Articles of Incorporation. See Note has no mandatory amortization, matures on May 5, 2029, and bears interest at a rate of 2% per annum, with accrued interest payable annually in arrears. It is unsecured and is subordinated to our existing and future indebtedness in accordance with its terms. We may prepay principal and any accrued interest in full or in part at any time.10.
In relation to the redemption of the Triangulum shares, onOn May 6, 2019 we filed a lawsuit seeking (i) a declaratory judgment that we acted lawfully and in full compliance with the Articles when we redeemed the Triangulum shares and (ii) certain remedies for breach of fiduciary duty and breach of contract by Triangulum and its Managing Member, Mr. Saucier (the “Triangulum Lawsuit”).Saucier. The suitTriangulum Lawsuit alleges that the redemption and the other relief sought by us are appropriate and in accordance with the Articles of Incorporation (Galaxy Gaming, Inc. v. Triangulum Partners, LLC, Robert B. Saucier, Clark County, Nevada district court (Case No. A-19-794293-B)). We are in the discovery phase of the Triangulum Lawsuit.
The defendants to that lawsuit responded to the complaint, and Triangulum filed counterclaims based on a theory of wrongful redemption by us. The defendantsTriangulum also filed a Motion for Preliminary Injunction seeking the redeemed shares be held in a constructive trust. On July 11, 2019, the Court denied the defendants’Triangulum’s Motion for Preliminary Injunction and all related relief. On September 6, 2019, DefendantsTriangulum appealed the denial of the Motion for Preliminary Injunction to the Nevada Supreme Court. We will oppose the appeal, but a briefing schedule has not yet been set by the Supreme Court.submitted our brief in opposition, and Triangulum’s reply brief is due on June 17, 2020. Separately, Triangulum filed amended counterclaims, which we moved to dismiss on a number of legal grounds. The Court denied the motion, stating that the amended complaint was sufficiently plead. We will fileThe Company filed a Petition for a Writ of Mandamus challenging the ruling.ruling, which the Supreme Court denied on January 23, 2020.
On October 18, 2019, Saucier also filed counterclaims centered similarly on a theory of wrongful redemption, and also claims that for breach of contract and quantum meruit, alleging Galaxy Gaming was obligated to pay Saucier his year-end bonuses, despite his resignation. We will file a timely response,filed an answer disputing these claims.
As a result of the effects of Coronavirus on the Nevada District court, the Court issued a revised Scheduling Order extending time frames for discovery and setting a new trial date in February of 2021.
On May 31, 20196, 2020, Saucier made a demand of the Company under our Bylaws and June 6, 2019 respectively, Derek Webban Indemnity Agreement between Saucier and Hannah O’Donnell together filed a complaintthe Company, for indemnity and a related Motion for Order Granting Request to Compel an Annual Meeting, oradvancement of funds seeking repayment of his lawyer’s fees and expenses he allegedly incurred in connection with the Company’s claims against him in the Alternative for a Writ of MandamusTriangulum Lawsuit. Saucier asserts that he is entitled to indemnity and Injunctive Relief (the “Motion”). The Motion sought the Court to compel us to hold an Annual Shareholder’s Meeting in 2019 and also sought related relief: that we not issue shares or redeem any shares or amend its Bylaws in any manner that could affect the obligation to hold the meeting or elect directors at the meeting. On June 6, 2019, we notified the public of the holding of an Annual Meeting to take place on August 28, 2019 for shareholders of record of July 17, 2019. During a hearing held on July 11, 2019, the Court denied Webb and O’Donnell’s Motion and all related relief. The Annual Meeting took place on August 28, 2019. On October 17, 2019 the Court dismissed the caseadvancement as a result of a stipulationhis tenure as an officer, director, and fiduciary of the parties.Company, which he claims triggers his rights of indemnity and advancement. The Company rejected his demand. Pursuant to the Indemnity Agreement, an Independent Counsel was agreed to by the parties to hear the dispute. The Independent Counsel generally agreed with the Company but awarded Saucier a small amount of indemnity funds related to the time he was employed by the Company.
Also on May 19, 2020, Saucier commenced a separate action, filed a verified complaint seeking advancement and filed a pleading styled “Motion For Declaratory Judgement On Verified Complaint For Advancement” (Robert B. Saucier v. Galaxy Gaming, Inc. (Clark County, Nevada district court (Case No. A-20-81590-B)) (“the Motion For Declaratory Judgement”). The Company filed its opposition on June 4, 2020. Saucier’s Motion For Declaratory Judgement was denied in a hearing that occurred on June 24, 2020. Saucier appealed the denial to the Nevada Supreme Court on August 10, 2020.
On July 22, 2020 Galaxy and its Directors, filed an Anti-SLAPP motion seeking to dismiss certain claims made against Galaxy and its Directors. The Anti-SLAPP motion was denied by the court. Galaxy and its Directors have appealed the denial of that motion to the Nevada Supreme Court. The appeal will stay most aspects of the litigation, pending outcome of the appeal.
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The appeals to the Nevada Supreme Court by Saucier and by Galaxy, have also been referred to the Supreme Court’s Settlement Program where they are pending. A mandatory settlement conference is scheduled for November 16, 2020.
We remain in the discovery phase of the Triangulum Lawsuit.
As has been previously reported by the Company, in September 2018, we were served with a complaint by TMAX regarding the TMAX Agreement. We filed an answer denying the allegations and counterclaiming for breach of contract, abuse of process and fraud in the inducement, among other counterclaims. We also filed a partial motion for summary judgment seeking dismissal of the plaintiff’s claims. Pursuant to a motion to dismiss brought by the co-defendant and former CEO of TMAX, the suit was dismissed, subject to the right of the plaintiff to file an amended complaint on or before March 20, 2019.
The plaintiff did not file an amended complaint within the time period set by the Judge. After that time, the Company considered the matter closed. Despite not filing an Amended complaint within the allotted time, thereafter TMAX filed a Motion for Leave to Amend their Complaint, which was granted by the Judge on May 11, 2020. On May 26, 2020 TMAX filed an Amended Complaint against the Company and other Co-Defendants. In the Amended Complaint, TMAX asserted a claim against the Company for conversion of personal property. The Company will respond to the Amended Complaint denying the allegations.
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ITEM 2. UNREGISTERED SALES OF EQUITYEQUITY SECURITIES AND USE OF PROCEEDS
On September 30, 2019,2020, we issued an aggregate of 82,60055,000 restricted shares of our common stock valued at $152,067$59,400 to Messrs. Lipparelli, DesRosiers, Isaacs, Waters, and Zender, in consideration of their service on the Board during the three months ended September 30, 2019.2020. These shares vested immediately on the grant date. In each of the transactions listed above, the securities were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, (the “Securities Act”) and rules and regulations promulgated thereunder.
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Our reliance upon Section 4(a)(2) of the Securities Act in granting the aforementioned options to purchase shares of our common stock was based in part upon the following factors: (a) each of the issuances of the securities was in connection with an isolated private transaction which did not involve any public offering; (b) there were a limited number of offerees; (c) there were no subsequent or contemporaneous public offerings of the securities by us; and (d) the negotiations for the issuance of the securities took place directly between the offeree and us.
Exhibit Number |
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| Description |
| Form |
| File No. |
| Exhibit |
| Filing Date |
| Filed Herewith |
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| 8-K |
| 000-30653 |
| 10.2 |
| August 28, 2019 |
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31.1 |
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| X | |
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31.2 |
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| X | |
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32.1 |
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| X | |
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101 |
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| Financials in XBRL format |
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| X |
Exhibit Number | Description | Form | File No. | Exhibit | Filing Date | Filed Herewith | ||||||
3.1 10.1 10.2 10.3 10.4 10.5 10.6 | Amendment #2 to the Employment Agreement dated July 27, 2017 between the Company and Todd P. Cravens | 8-K 8-K 8-K 8-K 8-K 8-K 8-K | 000-30653 000-30653 000-30653 000-30653 000-30653 000-30653 000-30653 | 3.2 10.1 10.2 10.1 10.1 10.1 | February 14, 2020 February 19, 2020 February 26, 2020 April 21, 2020 August 14, 2020 August 24, 2020 October 26, 2020 | |||||||
31.1 | X | |||||||||||
31.2 | X | |||||||||||
32.1 | X | |||||||||||
101 | Financials in XBRL format | X |
2327
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 thereunto duly authorized.
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| Galaxy Gaming, Inc. | ||
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Date: |
| November | ||
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| By: |
| /s/ TODD P. CRAVENS |
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| Todd P. Cravens |
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| President and Chief Executive Officer (Principal Executive Officer) |
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| Galaxy Gaming, Inc. | ||
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Date: |
| November | ||
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| By: |
| /s/ HARRY C. HAGERTY |
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| Harry C. Hagerty |
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| Chief Financial Officer (Principal Accounting Officer) |
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