re
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 March 31,September 30, 2020
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: 18,281,27721,582,638 common shares as of June 23,November 12, 2020.
GALAXY GAMING, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2020
TABLE OF CONTENTS
|
|
|
| PART I
|
|
Item 1: | 3 | |
Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
Item 3: |
| |
Item 4: |
| |
|
PART II
|
|
Item 1: |
| |
Item 2: |
| |
Item 6: |
|
2
Our financial statements included in this Form 10-Q are as follows:
3
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS |
| March 31, 2020 |
|
| December 31, 2019 |
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||||
Current assets: |
| (Unaudited) |
|
|
|
|
|
| (Unaudited) |
|
|
|
|
| ||
Cash, cash equivalents and restricted cash |
| $ | 11,051,143 |
|
| $ | 9,686,698 |
| ||||||||
Accounts receivable, net of allowance of $122,354 and $77,433, respectively |
|
| 2,564,271 |
|
|
| 3,099,586 |
| ||||||||
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 |
|
| 726,483 |
|
|
| 665,654 |
|
|
| 761,345 |
|
|
| 665,654 |
|
Income tax receivable |
|
| 224,385 |
|
|
| 260,347 |
|
|
| 350,244 |
|
|
| 260,347 |
|
Prepaid expense and other current assets |
|
| 958,216 |
|
|
| 761,650 |
|
|
| 704,557 |
|
|
| 761,650 |
|
Total current assets |
|
| 15,524,498 |
|
|
| 14,473,935 |
|
|
| 6,668,796 |
|
|
| 14,473,935 |
|
Property and equipment, net |
|
| 123,363 |
|
|
| 144,909 |
|
|
| 116,152 |
|
|
| 144,909 |
|
Operating lease right-of-use assets |
|
| 237,559 |
|
|
| 37,689 |
|
|
| 1,482,534 |
|
|
| 306,859 |
|
Assets deployed at client locations, net |
|
| 367,266 |
|
|
| 405,522 |
|
|
| 258,856 |
|
|
| 405,522 |
|
Goodwill |
|
| 1,091,000 |
|
|
| 1,091,000 |
|
|
| 1,091,000 |
|
|
| 1,091,000 |
|
Other intangible assets, net |
|
| 7,048,144 |
|
|
| 7,430,643 |
|
|
| 16,610,045 |
|
|
| 7,430,643 |
|
Deferred tax assets, net |
|
| 399,283 |
|
|
| 399,283 |
|
|
| 892,090 |
|
|
| 399,283 |
|
Other assets, net |
|
| 27,305 |
|
|
| — |
| ||||||||
Total assets |
| $ | 24,791,113 |
|
| $ | 23,982,981 |
|
| $ | 27,146,778 |
|
| $ | 24,252,151 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 775,088 |
|
| $ | 766,305 |
|
| $ | 2,099,180 |
|
| $ | 766,305 |
|
Accrued expenses |
|
| 1,085,368 |
|
|
| 1,450,879 |
|
|
| 844,146 |
|
|
| 1,450,879 |
|
Revenue contract liability |
|
| 1,298,451 |
|
|
| 1,294,265 |
|
|
| 587,094 |
|
|
| 1,294,265 |
|
Current portion of long-term debt |
|
| 1,599,103 |
|
|
| 1,634,527 |
|
|
| 2,530,149 |
|
|
| 1,634,527 |
|
Current portion of operating lease liabilities |
|
| 214,012 |
|
|
| 19,140 |
|
|
| 197,067 |
|
|
| 276,963 |
|
Total current liabilities |
|
| 4,972,022 |
|
|
| 5,165,116 |
|
|
| 6,257,636 |
|
|
| 5,422,939 |
|
Long-term operating lease liabilities |
|
| 23,972 |
|
|
| 18,978 |
|
|
| 1,266,215 |
|
|
| 30,325 |
|
Long-term debt, net |
|
| 46,929,382 |
|
|
| 46,291,014 |
| ||||||||
Long-term liabilities, net |
|
| 45,991,154 |
|
|
| 46,291,014 |
| ||||||||
Interest rate swap liability |
|
| 216,658 |
|
|
| 140,495 |
|
|
| 118,846 |
|
|
| 140,495 |
|
Total liabilities |
|
| 52,142,034 |
|
|
| 51,615,603 |
|
|
| 53,633,851 |
|
|
| 51,884,773 |
|
Commitments and Contingencies (See Note 11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity (deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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; 18,106,277 and 18,017,944 shares issued and outstanding, respectively |
|
| 18,106 |
|
|
| 18,018 |
| ||||||||
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 |
|
| 5,960,644 |
|
|
| 5,795,636 |
|
|
| 10,344,181 |
|
|
| 5,795,636 |
|
Accumulated deficit |
|
| (33,329,671 | ) |
|
| (33,446,276 | ) |
|
| (36,833,752 | ) |
|
| (33,446,276 | ) |
Accumulated other comprehensive loss |
|
| (19,084 | ) |
|
| — |
| ||||||||
Total stockholders’ deficit |
|
| (27,350,921 | ) |
|
| (27,632,622 | ) |
|
| (26,487,073 | ) |
|
| (27,632,622 | ) |
Total liabilities and stockholders’ deficit |
| $ | 24,791,113 |
|
| $ | 23,982,981 |
|
| $ | 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 |
|
| Three Months Ended |
|
| Nine Months Ended |
| |||||||||||||||
|
| March 31, 2020 |
|
| March 31, 2019 |
|
| September 30, 2020 |
|
| September 30, 2019 |
|
| September 30, 2020 |
|
| September 30, 2019 |
| ||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product leases, royalties and other |
| $ | 4,494,318 |
|
| $ | 5,346,751 |
|
| $ | 1,797,833 |
|
| $ | 5,371,646 |
|
| $ | 6,956,122 |
|
| $ | 16,117,583 |
|
Total revenue |
|
| 4,494,318 |
|
|
| 5,346,751 |
|
| $ | 1,797,833 |
|
| $ | 5,371,646 |
|
|
| 6,956,122 |
|
| $ | 16,117,583 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of ancillary products and assembled components |
|
| 21,812 |
|
|
| 82,391 |
|
|
| 11,142 |
|
|
| 37,674 |
|
|
| 40,855 |
|
|
| 167,009 |
|
Selling, general and administrative |
|
| 2,992,052 |
|
|
| 3,540,870 |
|
|
| 1,833,723 |
|
|
| 3,645,319 |
|
|
| 7,264,410 |
|
|
| 10,126,029 |
|
Research and development |
|
| 155,653 |
|
|
| 299,180 |
|
|
| 97,081 |
|
|
| 208,253 |
|
|
| 391,333 |
|
|
| 685,693 |
|
Depreciation and amortization |
|
| 469,805 |
|
|
| 482,064 |
|
|
| 575,637 |
|
|
| 476,112 |
|
|
| 1,499,927 |
|
|
| 1,439,220 |
|
Share-based compensation |
|
| 157,596 |
|
|
| 223,604 |
|
|
| 178,553 |
|
|
| 242,016 |
|
|
| 512,818 |
|
|
| 678,199 |
|
Total costs and expenses |
|
| 3,796,918 |
|
|
| 4,628,109 |
|
|
| 2,696,136 |
|
|
| 4,609,374 |
|
|
| 9,709,343 |
|
|
| 13,096,150 |
|
Income from operations |
|
| 697,400 |
|
|
| 718,642 |
| ||||||||||||||||
(Loss) income from operations |
|
| (898,303 | ) |
|
| 762,272 |
|
|
| (2,753,221 | ) |
|
| 3,021,433 |
| ||||||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
| 21,774 |
|
|
| 715 |
|
|
| 1,412 |
|
|
| 25,326 |
|
|
| 25,313 |
|
|
| 45,891 |
|
Interest expense |
|
| (363,153 | ) |
|
| (168,013 | ) |
|
| (162,082 | ) |
|
| (165,706 | ) |
|
| (506,922 | ) |
|
| (503,262 | ) |
Foreign currency exchange (loss) gain |
|
| (127,291 | ) |
|
| 36,476 |
| ||||||||||||||||
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 |
|
| (76,163 | ) |
|
| (26,142 | ) |
|
| 55,330 |
|
|
| 13,162 |
|
|
| 21,650 |
|
|
| (78,440 | ) |
Other non-recurring income |
|
| 15,320 |
|
|
| — |
|
|
| 15,320 |
|
|
| — |
| ||||||||
Total other expense |
|
| (544,833 | ) |
|
| (156,964 | ) |
|
| (265,488 | ) |
|
| (392,170 | ) |
|
| (1,127,061 | ) |
|
| (908,403 | ) |
Income before provision for income taxes |
|
| 152,567 |
|
|
| 561,678 |
| ||||||||||||||||
Provision for income taxes |
|
| (35,962 | ) |
|
| (101,014 | ) | ||||||||||||||||
Net income |
| $ | 116,605 |
|
| $ | 460,664 |
| ||||||||||||||||
(Loss) income before benefit (provision) for income taxes |
|
| (1,163,791 | ) |
|
| 370,102 |
|
|
| (3,880,282 | ) |
|
| 2,113,030 |
| ||||||||
Benefit (provision) for income taxes |
|
| (133,708 | ) |
|
| 210,132 |
|
|
| 492,807 |
|
|
| (17,189 | ) | ||||||||
Net (loss) income |
| $ | (1,297,499 | ) |
| $ | 580,234 |
|
| $ | (3,387,475 | ) |
| $ | 2,095,841 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
| ||||||||||||||||
Net (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Basic |
| $ | 0.01 |
|
| $ | 0.01 |
|
| $ | (0.07 | ) |
| $ | 0.03 |
|
| $ | (0.18 | ) |
| $ | 0.07 |
|
Diluted |
| $ | 0.01 |
|
| $ | 0.01 |
|
| $ | (0.06 | ) |
| $ | 0.03 |
|
| $ | (0.17 | ) |
| $ | 0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 18,022,761 |
|
|
| 40,370,338 |
|
|
| 19,745,525 |
|
|
| 17,774,022 |
|
|
| 18,675,769 |
|
|
| 28,083,665 |
|
Diluted |
|
| 19,239,294 |
|
|
| 42,242,557 |
|
|
| 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' |
|
| Common Stock |
|
| Additional Paid in |
|
| Accumulated Earnings |
|
| Accumulated Other |
|
| Total Shareholders' |
| |||||||||||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| (Deficit) |
|
| Equity (Deficit) |
|
| 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 | ) |
|
| 18,017,944 |
|
| $ | 18,018 |
|
| $ | 5,795,636 |
|
| $ | (33,446,276 | ) |
| $ | — |
|
| $ | (27,632,622 | ) |
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 116,605 |
|
|
| 116,605 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 116,605 |
|
|
| — |
|
|
| 116,605 |
|
Stock options exercised |
|
| 25,000 |
|
|
| 25 |
|
|
| 7,475 |
|
|
| — |
|
|
| 7,500 |
|
|
| 25,000 |
|
|
| 25 |
|
|
| 7,475 |
|
|
| — |
|
|
| — |
|
|
| 7,500 |
|
Share-based compensation |
|
| 63,333 |
|
|
| 63 |
|
|
| 157,533 |
|
|
| — |
|
|
| 157,596 |
|
|
| 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 | ) |
|
| 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 |
|
| Accumulated Earnings |
|
| Total Shareholders' |
|
| Common Stock |
|
| Additional Paid in |
|
| Accumulated Earnings |
|
| Accumulated Other |
|
| Total Shareholders' |
| |||||||||||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| (Deficit) |
|
| Equity (Deficit) |
|
| 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 |
|
|
| 39,921,591 |
|
| $ | 39,922 |
|
| $ | 4,733,701 |
|
| $ | 2,683,478 |
|
| $ | — |
|
| $ | 7,457,101 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 460,664 |
|
|
| 460,664 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 460,664 |
|
|
| — |
|
|
| 460,664 |
|
Stock options exercised |
|
| 98,332 |
|
|
| 98 |
|
|
| 36,134 |
|
|
| — |
|
|
| 36,232 |
|
|
| 98,332 |
|
|
| 98 |
|
|
| 36,134 |
|
|
| — |
|
|
| — |
|
|
| 36,232 |
|
Share based compensation expense |
|
| 470,200 |
|
|
| 470 |
|
|
| 223,134 |
|
|
| — |
|
|
| 223,604 |
| ||||||||||||||||||||||||
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 |
|
|
| 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)
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| March 31, 2020 |
|
| March 31, 2019 |
|
| September 30, 2020 |
|
| September 30, 2019 |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 116,605 |
|
| $ | 460,664 |
| ||||||||
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 |
|
| 469,805 |
|
|
| 473,493 |
|
|
| 1,499,927 |
|
|
| 1,424,934 |
|
Amortization of lease right-of-use assets |
|
| 69,301 |
|
|
| 69,711 |
| ||||||||
Non-cash lease expense |
|
| 207,378 |
|
|
| 203,205 |
| ||||||||
Amortization of debt issuance costs and debt discount |
|
| 9,159 |
|
|
| 9,776 |
|
|
| 26,935 |
|
|
| 25,584 |
|
Bad debt expense |
|
| 166,002 |
|
|
| 31,762 |
|
|
| 166,002 |
|
|
| 101,938 |
|
Change in estimated fair value of interest rate swap liability |
|
| 76,163 |
|
|
| 26,142 |
|
|
| (21,650 | ) |
|
| 78,440 |
|
Deferred income tax benefit |
|
| (492,807 | ) |
|
| (4,194 | ) | ||||||||
Share-based compensation |
|
| 157,596 |
|
|
| 223,604 |
|
|
| 512,818 |
|
|
| 678,199 |
|
Unrealized foreign exchange loss (gain) on cash, cash equivalents and restricted cash |
|
| 77,557 |
|
|
| (29,296 | ) | ||||||||
Unrealized foreign exchange loss |
|
| 84,757 |
|
|
| 33,291 |
| ||||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 369,313 |
|
|
| (158,003 | ) |
|
| 1,333,515 |
|
|
| (477,319 | ) |
Inventory |
|
| (86,885 | ) |
|
| (148,120 | ) |
|
| (123,359 | ) |
|
| (315,155 | ) |
Income tax receivable |
|
| 35,962 |
|
|
| 101,014 |
| ||||||||
Income tax receivable/payable |
|
| (14,379 | ) |
|
| (414,817 | ) | ||||||||
Prepaid expenses and other current assets |
|
| (197,283 | ) |
|
| (32,274 | ) |
|
| 54,953 |
|
|
| (40,086 | ) |
Accounts payable |
|
| 8,784 |
|
|
| 385,259 |
|
|
| 552,166 |
|
|
| 332,566 |
|
Accrued expenses |
|
| (365,512 | ) |
|
| (656,817 | ) |
|
| (698,380 | ) |
|
| (14,826 | ) |
Revenue contract liability |
|
| 4,186 |
|
|
| (82,656 | ) |
|
| (707,171 | ) |
|
| (143,812 | ) |
Operating lease liabilities |
|
| (69,305 | ) |
|
| (65,376 | ) |
|
| (254,363 | ) |
|
| (197,875 | ) |
Other current liabilities |
|
| — |
|
|
| (7,455 | ) |
|
| — |
|
|
| (71,581 | ) |
Net cash provided by operating activities |
|
| 841,448 |
|
|
| 601,428 |
| ||||||||
Net cash (used in) provided by operating activities |
|
| (1,261,133 | ) |
|
| 3,294,333 |
| ||||||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in intangible assets |
|
| — |
|
|
| (12,250 | ) |
|
| — |
|
|
| (27,400 | ) |
Acquisition of PGP assets, net of cash acquired |
|
| (6,266,335 | ) |
|
| — |
| ||||||||
Acquisition of property and equipment |
|
| (1,448 | ) |
|
| (6,940 | ) |
|
| (38,712 | ) |
|
| (32,495 | ) |
Net cash used in investing activities |
|
| (1,448 | ) |
|
| (19,190 | ) |
|
| (6,305,047 | ) |
|
| (59,895 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from draw on revolving loan |
|
| 1,000,000 |
|
|
| — |
|
|
| 1,000,000 |
|
|
| — |
|
Proceeds from Paycheck Protection Program |
|
| 835,300 |
|
|
| — |
| ||||||||
Proceeds from stock option exercises |
|
| 7,500 |
|
|
| 36,232 |
|
|
| 49,750 |
|
|
| 189,981 |
|
Payments of debt issuance costs |
|
| — |
|
|
| (5,736 | ) | ||||||||
Principal payments on finance lease obligations |
|
| — |
|
|
| (8,481 | ) |
|
| — |
|
|
| (14,198 | ) |
Principal payments on long-term debt |
|
| (405,498 | ) |
|
| (356,623 | ) |
|
| (1,264,322 | ) |
|
| (1,105,461 | ) |
Net cash provided by (used in) financing activities |
|
| 602,002 |
|
|
| (328,872 | ) |
|
| 620,728 |
|
|
| (935,414 | ) |
Effect of exchange rate changes on cash |
|
| (77,557 | ) |
|
| 29,296 |
|
|
| (72,340 | ) |
|
| (33,291 | ) |
Net increase in cash, cash equivalents and restricted cash |
|
| 1,364,445 |
|
|
| 282,662 |
| ||||||||
Cash, cash equivalents and restricted cash – beginning of period |
|
| 9,686,698 |
|
|
| 6,311,563 |
| ||||||||
Cash, cash equivalents and restricted cash – end of period |
| $ | 11,051,143 |
|
| $ | 6,594,225 |
| ||||||||
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 |
| $ | 152,949 |
|
| $ | 160,557 |
|
| $ | 462,959 |
|
| $ | 502,764 |
|
Cash paid for income taxes |
| $ | 77,465 |
|
| $ | 436,200 |
| ||||||||
Supplemental schedule of non-cash activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
| $ | 269,171 |
|
| $ | 293,350 |
|
| $ | 1,383,052 |
|
| $ | 305,163 |
|
Inventory transferred to assets deployed at client locations |
| $ | 26,056 |
|
| $ | 58,016 |
|
| $ | 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.
Share Redemption. 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.
There is ongoing litigation between the Company and Triangulum related to the redemption and other matters. See Note 11.
Membership Interest Purchase Agreement. On February 25, 2020, Galaxy Gaming entered into a Membership Interest Purchase Agreement, dated February 25, 2020 (the “Purchase Agreement”), between the Company and the membership interest holders of Progressive Games Partners LLC (“PGP”). Pursuant
On August 21, 2020, the Company entered into a First Amendment to the Purchase Agreement between the Company will pay $12.425 million to acquire alland the membership interest holders of PGP. The First Amendment, among other things, fixed the cash portion of the issued equity interest of PGP. Of the consideration,purchase price at least $6.425 million but no more than $10.425 million willand established that the stock portion would be paid in cash, withsatisfied through the balanceissuance of the consideration being paid in newly issued3,141,361 shares of the Company’s common stock valued at $1.91with a value of $1.27 per share. Completionshare on the date of the acquisition. The entirety of the purchase price ($10,414,528) has been allocated to customer relationships and is subjectincluded 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 is payable to various customary closing conditions, including butthe sellers of PGP.
Management has determined that the PGP transaction does not limited to (i) further due diligence by Galaxy, (ii) any necessary gaming approvals havingmeet the definition of a business combination and therefore has been obtained from the relevant gaming authorities, (iii) no material adverse effect or other specified adverse events occurring with respect to Galaxy or PGP, (iv) subject to certain exceptions, the accuracy of the representations and warranties of the parties, and (v) performance and compliance in all material respects with agreements and covenants contained in the Purchase Agreement.accounted for as an asset acquisition.
CoronavirusCOVID-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 continued 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. This didAlthough this has not havehad a material effect on our supply chain. However,chain, any future disruption of our suppliers and their contract manufacturers may impact our sales and operating results going forward.
8
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 third and fourth years the loan is outstanding. See Note 10.
As of the date of this filing, the Company believes that it has adequate liquidity to meet its near-termshort-term obligations. Further, we do not currently believe that the recent casino closures will result in an impairment of our assets or a default under our loan agreements. 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 precaution. 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 severity of any such adverse impact, we may fail to comply with our obligations, including covenants in our credit agreement, and we may need to reassess the carrying value of our assets.
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, 2019, filed with the SEC on March 30, 2020 (the “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 Company and the industry as a whole, and information available from other outside sources. Our estimates affect reported amounts for assets, liabilities, revenues, expenses and related disclosures. Actual results may differ from initial estimates.
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 concluded thatconsidered 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). Accordingly, management conducted an assessment of the values of these assets. 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. SeeSee Note 2 in Item 8. “Financial Statements and Supplementary Financial Information” included in our 2019 10-K.
Recently adopted accounting standards
Fair Value Measurement. In August 2018, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“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. We have adopted the new standard effective January 1, 2020, which did not have a material effect on our financial statements or related disclosures.
9
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 certain small public companies and other privatesmaller reporting companies until fiscal years beginning after December 5,15, 2022. Early adoption is permitted. We do not believe the adoption of this guidance will have a material impact on our financial statements or related disclosures.
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. 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 March 31, |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||
North America and Caribbean |
| $ | 3,130,465 |
|
| $ | 3,844,525 |
|
| $ | 971,147 |
|
| $ | 3,891,875 |
|
| $ | 4,262,408 |
|
| $ | 11,644,353 |
|
Europe, Middle East and Africa |
|
| 1,363,853 |
|
|
| 1,502,226 |
|
|
| 826,686 |
|
|
| 1,479,771 |
|
|
| 2,693,714 |
|
|
| 4,473,230 |
|
Total revenue |
| $ | 4,494,318 |
|
| $ | 5,346,751 |
|
| $ | 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 threenine months ended March 31,September 30, 2020:
Beginning balance – January 1, 2020 |
| $ | 1,294,265 |
|
| $ | 1,294,265 |
|
Increase (advanced billings) |
|
| 3,817,076 |
|
|
| 7,199,100 |
|
Decrease (revenue recognition) |
|
| (3,812,890 | ) |
|
| (7,906,271 | ) |
Ending balance – March 31, 2020 |
| $ | 1,298,451 |
| ||||
Ending balance – September 30, 2020 |
| $ | 587,094 |
|
Revenue recognized during the three and nine months ended March 31,September 30, 2020 that was included in the beginning balance of revenue contract liability above was $1,279,682.$6,250 and $1,292,182, respectively.
10
Inventory, net consisted of the following at:
|
| March 31, |
|
| December 31, |
|
| September 30, |
|
| December 31, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Raw materials and component parts |
| $ | 394,479 |
|
| $ | 359,349 |
|
| $ | 379,711 |
|
| $ | 359,349 |
|
Finished goods |
|
| 371,793 |
|
|
| 343,305 |
|
|
| 428,103 |
|
|
| 343,305 |
|
Inventory, gross |
|
| 766,272 |
|
|
| 702,654 |
|
|
| 807,814 |
|
|
| 702,654 |
|
Less: inventory reserve |
|
| (39,789 | ) |
|
| (37,000 | ) |
|
| (46,469 | ) |
|
| (37,000 | ) |
Inventory, net |
| $ | 726,483 |
|
| $ | 665,654 |
|
| $ | 761,345 |
|
| $ | 665,654 |
|
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following at:
|
| March 31, |
|
| December 31, |
|
| September 30, |
|
| December 31, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Furniture and fixtures |
| $ | 312,639 |
|
| $ | 312,639 |
|
| $ | 312,640 |
|
| $ | 312,639 |
|
Automotive vehicles |
|
| 215,127 |
|
|
| 215,127 |
|
|
| 215,127 |
|
|
| 215,127 |
|
Office and computer equipment |
|
| 303,744 |
|
|
| 302,296 |
|
|
| 329,296 |
|
|
| 302,296 |
|
Leasehold improvements |
|
| 6,843 |
|
|
| 6,843 |
|
|
| 18,554 |
|
|
| 6,843 |
|
Property and equipment, gross |
|
| 838,353 |
|
|
| 836,905 |
|
|
| 875,617 |
|
|
| 836,905 |
|
Less: accumulated depreciation |
|
| (714,990 | ) |
|
| (691,996 | ) |
|
| (759,465 | ) |
|
| (691,996 | ) |
Property and equipment, net |
| $ | 123,363 |
|
| $ | 144,909 |
|
| $ | 116,152 |
|
| $ | 144,909 |
|
For the three months ended March 31,September 30, 2020 and 2019, depreciation expense related to property and equipment was $22,994$22,153 and $27,140,$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, respectively.
11
NOTE 6. ASSETS DEPLOYED AT CLIENT LOCATIONS
Assets deployed at client locations, net consisted of the following at:
|
| March 31, |
|
| December 31, |
|
| September 30, |
|
| December 31, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Enhanced table systems |
| $ | 1,009,427 |
|
| $ | 993,127 |
|
| $ | 908,295 |
|
| $ | 993,127 |
|
Less: accumulated depreciation |
|
| (642,161 | ) |
|
| (587,605 | ) |
|
| (649,439 | ) |
|
| (587,605 | ) |
Assets deployed at client locations, net |
| $ | 367,266 |
|
| $ | 405,522 |
|
| $ | 258,856 |
|
| $ | 405,522 |
|
For the three months ended March 31,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, 2020 and 2019, depreciation expense related to assets deployed at client locations was $64,312$174,334 and $69,137,$209,729, respectively.
11
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:
|
| March 31, |
|
| December 31, |
|
| September 30, |
|
| December 31, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 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 |
|
| 183,415 |
|
|
| 183,415 |
|
|
| 183,416 |
|
|
| 183,415 |
|
Other intangible assets, gross |
|
| 20,609,382 |
|
|
| 20,609,382 |
|
|
| 31,046,908 |
|
|
| 20,609,382 |
|
Less: accumulated amortization |
|
| (13,561,238 | ) |
|
| (13,178,739 | ) |
|
| (14,436,863 | ) |
|
| (13,178,739 | ) |
Other intangible assets, net |
| $ | 7,048,144 |
|
| $ | 7,430,643 |
|
| $ | 16,610,045 |
|
| $ | 7,430,643 |
|
For the three months ended March 31,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, 2020 and 2019, amortization expense related to the other intangible assets was $382,499$1,258,124 and $377,216,$1,134,760, respectively.
The 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 March 31, |
| Total |
| |||||
Twelve Months Ending September 30, |
| Total |
| |||||
2021 |
| $ | 1,457,258 |
|
| $ | 2,582,511 |
|
2022 |
|
| 1,415,500 |
|
|
| 2,570,659 |
|
2023 |
|
| 829,535 |
|
|
| 1,417,510 |
|
2024 |
|
| 252,930 |
|
|
| 1,414,600 |
|
2025 |
|
| 252,930 |
|
|
| 1,410,100 |
|
Thereafter |
|
| 2,839,991 |
|
|
| 7,214,665 |
|
Total amortization |
| $ | 7,048,144 |
|
| $ | 16,610,045 |
|
NOTE 8. ACCRUED EXPENSES
Accrued expenses consisted of the following at:
|
| March 31, |
|
| December 31, |
|
| September 30, |
|
| December 31, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Payroll and related |
| $ | 209,831 |
|
| $ | 747,458 |
|
| $ | 249,902 |
|
| $ | 747,458 |
|
Interest |
|
| 721,716 |
|
|
| 520,671 |
|
|
| 26,924 |
|
|
| 9,895 |
|
Share redemption consideration |
|
| 315,293 |
|
|
| 510,776 |
| ||||||||
Commissions and royalties |
|
| 35,186 |
|
|
| 78,528 |
|
|
| 148,098 |
|
|
| 78,528 |
|
Income tax payable |
|
| 64,832 |
|
|
| 64,832 |
|
|
| — |
|
|
| 64,832 |
|
Other |
|
| 53,803 |
|
|
| 39,390 |
|
|
| 103,929 |
|
|
| 39,390 |
|
Total accrued expenses |
| $ | 1,085,368 |
|
| $ | 1,450,879 |
|
| $ | 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). The discount rate represents the interest rate implicit in each lease or our incremental borrowing rate at lease commencement date.
On December 31, 2019, we executed a second amendment to the corporate office lease to amend the lease expiration date from December 31, 2019 to December 31, 2020, with monthly base rents of $21,123 from January 1, 2020 to December 31, 2020. As a result of the amendment, we recorded a $246,998 increase to operating lease right-of-use assets and operating lease liabilities.
12
On September 24, 2019, we executed a third amendment to one of our satellite facilities to amend the lease expiration date from December 31, 2019 to December 31, 2021, with monthly base rents of $975.00 from January 1, 2020 to December 31, 2021. As a result of the amendment, we recorded a $22,173 increase to operating lease right-of-use assets and operating lease liabilities.
As of March 31,September 30, 2020, our leases have remaining lease terms ranging from twothree months to 2775 months. Gross right-of-use assets recorded under operating leases was $560,047, respectively, and the related accumulated amortization was $322,488.
Supplemental balance sheet information related to leases is as follows:
|
| As of March 31, 2020 |
| As of September 30, 2020 | ||||||||
|
| Amount |
|
| Classification |
| Amount |
|
| Classification | ||
Operating leases: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use lease assets |
| $ | 237,559 |
|
|
|
| $ | 1,482,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease current liabilities |
| $ | 214,012 |
|
| Current portion of operating lease liabilities |
| $ | 197,067 |
|
| Current portion of operating lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease long-term liabilities |
|
| 23,972 |
|
| Long-term operating lease liabilities |
|
| 1,266,215 |
|
| Long-term operating lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating lease liabilities |
| $ | 237,984 |
|
|
|
| $ | 1,463,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
| 1 year |
|
|
|
| 5.9 years |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
| 5.7 | % |
|
|
|
| 4.3 | % |
|
|
The components of lease expense are as follows:
|
| Three Months Ended March 31, 2020 | ||||
|
| 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 |
| $ | 71,712 |
|
| 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:
|
| Three Months Ended March 31, 2020 | ||||
|
| Amount |
|
| Classification | |
Cash paid for amounts included in the measure of lease liabilities: |
|
|
|
|
|
|
Operating cash flows from finance leases |
|
| — |
|
| Net income |
Financing cash flows from finance leases |
|
| — |
|
| Principal payments on finance lease obligations |
Operating cash flows from operating leases |
| $ | 71,712 |
|
| Net income |
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease liabilities: |
|
|
|
|
|
|
Finance leases |
|
| — |
|
| Supplemental cash flow information |
Operating leases |
| $ | 560,047 |
|
| 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 March 31,September 30, 2020, future maturities of our operating lease liabilities are as follows:
Twelve Months Ending March 31, |
| Amount |
| |||||
Twelve Months Ending September 30, |
| Amount |
| |||||
2021 |
| $ | 214,013 |
|
| $ | 197,067 |
|
2022 |
|
| 21,584 |
|
|
| 208,249 |
|
2023 |
|
| 2,387 |
|
|
| 215,373 |
|
2024 |
|
| 234,917 |
| ||||
2025 |
|
| 255,707 |
| ||||
Thereafter |
|
| 351,969 |
| ||||
Total lease liabilities |
| $ | 237,984 |
|
| $ | 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.
Our BJS agreementsoffice and warehouse space. The lease commenced on October 1, 2020, with clients conveyrent 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 them the rightswhat we are paying pursuant 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.our current lease.
NOTE 10. LONG-TERM DEBTLIABILITIES
Long-term debtliabilities consisted of the following at:
|
| March 31, |
|
| December 31, |
|
| September 30, |
|
| December 31, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Nevada State Bank credit agreement |
| $ | 9,358,799 |
|
| $ | 8,699,900 |
|
| $ | 8,629,800 |
|
| $ | 8,699,900 |
|
Triangulum promissory note |
|
| 39,096,401 |
|
|
| 39,096,401 |
| ||||||||
Paycheck Protection Program borrowing |
|
| 835,300 |
|
|
| — |
| ||||||||
Share redemption consideration obligation |
|
| 39,096,401 |
|
|
| 39,096,401 |
| ||||||||
Vehicle notes payable |
|
| 39,021 |
|
|
| 44,490 |
|
|
| 28,162 |
|
|
| 44,490 |
|
Insurance notes payable |
|
| 118,966 |
|
|
| 177,894 |
|
|
| — |
|
|
| 177,894 |
|
Long-term debt, gross |
|
| 48,613,187 |
|
|
| 48,018,685 |
| ||||||||
Long-term liabilities, gross |
|
| 48,589,663 |
|
|
| 48,018,685 |
| ||||||||
Less: Unamortized debt issuance costs |
|
| (84,702 | ) |
|
| (93,144 | ) |
|
| (68,360 | ) |
|
| (93,144 | ) |
Long-term debt, net |
|
| 48,528,485 |
|
|
| 47,925,541 |
| ||||||||
Long-term liabilities, net of debt issuance costs |
|
| 48,521,303 |
|
|
| 47,925,541 |
| ||||||||
Less: Current portion |
|
| (1,599,103 | ) |
|
| (1,634,527 | ) |
|
| (2,530,149 | ) |
|
| (1,634,527 | ) |
Long-term debt, long-term portion |
| $ | 46,929,382 |
|
| $ | 46,291,014 |
| ||||||||
Long-term liabilities, net |
| $ | 45,991,154 |
|
| $ | 46,291,014 |
|
Nevada State Bank (“NSB”) Credit Agreement. The Company entered intois party to a Credit Agreement with ZB,Zions Bancorporation, N.A. dba Nevada State Bank (as amended, the “Credit Agreement”), which was last amended on October 14, 2019.26, 2020. The Credit Agreement provided for a Term Loan in 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 component of the Credit Agreement was $7,629,800, bringing the total amount outstanding under the Credit Agreement at September 30, 2020, to $8,629,800.
Under the Credit Agreement, outstanding balances 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
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 MarchOctober 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 Borrowings. On April 17, 2020, the Company drew down $1,000,000obtained 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 Revolving Loan componentuse 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 Credit Agreement. At March 31, 2020, the principal amount outstanding under the Term Loan componentPPP Loan. The review of the Credit Agreement was $8,358,799, bringingCompany’s forgiveness application could take as long as five months, and there is no assurance that the total amount outstanding underPPP Loan will be forgiven in full or in any amount. The application for these funds required the Credit Agreement at March 31, 2020,Company to, $9,358,799.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.
Triangulum Promissory NoteShare 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,later than May 6, 2029; however, there can be no assurance that Triangulum will accept such payments. Additional share redemption consideration is scheduled to maturebeing accrued at 2% on the redemption obligation, and we paid the first annual payment on May 5, 2029, and bears interest at 2% per annum, with accrued interest payable annually2020 in arrears. Itthe amount of $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.
1415
As of March 31,September 30, 2020, future maturities of our long-term debt obligationsliabilities are as follows:
Twelve Months Ending March 31, |
| Total |
| |||||
Twelve Months Ending September 30, |
| Total |
| |||||
2021 |
| $ | 1,599,103 |
|
| $ | 2,530,307 |
|
2022 |
|
| 2,574,483 |
|
|
| 1,616,655 |
|
2023 |
|
| 1,664,400 |
|
|
| 4,511,000 |
|
2024 |
|
| 3,678,800 |
|
|
| — |
|
2025 |
|
| — |
|
|
| 835,300 |
|
Thereafter |
|
| 39,096,401 |
|
|
| 39,096,401 |
|
Long-term debt, gross |
|
| 48,613,187 |
| ||||
Less: |
|
|
|
| ||||
Unamortized debt issuance costs |
|
| (84,702 | ) | ||||
Long-term debt, net |
| $ | 48,528,485 |
| ||||
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 threenine months ended March 31,September 30, 2020 and 2019, respectively, we had the following client revenue concentration:
|
| Location |
| 2020 Revenue |
|
| 2019 Revenue |
|
| Accounts Receivable March 31, 2020 |
|
| Accounts Receivable December 31, 2019 |
| ||||
Client A |
| Europe |
|
| 12.4 | % |
|
| 11.6 | % |
| $ | 296,410 |
|
| $ | 176,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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. 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 and accordingly, no provision for loss has been reflected in the accompanying financial statements related to these matters.
NOTE 12. STOCKHOLDERS’ EQUITY (DEFICIT)
During the threenine months ended March 31,September 30, 2020,, we issued an aggregate of 63,333173,333 restricted shares of our common stock valued at $54,086,$187,186, to our board members in consideration of their service on the Board. These shares vested immediately on the grant date.
Our forecasted annual effective tax rate (“AETR”) at March 31,September 30, 2020 was 23.6%12.0%, as compared to 22.7%16.5% at March 31,September 30, 2019. The slight increaseThis 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 threenine months ended March 31,September 30, 2020.
For the threenine months ended March 31,September 30, 2020 and 2019, our ETReffective tax rate (“ETR”) was 23.6%12.7% and 18.0%0.8%, respectively. The increase in the effective tax rateETR for the threenine months ending March 31,ended September 30, 2020 is a result of favorable discrete items from the comparable prior-year period that are not recurring in the 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 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 March 31,September 30, 2020, a total of 6,550,750 shares of our common stock were authorized for issuance. As of March 31,September 30, 2020, 606,701381,701 shares remained available for issuance as new awards under the 2014 Plan.
15
Stock options. During the threenine months ended March 31,September 30, 2020 and 2019, we issued 225,000465,000 and 150,000320,000 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 threenine months ended March 31,September 30, 2020 and 2019 was determined to be $255,017$435,639 and $171,985,$564,450, respectively, using the Black-Scholes option pricing model with the following assumptions:
|
| Options Issued 2020 |
|
| Options Issued 2019 |
|
| Options Issued 2020 |
|
| Options Issued 2019 |
| ||||
|
| 0 | % |
|
| 0 | % |
|
| 0 | % |
|
| 0 | % | |
Expected volatility |
|
| 70.98 | % |
|
| 72.00 | % |
| 70.98% - 76.97% |
|
| 71.61% - 72.11% |
| ||
Risk free interest rate |
|
| 1.39 | % |
|
| 2.51 | % |
| 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 (“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 closing pricewhich vested on February 19, 2019).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 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) |
|
| 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 |
|
|
| 3,175,000 |
|
| $ | 0.92 |
|
| $ | 2,692,025 |
|
|
| 2.79 |
|
Issued |
|
| 225,000 |
|
|
| 1.93 |
|
|
| — |
|
|
| — |
|
|
| 465,000 |
|
|
| 1.57 |
|
|
| — |
|
|
| — |
|
Exercised |
|
| (25,000 | ) |
|
| 0.30 |
|
|
| — |
|
|
| — |
|
|
| (225,000 | ) |
|
| 0.22 |
|
|
| — |
|
|
| — |
|
Forfeited |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (100,000 | ) |
|
| 1.57 |
|
|
| — |
|
|
| — |
|
Outstanding – March 31, 2020 |
|
| 3,375,000 |
|
| $ | 0.99 |
|
| $ | (469,850 | ) |
|
| 2.71 |
| ||||||||||||||||
Exercisable – March 31, 2020 |
|
| 2,096,667 |
|
| $ | 0.67 |
|
| $ | 379,217 |
|
|
| 2.00 |
| ||||||||||||||||
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 |
|
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) |
|
| 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 |
|
|
| 1,053,333 |
|
| $ | 1.43 |
|
| $ | 357,734 |
|
|
| 3.92 |
|
Granted |
|
| 225,000 |
|
|
| 1.93 |
|
|
| — |
|
|
| — |
|
|
| 465,000 |
|
|
| 1.57 |
|
|
| — |
|
|
| — |
|
Vested |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (348,333 | ) |
|
| 1.29 |
|
|
| — |
|
|
| — |
|
Forfeited |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (100,000 | ) |
|
| 1.57 |
|
|
| — |
|
|
| — |
|
Unvested – March 31, 2020 |
|
| 1,278,333 |
|
| $ | 1.51 |
|
| $ | (849,066 | ) |
|
| 3.88 |
| ||||||||||||||||
Unvested – September 30, 2020 |
|
| 1,070,000 |
|
| $ | 1.52 |
|
| $ | (470,300 | ) |
|
| 3.92 |
|
As of March 31,September 30, 2020, our unrecognized share-based compensation expense associated with the stock options issued was $797,761,$708,698, which will be amortized over a weighted-average of 2.412.24 years.
16
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 March 31,September 30, 2020, 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 March 31,September 30, 2020 except as disclosed in Note 1 and as follows:
As discussed in Note 1, oOn April 17,n October 26, 2020, the Company obtained an unsecuredentered into a business loan of $835,300 throughagreement 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 Governors of the Federal Reserve System Section 13(3) of the Federal Reserve Act. Among other things, the Main Street Loan has a five-year maturity, bears interest at a rate of three-month US dollar LIBOR plus 300 basis points and has deferred interest payments during the first 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 the Credit Agreement and permits the security interest under the Paycheck Protection Program (the “PPP Loan”) pursuantMain Street Loan to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the United States Small Business Administration. In accordancebe pari passu with the requirements of the CARES Act, the Company will use proceeds from the PPP Loan primarily for payroll costs.Under the terms of the CARES Act, PPP Loan recipients can apply for and be granted forgiveness for all or a portion of loans grantedLender’s security interest under the PPP. 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. No assurance is provided that the Company will apply for and obtain forgiveness of the PPP Loan in whole or in part.Credit Agreement.
On April 23,November 16, 2020, the Company filedentered into a Registration Statement on Form S-8 (the “Registration Statement”). The Registration Statement was filed relating to 6,550,750 shares of its common stock, par value $0.001 per shares, to be issued pursuantSeventh Amendment to the Company’s 2014 Equity Incentive Plan.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.
On May 13, 2020, the Company filed a Form 8-K relating to extending its filing deadline for its first quarter ended March 31, 2020. In lightCases of COVID-19 infection have been rising in many of the circumstances and uncertainty surroundingmarkets we serve. As a result, there have been restrictions put in place on the effectsopening hours of casinos in those markets. In the United Kingdom in particular, casinos have been forced to 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 Coronavirus (COVID-19) pandemic on the business, employees, consultants and service providers of Galaxy, the Company’s Board of Directors and management determined that it would delay the filing of its report on Form 10-Q for the first quarter ended March 31, 2020, relying on an order issued by the Securities and Exchange Commission on March 25, 2020 (which extended and superseded a prior order issued on March 4, 2020) pursuant to Section 36 of the Securities Exchange Act of 1934, as amended (Release No. 34-88318), regarding exemptions granted to certain public companies.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 our financial condition, results of operations and liquidity and capital resources as of and for the three and nine months ended March 31,September 30, 2020 and 2019. This discussion should be read together with our audited consolidated financial statements and related notes included in Item 8. Financial Statements and Supplementary Data. Some of the information contained in this discussion includes forward-looking statements that 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, 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.
Results of operations for the three months ended March 31,September 30, 2020 and 2019. For the three months ended March 31,September 30, 2020, we generated total revenues of $4,494,318$1,797,833 compared to $5,346,751$5,371,646 for the comparable prior-year period, representing a decrease of $852,433,$3,573,813, or 15.9%66.5%. This decrease was primarily attributable to the closing of a majorityCOVID-19 crisis, as some of our land-based casino customers remained closed in mid-Marchthe third quarter, and those that were open had reduced capacity or realized reduced visitation which, in turn, resulted in us realizing no revenue from those that were closed and 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 dueand, with the acquisition of PGP in the third quarter, began to recognize revenue from licensing the newly-acquired game content to the COVID-19 virusonline gaming market.
Selling, general and administrative expenses for the three months ended March 31,September 30, 2020 were $2,989,552$1,833,723 compared to $3,540,870$3,645,319 for the comparable prior-year period,, representing a decrease of $551,318,$1,811,596, or 15.6%49.7%. This decrease was primarily due to a decrease in compensation-related expenses that are driven by revenue, suchdirectly 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 bonuses, commissions, distributor feeswell. Prior year legal expenses included expenses associated with our strategic review, the Triangulum Lawsuit and royalties.the related contested proxy campaign. Also, travel and entertainment-related expenses and professional and compliance-related expenses (consulting and regulatory) decreased due to the COVID-19 crisis.
Research and development expenses for the three months ended March 31,September 30, 2020 were $155,653,$97,081, compared to $299,180$208,253 for the comparable prior-year period, representing a decrease of $143,527,$111,172, or 48.0%53.4%. This decrease was primarily due to a reduction in headcountconsulting expenses related to a third-party research and otherdevelopment firm no longer used by the Company and a decrease in compensation-related expenses.
Share-based compensation expenses for the three months ended March 31,September 30, 2020 was $157,596,were $178,553, as compared to $223,604$242,016 for the comparable prior-year period, representing a decrease of $66,008,$63,463, or 29.5%26.2%. This decrease was mainly due to final vesting offewer restricted shares issued and at a three-year grant that occurred inlower stock price than the first quarter of 2019 that did not recur in the first quarter of 2020.comparable prior-year period.
As a result of the changes described above, income from operations decreased $18,742$1,660,575 or 2.6%217.8% to $699,900a loss of $898,303 for the three months ended March 31,September 30, 2020, compared to $718,642income of $762,272 for the comparable prior-year period.
Total interest expense decreased $3,624, or 2.2%, to $162,082 for the three months ended September 30, 2020, compared to $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 primarily attributable to favorable discrete items incurred in the prior-year period not recurring in the current-year period.
Adjusted EBITDA (as defined below) was $35,703 for the three months ended September 30, 2020, compared to $2,217,299 for the comparable prior-year period, representing a decrease of $2,181,596, or 98.4%. This decrease was primarily attributable the significant decrease in revenue in the quarter not being fully offset by the decreased amount of expenses.
20
Results of operations for the nine months ended September 30, 2020 and 2019. For the nine months ended September 30, 2020, we generated total revenues of $6,956,122 compared to $16,117,583 for the comparable prior-year period, representing a decrease of $9,161,461, or 56.8%. This decrease was attributable to the 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 those that were closed and 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, 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 nine months ended September 30, 2020 were $7,264,410 compared to $10,126,029 for the comparable prior-year period, representing a decrease of $2,861,619, or 28.3%. This decrease was primarily due to a 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 campaign. Also, travel and entertainment-related expenses and consulting expenses decreased due to the COVID-19 crisis.
Research and development expenses for the nine months ended September 30, 2020 were $391,333, compared to $685,693 for the comparable prior-year period, representing a decrease of $294,360, or 42.9%. This decrease was primarily due to a reduction in consulting expenses related to a third-party research and development firm no longer used by the Company and a decrease in compensation-related expenses.
Share-based compensation expenses for the nine months ended September 30, 2020 were $512,818, as compared to $678,199 for the comparable prior-year period, representing a decrease of $165,381, or 24.4%. This decrease was mainly due to fewer restricted shares issued and at a lower stock price than the comparable prior-year period.
As a result of the changes 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 $195,140,$3,660, or 116.1%0.7%, to $363,153$506,922 for the threenine months ended March 31,September 30, 2020, compared to $168,013$503,262 for the comparable prior-year period. Interest on lower balances of our Term Loan were offset by interest expense on our Revolving Loan (which was undrawn in 2019).
Share redemption consideration increased $271,153, or 86.0%, to $586,446 for the nine months ended September 30, 2020, compared to $315,293 for the comparable prior-year period. The increase was mainly attributable to interest accrued on the Triangulum Promissory Note.share redemption consideration obligation, which was outstanding for only a portion of the prior-year period.
Income tax expensebenefit was $35,962$492,807 for the threenine months ended March 31,September 30, 2020, compared to income tax provision of $101,014$17,189 for the comparable prior-year period. The decrease in income tax expense was primarily attributable to the decreasereduced operations related to the COVID-19 pandemic in the nine-month period resulting in a pre-tax book income from $561,677loss, offset by the GILTI inclusion related to the PGP acquisition, which reduced the taxable loss in the comparable prior-year period to $152,567 in the currentnine-month period.
Adjusted EBITDA (as defined below) was $1,500,572$115,997 for the threenine months ended March 31,September 30, 2020, compared to $2,019,865$6,654,222 for the comparable prior-year period, representing a decrease of $519,293,$6,538,225, or 25.7%98.3%. This decrease was primarily attributable to lowerthe net incomeloss for the period as a result of the COVID-19 crisis and lower adjustmentscrisis. This decrease was primarily attributable the significant decrease in share-based compensation and special project expense, partiallyrevenue in the period not being fully offset by larger adjustments related to interest expense.the decreased amount of expenses.
1821
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 March 31, |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||
Adjusted EBITDA Reconciliation: |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||
Net income |
| $ | 116,605 |
|
| $ | 460,664 |
| ||||||||||||||||
Net (loss) income |
| $ | (1,297,499 | ) |
| $ | 580,234 |
|
| $ | (3,387,475 | ) |
| $ | 2,095,841 |
| ||||||||
Interest expense |
|
| 363,153 |
|
|
| 168,013 |
|
|
| 162,082 |
|
|
| 165,706 |
|
|
| 506,922 |
|
|
| 438,101 |
|
Share redemption consideration |
|
| 195,482 |
|
|
| 195,482 |
|
|
| 586,446 |
|
|
| 380,454 |
| ||||||||
Interest income |
|
| (21,774 | ) |
|
| (715 | ) |
|
| (1,412 | ) |
|
| (25,326 | ) |
|
| (25,313 | ) |
|
| (45,891 | ) |
Depreciation and amortization |
|
| 469,805 |
|
|
| 482,064 |
|
|
| 575,637 |
|
|
| 476,112 |
|
|
| 1,499,927 |
|
|
| 1,439,220 |
|
Share-based compensation |
|
| 157,596 |
|
|
| 223,604 |
|
|
| 178,553 |
|
|
| 242,016 |
|
|
| 512,818 |
|
|
| 678,199 |
|
Foreign currency exchange (gain) loss |
|
| 127,291 |
|
|
| (36,476 | ) |
|
| (20,014 | ) |
|
| 69,470 |
|
|
| 95,976 |
|
|
| 57,299 |
|
Change in estimated fair value of interest rate swap liability |
|
| 76,163 |
|
|
| 26,142 |
|
|
| (55,330 | ) |
|
| (13,162 | ) |
|
| (21,650 | ) |
|
| 78,440 |
|
Income tax provision |
|
| 35,962 |
|
|
| 101,014 |
| ||||||||||||||||
Non-recurring severance expense |
|
| 2,500 |
|
|
| — |
| ||||||||||||||||
Non-recurring special project expense(1) |
|
| 173,271 |
|
|
| 595,555 |
| ||||||||||||||||
(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 |
| $ | 1,500,572 |
|
| $ | 2,019,865 |
|
| $ | 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 have generally been able to fund our continuing operations, our investments, and the obligations under our existing borrowings through cash flow from operations. However, the COVID-19 crisis will cause us to haveresulted in negative cash provided by operations during the nine months ended September 30, 2020, and we expect modestly negative cash 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, and potentially longer in 2020. In addition, we will have a significant use of cash associatedcombined with the closing of$3.92 million in cash we received from the PGP Purchase Agreement (see Note 1). TheMain 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 March 31,September 30, 2020, we had total current assets of $15,524,498$6,668,796 and total assets of $24,791,113.$27,146,778. This compares to $14,473,935 and $23,982,981,$24,252,151, respectively, as of December 31, 2019. The increasedecrease in current assets as of March 31,September 30, 2020 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. our Intangibles balance of $10.4 million, as a result of acquiring customer agreements in connection with the closing on the Purchase Agreement.
22
Our total current liabilities as of March 31,September 30, 2020 increased to $5,972,022$6,257,636 from $5,165,116$5,422,939 as of December 31, 2019, primarily due to an increase in current portion of long-term debt related toour Accounts Payable balance and the Company drawing down on its $1,000,000 Revolving Loan on March 17,12, 2020. This increase was offset by decreases in Accrued Expenses and our Revenue Contract Liability.
OurDespite the COVID-19 crisis, our business was profitable in Q1 but we expect losses2020. However, our business was not profitable in Q2 and potentially longeror Q3 of 2020. We anticipate modestly negative cash from operations in Q4 of 2020. We have sufficient working capital to meet our short-term and long-term obligations but may require additional sourcesas they become due. Further, we do not currently believe that the recent casino closures in the United Kingdom will result in an impairment of cash to meet longer-term obligations.our assets or a default under our loan agreements.
We continue to file 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.
Our operating activities provided $841,448used $1,261,133 in cash for the threenine months ended March 31,September 30, 2020, compared to $601,428cash provided of $3,294,333 for the comparable prior period. The increasedecrease in operating cash flow was primarily due to the net loss for the period as a result of the COVID-19 crisis. This decrease was partially offset by changes in accounts receivable.operating assets and liabilities such as Accounts Receivable, Accounts Payable and Revenue Contract Liability, as a result of the COVID-19 crisis.
Investing activities used cash of $1,448$6,305,047 for the threenine months ended March 31,September 30, 2020, compared to $19,190$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.
19
Cash provided inby financing activities during the threenine months ended March 31,September 30, 2020 was $602,002, $620,728, which resulted 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. This compares to $328,872$935,414 cash used in financing activities for the comparable prior period.
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 2019 10-K for further detail on these critical accounting policies.
Off-balance sheet arrangements. As of March 31,September 30, 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 March 31,September 30, 2020 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
23
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.
2024
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, based on the redemption value specified in our Articles of Incorporation. See Note 10. The Triangulum Promissory 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. We timely made the first payment under the Triangulum Promissory Note on May 6, 2020.
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”).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. Triangulum also filed a Motion for Preliminary Injunction seeking the redeemed shares be held in a constructive trust. On July 11, 2019, the Court denied Triangulum’s Motion for Preliminary Injunction and all related relief. On September 6, 2019, Triangulum appealed the denial of the Motion for Preliminary Injunction to the Nevada Supreme Court. We 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. The Company filed a Petition for a Writ of Mandamus challenging the 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 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 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. Saucier asserts that he is entitled to indemnity and advancement as a result of his tenure as an officer, director, and fiduciary of the Company, which he claims triggers his rights of indemnity and advancement. The Company rejected his demand. Thereafter,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.
25
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 TableMax (“TMAX”)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.
26
ITEM 2. UNREGISTERED SALES OF EQUITYEQUITY SECURITIES AND USE OF PROCEEDS
On March 31,September 30, 2020, we issued an aggregate of 63,33355,000 restricted shares of our common stock valued at $54,086$59,400 to Messrs. Lipparelli, DesRosiers, Isaacs, Waters, and Zender, in consideration of their service on the Board during the three months ended March 31,September 30, 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.
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 |
| 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 August 14, 2020 August 24, 2020 October 26, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.1 |
|
|
|
|
|
|
|
|
|
| X | |
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2 |
|
|
|
|
|
|
|
|
|
| X | |
|
|
|
|
|
|
|
|
|
|
|
|
|
32.1 |
|
|
|
|
|
|
|
|
|
| X | |
|
|
|
|
|
|
|
|
|
|
|
|
|
101 |
| Financials in XBRL format |
|
|
|
|
|
|
|
|
| X |
2227
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.
|
| Galaxy Gaming, Inc. | ||
|
|
| ||
Date: |
|
| ||
|
|
|
|
|
|
| By: |
| /s/ TODD P. CRAVENS |
|
|
|
| Todd P. Cravens |
|
|
|
| President and Chief Executive Officer (Principal Executive Officer) |
|
|
|
|
|
|
| Galaxy Gaming, Inc. | ||
|
|
| ||
Date: |
|
| ||
|
|
|
|
|
|
| By: |
| /s/ HARRY C. HAGERTY |
|
|
|
| Harry C. Hagerty |
|
|
|
| Chief Financial Officer (Principal Accounting Officer) |
2328