UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2020~~March 31, 2021

☐	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~~6480 Cameron Street Ste. 305 – Las Vegas, NV ~~89119~~89118
(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.

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: ~~21,582,638~~22,075,638 common shares as of ~~November 12, 2020.~~May 10, 2021.

GALAXY GAMING, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED ~~SEPTEMBER 30, 2020~~MARCH 31, 2021

TABLE OF CONTENTS


	PART I
Item 1:	Financial Statements (unaudited)	3
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4:	Controls and Procedures	23
	PART II
Item 1:	Legal Proceedings	2524
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	2724
Item 6:	Exhibits	2724

PART I

ITEM 1. FINANCIAL STATEMENTS

Our financial statements included in this Form 10-Q are as follows:

Condensed Consolidated Balance Sheets as of ~~September 30, 2020~~March 31, 2021 (unaudited) and December 31, ~~2019 (unaudited)~~2020	4
Condensed Consolidated Statements of Operations and Comprehensive Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ (unaudited)	5
Condensed Consolidated Statements of Changes in Stockholders’ ~~Equity (Deficit)~~Deficit for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ (unaudited)	6
Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ (unaudited)	7
Notes to Condensed Consolidated Financial Statements (unaudited)	8

~~GALA~~XYGALAXY GAMING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

ASSETS	September 30, 2020			December 31, 2019			March 31, 2021			December 31, 2020
Current assets:	(Unaudited)						(Unaudited)
Cash and cash equivalents	$	2,668,906		$	9,686,698		$	6,081,421		$	5,993,388
Accounts receivable, net of allowance of $129,587 and $77,433, respectively		2,183,744			3,099,586
Inventory, net		761,345			665,654
Accounts receivable, net of allowance of $199,599 and $145,000, respectively								3,516,122			2,493,254
Inventory								708,686			668,525
Income tax receivable		350,244			260,347			1,272,611			1,229,795
Prepaid expense and other current assets		704,557			761,650
Prepaid expenses								892,829			1,167,068
Other current assets								149,716			10,803
Total current assets		6,668,796			14,473,935			12,621,385			11,562,833
Property and equipment, net		116,152			144,909			125,160			116,724
Operating lease right-of-use assets		1,482,534			306,859			1,311,349			1,367,821
Assets deployed at client locations, net		258,856			405,522			217,379			232,156
Goodwill		1,091,000			1,091,000			1,091,000			1,091,000
Other intangible assets, net		16,610,045			7,430,643			15,487,625			16,086,896
Deferred tax assets, net		892,090			399,283
Other assets, net		27,305			—
Other assets								261,235			117,164
Total assets	$	27,146,778		$	24,252,151		$	31,115,133		$	30,574,594
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	2,099,180		$	766,305		$	451,946		$	467,792
Accrued expenses		844,146			1,450,879			2,162,033			1,333,032
Revenue contract liability		587,094			1,294,265			106,250			29,167
Current portion of long-term debt		2,530,149			1,634,527			1,913,355			2,222,392
Current portion of operating lease liabilities		197,067			276,963			213,531			195,411
Total current liabilities		6,257,636			5,422,939			4,847,115			4,247,794
Long-term operating lease liabilities		1,266,215			30,325			1,163,743			1,215,680
Long-term liabilities, net		45,991,154			46,291,014			49,396,992			49,691,184
Interest rate swap liability		118,846			140,495			16,187			66,009
Deferred tax liabilities, net								150,892			150,892
Total liabilities		53,633,851			51,884,773			55,574,929			55,371,559
Commitments and Contingencies (See Note 11)
Stockholders’ equity (deficit)
Stockholders’ 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; 21,582,638 and 18,017,944 shares issued and outstanding, respectively		21,582			18,018
Common stock, 65,000,000 shares authorized; $0.001 par value; 22,075,638 and 21,970,638 shares issued and outstanding, respectively								22,076			21,971
Additional paid-in capital		10,344,181			5,795,636			11,126,070			10,798,536
Accumulated deficit		(36,833,752	)		(33,446,276	)		(35,566,426	)		(35,655,163	)
Accumulated other comprehensive loss		(19,084	)		—
Accumulated other comprehensive (loss) income								(41,516	)		37,691
Total stockholders’ deficit		(26,487,073	)		(27,632,622	)		(24,459,796	)		(24,796,965	)
Total liabilities and stockholders’ deficit	$	27,146,778		$	24,252,151		$	31,115,133		$	30,574,594

The accompanying notes are an integral part of the condensed consolidated financial statements.

GALAXY GAMING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019			March 31, 2021			March 31, 2020
Revenue:
Product leases, royalties and other	$	1,797,833		$	5,371,646		$	6,956,122		$	16,117,583
Licensing fees													$	4,282,901		$	4,494,318
Total revenue	$	1,797,833		$	5,371,646			6,956,122		$	16,117,583		$	4,282,901		$	4,494,318
Costs and expenses:
Cost of ancillary products and assembled components		11,142			37,674			40,855			167,009			14,304			21,812
Selling, general and administrative		1,833,723			3,645,319			7,264,410			10,126,029			2,711,052			2,992,052
Research and development		97,081			208,253			391,333			685,693			118,701			155,653
Depreciation and amortization		575,637			476,112			1,499,927			1,439,220			717,254			469,805
Share-based compensation		178,553			242,016			512,818			678,199			316,640			157,596
Total costs and expenses		2,696,136			4,609,374			9,709,343			13,096,150			3,877,951			3,796,918
(Loss) income from operations		(898,303	)		762,272			(2,753,221	)		3,021,433
Income from operations														404,950			697,400
Other income (expense):
Interest income		1,412			25,326			25,313			45,891			382			21,774
Interest expense		(162,082	)		(165,706	)		(506,922	)		(503,262	)		(180,910	)		(167,671	)
Share redemption consideration		(195,482	)		(195,482	)		(586,446	)		(315,293	)		(195,482	)		(195,482	)
Foreign currency exchange gain (loss)		20,014			(69,470	)		(95,976	)		(57,299	)
Foreign currency exchange loss														(8,975	)		(127,291	)
Change in estimated fair value of interest rate swap liability		55,330			13,162			21,650			(78,440	)		49,822			(76,163	)
Other non-recurring income		15,320			—			15,320			—
Total other expense		(265,488	)		(392,170	)		(1,127,061	)		(908,403	)		(335,163	)		(544,833	)
(Loss) income before benefit (provision) for income taxes		(1,163,791	)		370,102			(3,880,282	)		2,113,030
Income before benefit (provision) for income taxes														69,787			152,567
Benefit (provision) for income taxes		(133,708	)		210,132			492,807			(17,189	)		18,950			(35,962	)
Net (loss) income	$	(1,297,499	)	$	580,234		$	(3,387,475	)	$	2,095,841
Net income														88,737			116,605
Foreign currency translation adjustment														(79,207	)		—
Comprehensive income													$	9,530		$	116,605

Net (loss) income per share:
Net income per share:
Basic	$	(0.07	)	$	0.03		$	(0.18	)	$	0.07		$	0.00		$	0.01
Diluted	$	(0.06	)	$	0.03		$	(0.17	)	$	0.07		$	0.00		$	0.01

Weighted-average shares outstanding:
Basic		19,745,525			17,774,022			18,675,769			28,083,665			18,838,221			18,022,761
Diluted		20,475,085			19,102,709			19,483,464			29,672,645			20,173,443			19,239,294

The accompanying notes are an integral part of the condensed consolidated financial statements.

GALAXY GAMING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ ~~EQUITY (DEFICIT)~~DEFICIT

(Unaudited)

Common Stock

Additional Paid in

Accumulated Earnings

Accumulated Other

Total Shareholders'

Shares

Amount

Capital

(Deficit)

Comprehensive Income

Deficit

Beginning balance, December 31, 2019

18,017,944

$
18,018

$
5,795,636

$
(33,446,276
)

$
—

$
(27,632,622
)
Net income

—

—

—

116,605

—

116,605

Stock options exercised

25,000

25

7,475

—

—

7,500

Share-based compensation

63,333

63

157,533

—

—

157,596

Balance, March 31, 2020

18,106,277

$
18,106

$
5,960,644

$
(33,329,671
)

$
—

$
(27,350,921
)
Net loss

—

—

—

(2,206,582
)

—

(2,206,582
)
Stock options exercised

150,000

150

30,113

—

—

30,263

Share-based compensation

80,000

80

176,589

—

—

176,669

Balance, June 30, 2020

18,336,277

$
18,336

$
6,167,346

$
(35,536,253
)

$
—

$
(29,350,571
)
Shares issued in connection with PGP asset acquisition

3,141,361

3,141

$
3,986,387

—

—

3,989,528

Net loss

—

—

—

(1,297,499
)

—

(1,297,499
)
Foreign currency translation adjustment

—

—

—

—

(19,084
)

(19,084
)
Stock options exercised

50,000

50

11,950

—

—

12,000

Share-based compensation

55,000

55

178,498

—

—

178,553

Balance, September 30, 2020

21,582,638

$
21,582

$
10,344,181

$
(36,833,752
)

$
(19,084
)

$
(26,487,073
)

										Accumulated
	Common Stock				Additional Paid-in		Accumulated			Other Comprehensive			Total Shareholders'
	Shares		Amount		Capital		Deficit			Income (Loss)			Deficit
Beginning balance, December 31, 2020		21,970,638	$	21,971	$	10,798,536	$	(35,655,163	)	$	37,691		$	(24,796,965	)
Net income		—		—		—		88,737			—			88,737
Foreign currency translation		—		—		—		—			(79,207	)		(79,207	)
Stock options exercised		50,000		50		10,949		—			—			10,999
Share-based compensation		55,000		55		316,585		—			—			316,640
Balance, March 31, 2021		22,075,638	$	22,076	$	11,126,070	$	(35,566,426	)	$	(41,516	)	$	(24,459,796	)

	Common Stock						Additional Paid in		Accumulated Earnings			Accumulated Other		Total Shareholders'												Accumulated
	Shares			Amount			Capital		(Deficit)			Comprehensive Income		Equity (Deficit)			Common Stock				Additional Paid-in		Accumulated			Other Comprehensive		Total Shareholders'
Beginning balance, December 31, 2018		39,921,591		$	39,922		$	4,733,701	$	2,683,478		$	—	$	7,457,101
																	Shares		Amount		Capital		Deficit			Income (Loss)		Deficit
Beginning balance, December 31, 2019																		18,017,944	$	18,018	$	5,795,636	$	(33,446,276	)	$	—	$	(27,632,622	)
Net income		—			—			—		460,664			—		460,664			—		—		—		116,605			—		116,605
Stock options exercised		98,332			98			36,134		—			—		36,232			25,000		25		7,475		—			—		7,500
Share-based compensation		470,200			470			223,134		—			—		223,604			63,333		63		157,533		—			—		157,596
Balance, March 31, 2019		40,490,123		$	40,490		$	4,992,969	$	3,144,142		$	—	$	8,177,601
Common stock redemption		(23,271,667	)		(23,271	)		—		(39,073,130	)		—		(39,096,401	)
Net income		—			—			—		1,054,943			—		1,054,943
Stock options exercised		457,888			458			59,917		—			—		60,375
Share-based compensation		76,400			76			212,502		—			—		212,578
Balance, June 30, 2019		17,752,744		$	17,753		$	5,265,388	$	(34,874,045	)	$	—	$	(29,590,904	)
Net income		—			—			—		580,234			—		580,234
Stock options exercised		75,000			75			29,175		—			—		29,250
Share-based compensation		82,600			82			241,934		—			—		242,016
Balance, September 30, 2019		17,910,344		$	17,910		$	5,536,497	$	(34,293,811	)	$	—	$	(28,739,404	)
Balance, March 31, 2020																		18,106,277	$	18,106	$	5,960,644	$	(33,329,671	)	$	—	$	(27,350,921	)

The accompanying notes are an integral part of the condensed consolidated financial statements.

GALAXY GAMING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended						Three Months Ended
	September 30, 2020			September 30, 2019			March 31, 2021			March 31, 2020
Cash flows from operating activities:
Net income (loss)	$	(3,387,475	)	$	2,095,841
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization of intangible assets		1,499,927			1,424,934
Non-cash lease expense		207,378			203,205
Net income							$	88,737		$	116,605
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization								717,254			469,805
Amortization of right-of-use assets								56,472			69,301
Amortization of debt issuance costs and debt discount		26,935			25,584			12,243			9,159
Bad debt expense		166,002			101,938			76,160			166,002
Change in estimated fair value of interest rate swap liability		(21,650	)		78,440			(49,822	)		76,163
Deferred income tax benefit		(492,807	)		(4,194	)
Share-based compensation		512,818			678,199			316,640			157,596
Unrealized foreign exchange loss		84,757			33,291
Unrealized foreign exchange (gain) loss								(3,573	)		77,557
Changes in operating assets and liabilities:
Accounts receivable		1,333,515			(477,319	)		(1,139,395	)		369,313
Inventory		(123,359	)		(315,155	)		(70,010	)		(86,885	)
Income tax receivable/payable		(14,379	)		(414,817	)		(42,816	)		35,962
Prepaid expenses and other current assets		54,953			(40,086	)		138,788			(197,283	)
Other assets								(144,072	)		—
Accounts payable		552,166			332,566			(66,044	)		8,784
Accrued expenses		(698,380	)		(14,826	)		834,001			(365,512	)
Revenue contract liability		(707,171	)		(143,812	)		77,083			4,186
Operating lease liabilities		(254,363	)		(197,875	)		(33,817	)		(69,305	)
Other current liabilities		—			(71,581	)
Net cash (used in) provided by operating activities		(1,261,133	)		3,294,333
Net cash provided by operating activities								767,829			841,448
Cash flows from investing activities:
Investment in intangible assets		—			(27,400	)		(49,900	)		—
Acquisition of PGP assets, net of cash acquired		(6,266,335	)		—
Acquisition of property and equipment		(38,712	)		(32,495	)		(31,892	)		(1,448	)
Net cash used in investing activities		(6,305,047	)		(59,895	)		(81,792	)		(1,448	)
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		49,750			189,981			10,999			7,500
Payments of debt issuance costs		—			(5,736	)
Principal payments on finance lease obligations		—			(14,198	)
Principal payments on long-term debt		(1,264,322	)		(1,105,461	)		(568,637	)		(405,498	)
Net cash provided by (used in) financing activities		620,728			(935,414	)
Net cash (used in) provided by financing activities								(557,638	)		602,002
Effect of exchange rate changes on cash		(72,340	)		(33,291	)		(40,366	)		(77,557	)
Net (decrease) increase in cash and cash equivalents		(7,017,792	)		2,265,733
Net increase in cash and cash equivalents								88,033			1,364,445
Cash and cash equivalents – beginning of period		9,686,698			6,311,563			5,993,388			9,686,698
Cash and cash equivalents – end of period	$	2,668,906		$	8,577,296		$	6,081,421		$	11,051,143
Supplemental cash flow information:
Cash paid for interest	$	462,959		$	502,764		$	112,487		$	152,949
Cash paid for income taxes	$	77,465		$	436,200		$	500		$	—
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	$	1,383,052		$	305,163
Debt modification fee payable							$	50,185		$	—
Inventory transferred to assets deployed at client locations	$	27,668		$	157,202		$	29,849		$	26,056

The accompanying notes are an integral part of the condensed consolidated financial statements.

GALAXY GAMING, INC.

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, acquisition, assembly, marketing and ~~acquisition~~licensing 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 casino gaming companies in North America, the Caribbean, Central America, the ~~British Isles,~~United Kingdom, Europe and Africa ~~and~~as well as to cruise ship companies. We license our products and services for use solely in legalized gaming markets. We also license our content and distribute content from other companies to iGaming operators throughout the world.

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. Our Articles of Incorporation (the “Articles”) 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.

The consideration owed to Triangulum for the redemption is $39,096,401 (the “Redemption ~~Consideration”~~Consideration Obligation”). 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,~~August 21, 2020, ~~Galaxy Gaming entered into a Membership Interest Purchase Agreement, dated February 25, 2020 (the “Purchase Agreement”), between~~ the Company ~~and~~completed the ~~membership interest holders~~acquisition of 100% of the member interests in Progressive Games Partners LLC (“PGP”).

~~On August 21, 2020,~~ The entirety of the ~~Company entered into a First Amendment~~ purchase price ($10,414,528) and transaction-related costs ($127,586) were allocated to customer relationships and are included in Other intangible assets, net, on the ~~Purchase Agreement between the Company and the membership interest holders of PGP.~~Company’s balance sheet. The ~~First Amendment, among other things, fixed the~~ cash portion of the purchase price ~~at $6.425 million~~was $6,425,000, and ~~established that~~ the ~~stock portion would be~~balance of the purchase price was satisfied through the issuance of 3,141,361 shares of the Company’s common stock with a value of $1.27 per share on the date of the acquisition. The ~~entirety~~shares issued are being held in escrow pending the performance of the ~~purchase price ($10,414,528) has been allocated~~assets acquired during the twelve months following the acquisition. See Note 7 to ~~customer relationships and is~~our audited financial statements included in ~~Other intangible assets, net,~~Item 8 “Financial Statements and Supplementary Financial Information” of our Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on ~~the Company’s balance sheet. See Note 7.~~March 31, 2021 (the “2020 10-K”) for further details. The Company also acquired certain receivables and payables in the net ~~working capital~~amount of $581,885, ~~(including cash of $158,665), all of~~ which ~~is payable~~was to be remitted to the sellers of ~~PGP.~~PGP as the receivables and payables were settled. As of March 31, 2021, the remaining balance owed to the sellers was $55,186.

Management ~~has~~ determined that, for accounting purposes, the PGP transaction ~~does~~did not meet the definition of a business combination and, therefore, ~~has been~~was accounted for as an asset acquisition.

COVID-19. On March 11, 2020, the World Health Organization declared a pandemic related to the COVID-19 outbreak, which led to a global health emergency. The ~~public-health~~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~~resulted in us realizing substantially less revenue than we might otherwise expect. In addition, b~~ecause~~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, the Company was notified by some of ~~our casino clients have notified vendors (including us)~~the land-based casinos that they ~~will lengthen~~would be extending their payment ~~terms for a period of time after reopening as they attempt to preserve their own liquidity.~~terms.

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.~~some portion of 2020. Although this has not had a material effect on our supply chain, any future disruption of our suppliers and their contract manufacturers may impact our sales and operating results going forward.

Because of the uncertainties of COVID-19, the Company drew on its Revolving Loan in the amount of $1,000,000 on March 12, 2020. ~~Also, on April 17, 2020, the Company obtained an unsecured loan of $835,300 through Zions Bancorporation, N.A. dba Nevada State Bank under the Paycheck Protection Program (the “PPP Loan”) pursuant~~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~~Priority Loan Program (“MSPLP”) to provide financing for small and medium-sized businesses. On October 26, 2020, the Company borrowed ~~$4 million~~$4,000,000 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.this program. See Note 10.

As of the date of this filing, the Company believes that it has adequate liquidity to meet its short-term obligations. If the effects of the COVID-19 crisis endure or there is a second period of casino closures (Note 16), we may be required to reassess our obligations, including our ability to pay employee compensation and benefits.

~~The COVID-19 crisis may change the behavior of gaming patrons.~~ Most of our clients operate places of public accommodation, and their patrons may reduce visitation and play as a 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”).~~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~~and include the results of the Company and its wholly owned subsidiary, PGP. All intercompany transactions and balances have been eliminated in consolidation.

~~Impairment considerations.~~ We considered whether the impact of the current COVID-19 pandemic on operations and financial results is an indicator that impairment may exist related to the Company’s inventory (Note 4), property and equipment (Note 5), assets deployed at client locations (Note 6) and intangible assets (Note 7). As a result of its impairment assessments, management has determined that its assets are not currently impaired. We considered the following:

~~Inventory.~~ ~~We considered whether additional write-offs or reserves were necessary to our inventory balance as a result of the impact of COVID-19. T~~he 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

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.

Cash and cash equivalents. We consider cash on hand and cash in banks as cash. We consider certificates of deposit and other short-term securities with maturities of three months or less when purchased as cash equivalents. Our cash in bank balances are deposited in insured banking institutions, which are insured up to $250,000 per account. To date, we have not experienced uninsured losses, and we believe the risk of future loss is negligible.

Accounts receivable and allowance for doubtful accounts. Accounts receivable are stated at face value less an allowance for doubtful accounts. Accounts receivable are non-interest bearing. The Company reviews the accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. The allowance for doubtful accounts is estimated based on specific customer reviews, historical collection trends and current economic and business conditions.

Inventory. Inventory consists of ancillary products such as signs, layouts and bases for the various games and electronic devices and components to support all our electronic enhancements used on casino table games (“Enhanced Table Systems”), and we maintain inventory levels based on historical and industry trends. We regularly assess inventory quantities for excess and obsolescence primarily based on forecasted product demand. Inventory is valued at the lower of net realizable value or cost, which is determined by the average cost method.

Assets deployed at client locations, net. Our Enhanced Table Systems are assembled by us and accounted for as inventory until deployed at our casino clients’ premises (Note 6). Once deployed and placed into service at client locations, the assets are transferred from inventory and reported as assets deployed at client locations. These assets are stated at cost, net of accumulated depreciation. Depreciation on assets deployed at client locations is calculated using the straight-line method over a three-year period.

Property and equipment, net. Property and equipment are being depreciated over their estimated useful lives (three to five years) using the straight-line method of depreciation (Note 5). Property and equipment are analyzed for potential impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable and exceeds their fair value.

Goodwill. Goodwill (Note 7) is assessed for impairment at least annually or at other times during the year if events or circumstances indicate that it is more-likely-than-not that the fair value of a reporting asset is below the carrying amount. If found to be impaired, the carrying amount will be reduced, and an impairment loss will be recognized. The Company performed a qualitative evaluation of goodwill impairment at March 31, 2021 and determined it was not necessary to perform a quantitative assessment As a result, no impairment was recorded in the period ended March 31, 2021.

Other intangible assets, net. The following intangible assets have finite lives and are being amortized using the straight-line method over their estimated economic lives as follows:

Patents		4 - 20 years
Client relationships		9 - 22 years
Trademarks		30 years
Non-compete agreements		9 years
Internally-developed software		3 years

Other intangible assets (Note 7) are analyzed for potential impairment at least annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable and exceeds the fair value, which is the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the intangible assets. No impairment was recorded for the three months ended March 31, 2021.

Interest rates swap agreement. The Company has entered into an interest rate swap agreement to reduce the impact of changes in interest rates on its floating rate long-term debt. The interest rate swap agreement matures May 1, 2021. The interest rate swap has not been designated a hedging instrument and is adjusted to fair value through earnings in the Company’s statements of operations.

Fair value of financial instruments. We estimate fair value for financial assets and liabilities in accordance with Financial Accounting Standards Board (“FASB”) 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 values of cash equivalents, accounts receivable and accounts payable approximate their carrying amounts due to their short-term nature. The estimated fair value of our long-term debt approximates its carrying value based upon our expected borrowing rate for debt with similar remaining maturities and comparable risk. As of March 31, 2021, 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.

Leases. We account for lease components (such as rent payments) separately from non-lease components (such as common-area maintenance costs, real estate and sales taxes and insurance costs). Operating and finance leases with terms greater than 12 months are recorded on the balance sheet as right-of-use assets with corresponding lease liabilities. Lease expense is recognized on a straight-line basis using the discount rate implicit in each lease or our incremental borrowing rate at lease commencement date (Note 9).

Revenue recognition. We account for our revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. See Note 3.

Costs of ancillary products and assembled components. Ancillary products include pay tables (display of payouts), bases, layouts, signage and other items as they relate to support of specific proprietary games in connection with the licensing of our games. Assembled components represent the cost of the equipment, devices and incorporated software used to support our Enhanced Table Systems.

Research and development. We incur research and development (“R&D”) costs to develop our new and next-generation products. Our products reach commercial feasibility shortly before the products are released, and therefore R&D costs are expensed as incurred. Employee-related costs associated with product development are included in R&D costs.

Foreign currency translation. The functional currency for PGP is the Euro. Gains and losses from settlement of transactions involving foreign currency amounts are included in other income or expense in the consolidated statements of operations. Gains and losses resulting from translating assets and liabilities from the functional currency to U.S. dollars are included in accumulated other comprehensive income or (loss) in the consolidated statements of changes in stockholders’ deficit.

Net income per share. Basic net income per share is calculated by dividing net income by the weighted-average number of common shares issued and outstanding during the year. Diluted net income per share is similar to basic, except that the weighted-average number of shares outstanding is increased by the potentially dilutive effect of outstanding stock options and restricted stock, if applicable, during the year.

Segmented Information. We define operating segments as components of our enterprise for which separate financial information is reviewed regularly by the chief operating decision-makers to evaluate performance and to make operating decisions. We currently operate our business as one operating segment which generates revenue from the licensing of intellectual property.

Share-based compensation. We recognize compensation expense for all restricted stock and stock option awards made to employees, directors and independent contractors. The fair value of restricted stock is measured using the grant date trading price of our stock.The fair value of stock option awards (Note 13) is estimated at the grant date using the Black-Scholes option-pricing model, and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period. We have elected to recognize compensation expense for all options with graded vesting on a straight-line basis over the vesting period of the entire option. The determination of fair value using the Black-Scholes pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables, including expected stock price volatility, risk-free interest rate, expected dividends and projected employee stock option exercise behaviors. We estimate volatility based on historical volatility of our common stock, and estimate the expected term based on several criteria, including the vesting period of the grant and the term of the award. We estimate employee stock option exercise behavior based on actual historical exercise activity and assumptions regarding future exercise activity of unexercised, outstanding options.

Other significant accounting policies. See Note 2 in Item 8.8 “Financial Statements and Supplementary Financial Information” included in our ~~2019~~2020 10-K.

Recently adopted accounting ~~standards~~

~~Fair Value Measurement.~~ standards. Simplifying the Accounting for Income Taxes. In ~~August 2018,~~December 2019, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued Accounting ~~Standards~~Standard Update (“ASU”) No. ~~2018-13,~~2019-12, ~~Fair Value Measurement~~Income Taxes (Topic ~~820)~~740): ~~Disclosure Framework – Changes to~~Simplifying the ~~Disclosure Requirements~~Accounting for ~~Fair Value Measurement~~Income Taxes. (ASU 2019-12), which simplifies the accounting for income taxes. 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 losses2019-12 is effective 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.fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We have adopted the new standard effective January 1, ~~2020, which did~~2021, and its adoption does not have a material ~~effect~~impact on our consolidated financial ~~statements or related disclosures.~~statements.

New accounting standards not yet ~~adopted~~

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~~ smaller reporting companies until fiscal years beginning after December 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~~recognize revenue ~~from negotiated~~under 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~~monthly as we satisfy our performance ~~obligations. In addition, revenue associated with performance-based agreements is recognized during~~obligation, which consists of granting the ~~month that~~customer the right to use our intellectual property. Amounts billed are determined based on flat rates or usage ofrates stipulated in the ~~product or intellectual property occurs.~~customer contract.

~~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.

Disaggregation of revenue

The following table disaggregates our revenue by geographic location for the following periods:

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2020		2019		2020		2019		2021		2020
North America and Caribbean	$	971,147	$	3,891,875	$	4,262,408	$	11,644,353	$	2,451,896	$	3,130,465
Europe, Middle East and Africa		826,686		1,479,771		2,693,714		4,473,230		1,831,005		1,363,853
Total revenue	$	1,797,833	$	5,371,646	$	6,956,122	$	16,117,583	$	4,282,901	$	4,494,318

~~Revenue~~Contract liabilities. Amounts billed and cash received in advance of performance obligations fulfilled are recorded as contract ~~liability~~ liabilities and recognized as performance obligations are fulfilled.

~~For a portion~~Contract Assets. The Company’s contract assets consist solely of ~~our business, we invoice our clients monthly~~unbilled receivables which are recorded when the Company recognizes revenue in advance of billings. Unbilled receivables totaled $545,928 and $502,860 for ~~unlimited use of our intellectual property licenses~~the periods ended March 31, 2021 and ~~recognize a revenue contract liability that represents such advanced billing~~ ~~to our clients for unsatisfied performance. We reduce the revenue contract liability~~ December 31, 2020 and ~~recognize revenue when we transfer those goods or services and, therefore, satisfy our performance obligation.~~

~~The table below summarizes changes in the revenue contract liability during the nine months ended September 30, 2020:~~

Beginning balance – January 1, 2020

$
1,294,265

Increase (advanced billings)

7,199,100

Decrease (revenue recognition)

(7,906,271
)
Ending balance – September 30, 2020

$
587,094

~~Revenue recognized during the three and nine months ended September 30, 2020 that was~~are included in the ~~beginning~~accounts receivable balance ~~of revenue contract liability was $6,250 and $1,292,182, respectively.~~in the accompanying balance sheets.

NOTE 4. INVENTORY

Inventory ~~net~~ consisted of the following at:

	September 30,			December 31,			March 31,		December 31,
	2020			2019			2021		2020
Raw materials and component parts	$	379,711		$	359,349		$	369,479	$	300,244
Finished goods		428,103			343,305			339,207		368,281
Inventory, gross		807,814			702,654
Less: inventory reserve		(46,469	)		(37,000	)
Inventory, net	$	761,345		$	665,654		$	708,686	$	668,525

NOTE 5. PROPERTY AND EQUIPMENT

Property and equipment, net, consisted of the following at:

	September 30,			December 31,			March 31,			December 31,
	2020			2019			2021			2020
Furniture and fixtures	$	312,640		$	312,639		$	312,639		$	312,639
Automotive vehicles		215,127			215,127			215,127			215,127
Office and computer equipment		329,296			302,296			361,451			332,544
Leasehold improvements		18,554			6,843			35,532			32,547
Property and equipment, gross		875,617			836,905			924,749			892,857
Less: accumulated depreciation		(759,465	)		(691,996	)		(799,589	)		(776,133	)
Property and equipment, net	$	116,152		$	144,909		$	125,160		$	116,724

For the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ depreciation expense related to property and equipment was ~~$22,153~~$23,456 and ~~$26,467,~~$22,994, 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.~~

NOTE 6. ASSETS DEPLOYED AT CLIENT LOCATIONS

Assets deployed at client locations, net, consisted of the following at:

	September 30,			December 31,			March 31,			December 31,
	2020			2019			2021			2020
Enhanced table systems	$	908,295		$	993,127		$	909,507		$	890,560
Less: accumulated depreciation		(649,439	)		(587,605	)		(692,128	)		(658,404	)
Assets deployed at client locations, net	$	258,856		$	405,522		$	217,379		$	232,156

For the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ depreciation expense related to assets deployed at client locations was ~~$51,778~~$44,626 and ~~$70,145,~~$64,312, respectively. ~~For the nine months ended September 30, 2020 and 2019, depreciation expense related to assets deployed at client locations was~~ ~~$174,334 and $209,729, respectively.~~

NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill. A goodwill balance of $1,091,000 was created as a result of a transaction completed in October 2011 with Prime Table Games, LLC (“PTG”).

Other intangible assets, net. Other intangible assets, net consisted of the following at:

	September 30,			December 31,			March 31,			December 31,
	2020			2019			2021			2020
Patents	$	13,507,997		$	13,485,000		$	13,507,997		$	13,507,997
Customer relationships		13,814,528			3,400,000			13,942,115			13,942,115
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		183,416			183,415
Software								233,315			183,415
Other intangible assets, gross		31,046,908			20,609,382			31,224,394			31,174,494
Less: accumulated amortization		(14,436,863	)		(13,178,739	)		(15,736,769	)		(15,087,598	)
Other intangible assets, net	$	16,610,045		$	7,430,643		$	15,487,625		$	16,086,896

For the three months ended ~~September 30,~~March 31, 2021 and 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 ~~$1,258,124~~$649,171 and ~~$1,134,760, respectively.~~$382,499, 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.~~12

Estimated future amortization expense is as follows:

Twelve Months Ending September 30,	Total
2021	$	2,582,511
Twelve Months Ending March 31,			Total
2022		2,570,659	$	2,609,479
2023		1,417,510		2,023,514
2024		1,414,600		1,446,909
2025		1,410,100		1,425,776
2026				1,424,276
Thereafter		7,214,665		6,557,671
Total amortization	$	16,610,045	$	15,487,625

NOTE 8. ACCRUED EXPENSES

Accrued expenses consisted of the following at:

	September 30,		December 31,		March 31,		December 31,
	2020		2019		2021		2020
Share redemption consideration					$	706,258	$	510,776
Commissions and royalties						722,023		398,096
Payroll and related	$	249,902	$	747,458		461,095		173,487
Interest		26,924		9,895		98,398		95,879
Share redemption consideration		315,293		510,776
Commissions and royalties		148,098		78,528
Income tax payable		—		64,832		46,629		42,218
Other		103,929		39,390		127,630		112,576
Total accrued expenses	$	844,146	$	1,450,879	$	2,162,033	$	1,333,032

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.

As of ~~September 30, 2020,~~March 31, 2021, our leases have remaining lease terms ranging from three months to 7569 months.

Supplemental balance sheet information related to leases is as follows:

	As of September 30, 2020				As of March 31, 2021
	Amount			Classification	Amount			Classification
Operating leases:
Operating lease right-of-use lease assets	$	1,482,534			$	1,311,349

Operating lease current liabilities	$	197,067		Current portion of operating lease liabilities	$	213,531		Current portion of operating lease liabilities

Operating lease long-term liabilities		1,266,215		Long-term operating lease liabilities		1,163,743		Long-term operating lease liabilities

Total operating lease liabilities	$	1,463,282			$	1,377,274

Weighted-average remaining lease term:
Operating leases	5.9 years				5.6 years

Weighted-average discount rate:
Operating leases		4.3	%			4.2	%

The components of lease expense are as follows:

Three Months Ended September 30, 2020

Amount

Classification
Operating lease cost

$
71,716

Selling, general and administrative expense

Nine Months Ended September 30, 2020

Amount

Classification
Operating lease cost

$
215,142

Selling, general and administrative expense

Supplemental cash flow information related to leases is as follows:

Nine Months Ended September 30, 2020

Three Months Ended March 31, 2021

Amount

Classification

Amount

Classification

Cash paid for amounts included in the

measurement of lease liabilities:

Operating cash flows from operating leases

215,142

Net income

69,828

Net income

Right-of-use assets obtained in exchange

for lease liabilities:

Operating leases

1,383,052

Supplemental cash flow information

—

Supplemental cash flow information

As of ~~September 30, 2020,~~March 31, 2021, future maturities of our operating lease liabilities are as follows:

Twelve Months Ending September 30,	Amount
2021	$	197,067
Twelve Months Ending March 31,			Amount
2022		208,249	$	213,532
2023		215,373		210,892
2024		234,917		226,496
2025		255,707		245,204
2026				266,645
Thereafter		351,969		214,505
Total lease liabilities	$	1,463,282	$	1,377,274

On July 3, 2020 we entered into a new 75-month lease for our corporate headquarters in Las Vegas. Pursuant to the new lease, we now occupy approximately 14,000 square feet of office and warehouse space. The lease commenced on October 1, 2020, with rent abated through the remainder of 2020. Early occupancy was granted on September 15, 2020. Therefore, the right-of-use asset and corresponding liability were recorded on this date. Beginning in January 2021, we will commence paying rent and common area charges in an amount that is approximately equal to what we are paying pursuant to our current lease.

NOTE 10. LONG-TERM LIABILITIES

Long-term liabilities consisted of the following at:

	September 30,			December 31,			March 31,			December 31,
	2020			2019			2021			2020
Nevada State Bank credit agreement	$	8,629,800		$	8,699,900		$	8,022,300		$	8,413,184
Paycheck Protection Program borrowing		835,300			—
Share redemption consideration obligation		39,096,401			39,096,401
Main Street Priority Loan								4,000,000			4,000,000
Redemption Consideration Obligation								39,096,401			39,096,401
Vehicle notes payable		28,162			44,490			17,040			22,614
Insurance notes payable		—			177,894			347,015			519,194
Long-term liabilities, gross		48,589,663			48,018,685			51,482,756			52,051,393
Less: Unamortized debt issuance costs		(68,360	)		(93,144	)		(172,409	)		(137,817	)
Long-term liabilities, net of debt issuance costs		48,521,303			47,925,541			51,310,347			51,913,576
Less: Current portion		(2,530,149	)		(1,634,527	)		(1,913,355	)		(2,222,392	)
Long-term liabilities, net	$	45,991,154		$	46,291,014		$	49,396,992		$	49,691,184

~~Nevada State Bank (“NSB”) Credit Agreement~~. The Company is party to a Credit Agreement with Zions Bancorporation, N.A. dba Nevada State Bank (as amended, the “Credit Agreement”), which was last amended on October 26, 2020. The Credit Agreement provided for a Term Loan 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

Agreement). Effective December 31, 2021, LIBOR will no longer serve as a reference rate for bank loans, among other investment classes. The Fourth Amendment to the Credit Agreement stipulates that an alternative reference rate will be selected and used in lieu of LIBOR.

The Credit Agreement, as amended, contains affirmative and negative financial covenants and other restrictions customary for borrowings of this nature. In particular, we are required to maintain (i) a minimum trailing-four-quarters Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of 1.25x; (ii) a maximum Total Leverage Ratio (as defined in the Credit Agreement) of 7.25x (with semi-annual step-downs of 0.25x every six months, commencing June 30, 2020 through December 31, 2022 (the current required Total Leverage Ratio is 7.00x) and (iii) a maximum Senior Leverage Ratio (as defined in the Credit Agreement) of 2.00x. We were not in compliance with the Fixed Charge Coverage Ratio, Total Leverage Ratio and Senior Leverage Ratio as of September 30, 2020. Furthermore, because the impact of the COVID-19 crisis on our trailing-four-quarters Adjusted EBITDA into 2021, we think it is likely that we will not be in compliance with one or more of the Fixed Charge Coverage Ratio, Total Leverage Ratio and Senior Leverage Ratio through the first quarter of 2021. In view of that, the Company and NSB entered into a Forbearance and Fifth Amendment to Credit Agreement dated August 14, 2020 (the “Fifth Amendment”). In the Fifth Amendment, NSB agreed to forbear from exercising any of its rights or remedies that result from the aforementioned covenant breaches during the aforementioned period. The Fifth Amendment also imposes a new Minimum EBITDA covenant pursuant to which the Company must demonstrate trailing-four-quarter EBITDA of $2.4 million for the each of the quarters ended September 30, 2020, December 31, 2020 and March 31, 2021 and $3.0 million thereafter. The Company was in compliance with the Minimum EBITDA covenant as of September 30, 2020. On October 26, 2020, the Company and NSB entered into the Sixth Amendment to Credit Agreement dated August 14, 2018 (the “Sixth Amendment”) in connection with the Company’s borrowing under the Main Street Loan Program (see Note 16 Subsequent Events). The Sixth Amendment added a Minimum Liquidity covenant requiring that the Company have cash and cash equivalents of no less than $1.5 million at quarter ends through and including June 30, 2021, and $2.5 million thereafter. The Company was in compliance with the Minimum Liquidity covenant as of September 30, 2020. On November 16, 2020, the Company entered into a Seventh Amendment to the Credit Agreement with Zions Bancorporation N.A., dba Nevada State Bank. The Seventh Amendment changed the trailing-four-quarter Minimum EBITDA covenant from $3.0 million to $2.4 million for each fiscal quarter ending September 30, 2020 and thereafter.

~~Paycheck Protection Program Borrowings~~. On April 17, 2020, the Company obtained an unsecured loan of $835,300 through Zions Bancorporation, N.A. dba Nevada State Bank under the Paycheck Protection Program pursuant to the CARES Act and the Flexibility Act. The Paycheck Protection Program is administered by the United States Small Business Administration. In accordance with the requirements of the CARES Act, the Company used proceeds from the PPP Loan primarily for payroll costs. Under the terms of the CARES and Flexibility Acts, PPP Loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the Paycheck Protection Program. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payroll costs and mortgage interest, rent and utility costs.

On July 16, 2020, the Company filed an application and supporting documentation for forgiveness in full of the PPP Loan. The review of the Company’s forgiveness application could take as long as five months, and there is no assurance that the PPP Loan will be forgiven in full or in any amount. The application for these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the pending application for forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our adherence to the forgiveness criteria.

Share Redemption Consideration Obligation. On May 6, 2019, we issued a promissory note in the face amount of $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~~Because Triangulum disputes the promissory note issued by the Company and ~~Triangulum,~~its terms, 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, based 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 later than May 6, 2029; however, there can be no assurance that Triangulum will accept such payments. Additional share redemption consideration is being accrued at 2% on the ~~redemption obligation,~~Redemption Consideration Obligation, and we paid the first annual payment on May 5, 2020, in the amount of $781,928, which was accepted by Triangulum. The ~~share redemption consideration obligation~~Redemption Consideration Obligation is unsecured and is subordinated to our existing and future indebtedness. Interest payments were made to Triangulum, in a timely fashion in May of 2020 and May of 2021.

Nevada State Bank (“NSB”) Credit Agreement. The Company is party to a Credit Agreement with Zions Bancorporation, N.A. dba Nevada State Bank (as amended, the “Credit Agreement”). The Credit Agreement provides 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 March 31, 2021, the principal amount outstanding under the Term Loan component of the Credit Agreement was $7,022,300, bringing the total amount outstanding under the Credit Agreement at March 31, 2021, to $8,022,300.

On March 29, 2021, the Company entered into an amended and restated credit agreement with Zions Bancorporation, N.A. dba Nevada State Bank (“the A&R Credit Agreement”). The A&R Credit Agreement replaced the original Credit Agreement entered into by the Company with Zions Bancorporation, N.A. dba Nevada State Bank on April 24, 2018 and last modified on November 16, 2020. The A&R Credit Agreement provides for a Term Loan in the amount of $7,022,300 and a Revolving Loan in the amount of $1,000,000. If not paid earlier, amounts outstanding under the Revolving Loan mature on April 24, 2022, and amounts outstanding under the Term Loan mature on April 24, 2023.

Under the A&R Credit Agreement, outstanding balances accrue interest based on one-month U.S. 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 A&R Credit Agreement). Effective December 31, 2021, LIBOR will no longer serve as a reference rate for bank loans, among other investment classes. The A&R Credit Agreement stipulates that a substitute index rate will be selected and used in lieu of LIBOR.

The A&R Credit Agreement contains affirmative and negative financial covenants (as defined in the A&R Credit Agreement) and other restrictions customary for borrowings of this nature. In particular, we are required to maintain (i) a quarterly minimum Fixed Charge Coverage ratio of 1.25x; (ii) a quarterly maximum Total Leverage ratio of 22.50x for the quarter ending March 31, 2021, 10.00x for quarter ending June 30, 2021, 6.50x for the quarter ending September 30, 2021 with semi-annual step-downs of 0.25x commencing December 31, 2021 and quarterly thereafter; (iii) a quarterly maximum Senior Leverage ratio of 5.25x for the quarter ending March 31, 2021, 2.50x for the quarter ending June 30, 2021 and 2.00x quarterly thereafter; (iv) a quarterly Minimum EBITDA covenant of $2.4 million for each of the quarters ending March 31, 2021, June 30, 2021 and September 30, 2021 and $8.0 million quarterly thereafter; (v) a quarterly Minimum Liquidity covenant requiring the Company to 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 quarterly thereafter; and (vi) a yearly maximum Maintenance Capital Expenditure covenant of 5% of total revenues for the prior year. The Company was in compliance with its affirmative and negative financial covenants as of March 31, 2021.

The obligations under the A&R Credit Agreement are secured by substantially all of the assets of the Company. The Company’s wholly owned subsidiary, PGP is also a guarantor of the A&R Credit Agreement and related agreements.

Main Street Priority Loan Borrowings (“MSPLP”). On October 26, 2020, the Company obtained an unsecured loan of $4,000,000 through Zions Bancorporation, N.A. dba Nevada State Bank under section 13(3) of the Federal Reserve Act.

15The MSPLP bears interest at a rate of three-month U.S. dollar LIBOR plus 300 basis points (initially 3.215%), and interest payments during the first year will deferred and added to the loan balance. The MSPLP has a five-year final maturity, with 15% of principal amortizing in each of years three and four. The MSPLP, plus accrued and unpaid interest, may be prepaid at any time at par. While the MSPLP is outstanding, and for one year after it is repaid in full, the Company may not 1) repurchase stock, pay dividends or make other distributions, or 2) pay compensation to executive officers that exceeds the total compensation they received in 2019. The entire outstanding principal balance of the MSPLP, together with all accrued and unpaid interest, is due and payable in full on October 26, 2025. The terms of the MSPLP provide for customary events of default, including, among others, those relating to a failure to make payment, bankruptcy, breaches of representations and covenants, and the occurrence of certain events. The MSPLP is secured by a security interest in the assets of the Company, which security interest is pari passu with the security interest granted under the Credit Agreement.

As of ~~September 30, 2020,~~March 31, 2021, future maturities of our long-term liabilities are as follows:

Twelve Months Ending September 30,	Total
2021	$	2,530,307
Twelve Months Ending March 31,			Total
2022		1,616,655	$	1,913,355
2023		4,511,000		2,655,500
2024		—		4,417,500
2025		835,300		600,000
2026				2,800,000
Thereafter		39,096,401		39,096,401
Long-term liabilities, gross	$	48,589,663	$	51,482,756

NOTE 11. COMMITMENTS AND CONTINGENCIES

Concentration of risk. We are exposed to risks associated with clients who represent a significant portion of total revenues. For the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively, we had the following client revenue ~~concentration:~~concentrations:

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

	Location	Q1 2021 Revenue			Q1 2020 Revenue			Accounts Receivable March 31, 2021		Accounts Receivable December 31, 2020
Client A	Europe		29.7	%		7.7	%	$	377,962	$	164,236
Client B	North America		11.1	%		9.0	%	$	590,078	$	79,582

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~~the Company’s founder, and, prior to the redemption, the holder of a majority of our outstanding common stock.

On May 6, 2019, wethe Company redeemed the shares of our common stock held by Triangulum. Also on May 6, 2019, the Company filed a lawsuit ~~seeking~~seeking: (i) a declaratory judgment that weit acted lawfully and in full compliance with the Articles when weit 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 usthe Company are appropriate and in accordance with the Articles.

The defendants to ~~that lawsuit~~the Triangulum Lawsuit responded to the complaint, and Triangulum filed counterclaims. Triangulum also filed a Motion seeking a mandatory injunction requiring the ~~redeemed~~Company to either reissue shares to Triangulum or reissue shares to be held in a constructive ~~trust.~~trust for Triangulum (the “Injunction Motion”). On July 11, 2019, the ~~Court~~Nevada district court denied Triangulum’s ~~Motion.~~Injunction Motion, finding, among other things, that the business judgment rule applies to the Board’s redemption decisions and the decisions were in the Company’s best interests. On September 6, 2019, Triangulum appealed the denial of the Injunction Motion to the Nevada Supreme Court. WeThe Company submitted ~~our~~its brief in opposition, and Triangulum filed its reply ~~brief~~ brief. Recently, on ~~June 17, 2020. Separately,~~January 13, 2021, the Nevada Supreme Court heard oral argument on Triangulum’s appeal. On March 26, 2021, the Nevada Supreme Court affirmed the ruling of the District Court denying Triangulum’s Injunction Motion, the effect of which is to preclude the re-issuance of any shares of Galaxy stock to Triangulum.

On October 18, 2019, Saucier filed counterclaims against the Company and its Chairman of the Board, Mark Lipparelli, including a breach of contract claim alleging that the Company was obligated to pay Saucier his year-end bonus despite his resignation. The Company and Chairman Lipparelli filed an answer to the counterclaims.

Subsequent to its original counterclaims, Triangulum filed amended counterclaims, which wethe Company and its Directors moved to dismiss on a number of legal ~~grounds.~~grounds (the “Motion to Dismiss”). The Court denied the ~~motion.~~Motion to Dismiss. The Company and its Directors filed a writ petition challenging the ruling, which the Nevada 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~~Indemnification Agreement between Saucier and the Company, for indemnity and advancement of funds seeking repayment of his ~~lawyer’s~~attorneys’ 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.~~Agreement (the “Advancement Lawsuit”). 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 Nevada district court’s decision in the Advancement Lawsuit to the Nevada Supreme Court on August 10, 2020.

~~On July 22, 2020 Galaxy~~ Saucier subsequently moved for attorneys' fees related to the filing of the Advancement Lawsuit, which the Nevada district court granted, and ~~its Directors,~~the Company 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~~a notice of ~~that motion~~appeal to the Nevada Supreme Court. The Company filed its opening appeal ~~will stay most aspects~~brief. When Saucier filed a supplemental motion for attorneys’ fees, the Nevada district court denied his motion, finding the fees incurred to be unreasonable, among other things. Saucier also appealed this ruling of the ~~litigation,~~Nevada district court.

On July 22, 2020, in the Triangulum Lawsuit, the Company and its Directors filed a special motion to dismiss most of Triangulum and Saucier’s counterclaims under Nevada anti-SLAPP statute (Strategic Lawsuit Against Public Participation) because Triangulum and Saucier seek to impose liability on the Company and its Directors based upon their privileged communications with regulators. The Nevada district court denied the motion, and the Company and its Directors appealed the order to the Nevada Supreme Court. Discovery in the Triangulum Lawsuit is stayed pending the outcome of ~~the~~this appeal.

The appeals to the Nevada Supreme Court by both Saucier and ~~by Galaxy, have also been~~the Company in the Triangulum Lawsuit and the Advancement Lawsuit were referred to the Nevada Supreme Court’s mandatory Settlement ~~Program where they are pending.~~Program. A ~~mandatory~~consolidated settlement conference ~~is scheduled for~~occurred on November 16, ~~2020.~~ 2020, with no resolution of any of the issues on appeal or the lawsuit. The Nevada Supreme Court subsequently issued briefing schedules on the three appeals.

~~We remain~~On November 24, 2020, Triangulum filed a Motion for Partial Summary Judgment in ~~the discovery phase of~~ the Triangulum Lawsuit ~~with~~in the Nevada district court, seeking a ruling that the Company violated Nevada law and its Articles by issuing a promissory note as consideration for the redeemed shares and that the redemption was ineffective as a matter of law (the “Triangulum MPSJ”). The Company opposed Triangulum’s MPSJ and filed its own Countermotion for Summary Judgment (the “CMSJ”), seeking a ruling that as a matter of law the business judgement rule applies and prohibits any judicial review of the Board’s decisions related to the redemption. During the January 20, 2021 hearing on both motions, the Nevada district court denied Triangulum’s MPSJ, finding that Nevada statutes allow for the payment of redemption consideration in the form of a promissory note and that the Company’s decisions to redeem and to issue a promissory note as consideration for the redemption are subject to the business judgment rule. The court further found again that the redeemed shares have been actually cancelled and cannot be placed in a constructive trust. The court also denied the Company’s CMSJ, without prejudice for the Company to refile after further discovery. On April 23, 2021, Triangulum appealed the District court’s denial of its MPSJ.

On December 18, 2020 Saucier filed a separate lawsuit in Nevada district court (which was served on January 21, 2021), alleging breach of contract related to his demand for indemnity from the Company (the “Indemnity Lawsuit”). Similar to the Company’s position in the Advancement Lawsuit discussed above, the Company denies that he is entitled to indemnity and moved to dismiss the action on February 16, 2021. The Company filed a Motion to Reassign the case to the Judge presiding over the Triangulum Lawsuit and the Advancement Lawsuit. On February 18, 2021, the Company’s Motion to Reassign was granted. On February 16, 2021, the Company filed a Motion to Dismiss the Indemnity Lawsuit. The Company’s Motion to Dismiss was denied on April 19, 2021. The Company will respond in a timely manner.

As mentioned above, discovery in the Triangulum Lawsuit has been stayed as a result of the Company’s appeal of the Anti-SLAPP motion decision to the Nevada Supreme Court. As such, the previously set ~~to close on December 31, 2020.~~April 2021 trial date cannot proceed until the discovery stay is lifted and after additional discovery proceeds.

In September 2018, we were served with a complaint by TableMax Corporation (“TMAX”) regarding ~~the TMAX Agreement.~~an Operation and License Agreement executed between TMax and Galaxy in February 2011 (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.~~filed a Motion To Enforce Settlement Or, In The Alternative, Motion To Dismiss And/Or For Summary Judgement and Request For Sanctions, on April 30, 2021.

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 nine months ended September 30, 2020, we issued an aggregate of 173,333 restricted shares of our common stock valued at $187,186, to our board members~~ ~~in consideration of their service on the Board. These shares vested immediately on the grant date.~~

~~NOTE 13.~~ INCOME TAXES

Our forecasted annual effective tax rate (“AETR”) at ~~September 30, 2020~~March 31, 2021 was ~~12.0%~~12.92%, as compared to ~~16.5%~~23.57% at ~~September 30, 2019.~~March 31, 2020. This decrease was primarily due to ~~the global intangible low-taxed income (“GILTI”)~~excess tax benefits from stock-based compensation, utilization of tax credits, foreign rate differential, Subpart F inclusion ~~related to the PGP acquisition~~ and ~~other~~a change in valuation allowance as a result of changes in ~~permanent book-to-tax differences f~~orestimates of current-year ordinary income considered in determining the ~~nine~~forecasted AETR.

For the three months ended ~~September 30, 2020.~~

~~For the nine months ended September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ our effective tax rate (“ETR”) was ~~12.7%~~(27.15%) and ~~0.8%~~23.57%, respectively. The ~~increase~~decrease in the ETR for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 is a result of favorable discrete items related to excess tax benefits from stock-based compensation that resulted in an income tax benefit that exceeded pre-tax book income for the ~~comparable prior-year period that are not recurring in the current period.~~quarter.

NOTE ~~14. STOCK OPTIONS~~13. SHARE-BASED COMPENSATION

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 ~~September 30, 2020~~March 31, 2021, a total of 6,550,750 shares of our common stock were authorized for issuance. As of ~~September 30, 2020, 381,701~~March 31, 2021, 48,367 shares remained available for issuance as new awards under the 2014 Plan.

~~Stock options.~~During the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ we issued ~~465,000~~30,000 and ~~320,000~~225,000 options to purchase our common stock, respectively, to members of our Board, executive officers, employees and independent contractors. The fair value of all stock options granted for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ was determined to be ~~$435,639~~$38,012 and ~~$564,450,~~$255,017, respectively, using the Black-Scholes option pricing model with the following assumptions:

	Options Issued 2020			Options Issued 2019			Options Issued 2021			Options Issued 2020
Dividend yield		0	%		0	%		0	%		0	%
Expected volatility	70.98% - 76.97%			71.61% - 72.11%				68.74	%		70.98	%
Risk free interest rate	0.27% - 1.39%			1.37% - 2.51%
Risk-free interest rate								0.48	%		1.39	%
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 at an exercise price of $1.90 per share, which vested on August 1, 2020.

On February 17, 2020, we entered into Amendment No. #2 to the employment agreement with Mr. Cravens. Among other things, Amendment No. #2 provides that Mr. Cravens receive a grant of 225,000 options at a strike price of $1.93 and vest as follows: 88,000 shares on July 26, 2021, 87,000 shares on July 26, 2022 and 50,000 shares on July 26, 2023.

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
Outstanding – December 31, 2020											2,982,000		$	1.08	$	2,101,780			2.35
Issued		465,000			1.57		—		—		30,000			2.25		—			—
Exercised		(225,000	)		0.22		—		—		(50,000	)		0.22		(130,188	)		—
Forfeited		(100,000	)		1.57		—		—		(41,666	)		1.04		—			—
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
Outstanding – March 31, 2021											2,920,334		$	1.10	$	5,249,621			2.17
Exercisable – March 31, 2021											2,087,001		$	0.90	$	4,163,613			1.56

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
Unvested – December 31, 2020												845,000		$	1.55	$	197,608		3.83
Granted		465,000			1.57		—			—		30,000			2.25		—		—
Vested		(348,333	)		1.29		—			—		—			—		—		—
Forfeited		(100,000	)		1.57		—			—		(41,666	)		1.04		—		—
Unvested – September 30, 2020		1,070,000		$	1.52	$	(470,300	)		3.92
Unvested – March 31, 2021												833,334		$	1.60	$	1,086,009		3.71

As of ~~September 30, 2020,~~March 31, 2021, our unrecognized share-based compensation expense associated with the stock options issued was ~~$708,698,~~$549,503, which will be amortized over a weighted-average of ~~2.24~~1.93 years.

~~NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS~~

~~We estimate fair value for financial assets and liabilities in accordance with Accounting Standards Codification (“ASC”) Topic 820,~~Restricted Awards

During the three months ended ~~Fair Value Measurement~~March 31, 2021, we issued (“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 an aggregate 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 3: Unobservable inputs that reflect the reporting entity’s own assumptions.~~

~~The estimated fair value of cash equivalents, accounts receivable and accounts payable approximates their carrying amount due to their short-term nature. The estimated fair value~~55,000 restricted shares of our ~~long-term debt and lease obligations approximates~~common stock valued at $159,500 to our Board members in consideration of their ~~carrying value based upon~~service on the Board. These shares vested immediately on the grant date. An additional 80,000 restricted shares of our ~~expected borrowing rate for debt with similar remaining maturities and comparable risk.~~common stock valued at $181,600 were issued to an employee of the Company on February 17, 2021. These shares were granted in consideration of the individual’s service to the Company. These shares vest on November 12, 2021. As of ~~September 30, 2020~~,March 31, 2021, there were 2,236,133 restricted shares outstanding. Of the ~~interest rate swap agreement wasthe 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.~~restricted shares outstanding, 260,000 restricted shares were unvested.

NOTE 14. SUBSEQUENT EVENTS

~~NOTE 16. SUBSEQUENT EVENTS~~

~~We evaluate subsequent events through~~On May 13, 2021, 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~~Company and ~~for the quarter ended September 30, 2020 except as disclosed in Note 1 and as follows:~~

~~As discussed in Note 1, on October 26, 2020, the Company~~NSB entered into a ~~business loan agreement with Zions Bancorporation N.A., dba Nevada State Bank for a secured loan~~Forbearance to the A&R Credit Agreement, in ~~the amount~~which NSB agreed to forbear from exercising any of ~~$4 million under Main Street Priority Loan Facility as established by the Board of Governors~~its rights or remedies that would result from potential breaches of the ~~Federal Reserve System Section 13(3) of~~Minimum EBITDA and Total Leverage covenants for the ~~Federal Reserve Act. Among other things,~~quarters ending June 30, 2021 and September 30, 2021.

Galaxy made a share redemption consideration payment to Triangulum, in connection with the ~~Main Street Loan has~~Redemption Consideration Obligation, in 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.~~timely fashion in May 2021.

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 Main Street Loan to be pari passu with the Lender’s security interest under the Credit Agreement.

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.

Cases of COVID-19 infection have been rising in many of the markets we serve. As a result, there have been restrictions put in place on the opening 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 virus.

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 ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020. This discussion should be read together with our audited consolidated financial statements and related notes included in Item 8.8 Financial Statements and Supplementary ~~Data.~~Financial Information included in our 2020 10-K. 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 casino floors and on 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~~fully-automated electronic tables and other ancillary equipment. In addition, we license intellectual property to legal internet gaming ~~sites.~~operators. 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 ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020. For the three months ended ~~September 30, 2020,~~March 31, 2021, we generated ~~total~~gross revenues of ~~$1,797,833~~$4,282,901 compared to ~~$5,371,646~~$4,494,318 for the comparable prior-year period, representing a decrease of ~~$3,573,813,~~$211,417, or ~~66.5%~~4.7%. This decrease was attributable to the continuing impact of the COVID-19 crisis, as some of our land-based casino customers remained closed induring the ~~third~~first 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~~The decrease in our land-based revenue ~~from licensing~~was offset by an increase in 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.~~revenues.

Selling, general and administrative expenses for the three months ended ~~September 30, 2020~~March 31, 2021 were ~~$1,833,723~~$2,711,052 compared to ~~$3,645,319~~$2,992,052 for the comparable prior-year period, representing a decrease of ~~$1,811,596,~~$281,000, or ~~49.7%~~9.4%. This decrease was primarily due to a decrease in compensation-related expenses and travel and entertainment expenses directly related to the COVID-19 crisis. In 2021, the Company incurred $249,436 in legal expenses associated with the Triangulum Lawsuit.

Research and development expenses for the three months ended March 31, 2021 were $118,701, compared to $155,653 for the comparable prior-year period, representing a decrease of $36,952, or 23.7%. 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~~Also, consulting expenses included expenses associated with our strategic review, the Triangulum Lawsuit and 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 September 30, 2020 were $97,081, compared to $208,253 for the comparable prior-year period, representing a decrease of $111,172, or 53.4%. This decrease was primarily due to a reduction in consulting expenses related to aCompany no longer using certain third-party research and development ~~firm no longer used by the Company and a decrease in compensation-related expenses.~~firms.

Share-based compensation expenses for the three months ended ~~September 30, 2020~~March 31, 2021 were ~~$178,553,~~$316,640, as compared to ~~$242,016~~$157,596 for the comparable prior-year period, representing ~~a decrease~~an increase of ~~$63,463,~~$159,044, or ~~26.2%~~100.9%. This ~~decrease~~increase was ~~mainly~~ due to ~~fewer~~the quarterly restricted shares granted to our Board members being issued ~~and~~ at a ~~lower~~higher stock price than the comparable prior-year period. The increase was also due to restricted shares being issued to two employees and a contractor of the Company in November 2020 and February 2021.

As a result of the changes described above, income from operations decreased ~~$1,660,575~~$292,450 or ~~217.8%~~41.9% to ~~a loss of $898,303~~$404,950 for the three months ended ~~September 30, 2020,~~March 31, 2021, compared to income 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.

~~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$697,400 for the comparable prior-year period.

Total interest expense increased ~~$3,660,~~$13,239, or ~~0.7%~~7.9%, to ~~$506,922~~$180,910 for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, compared to ~~$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~~$167,671 for the comparable prior-year period. The increase was mainly attributable to interest being accrued on the MSPLP.

Share redemption consideration was $195,482 in 2021 compared to $195,482 in 2020. The share redemption consideration is related to the Triangulum ~~share redemption consideration obligation, which was outstanding for only a portion of the prior-year period.~~Redemption Consideration Obligation.

Income tax benefit was ~~$492,807~~($18,950) for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, compared to income tax provision of ~~$17,189~~$35,962 for the comparable prior-year period. The ~~decrease in income tax expense was~~change is primarily attributable to the reduced operations related to the COVID-19 pandemic in the nine-month period resulting in a pre-tax book loss, offset by the GILTI inclusion related to the PGP acquisition, which reduced the taxable loss in the nine-month period.

Adjusted EBITDA (as defined below) was $115,997 for the nine months ended September 30, 2020, compared to $6,654,222 for the comparable prior-year period, representing a decrease of $6,538,225, or 98.3%. This decrease was primarily attributable to the net loss for the period as a result of ~~the COVID-19 crisis. This decrease was primarily attributable the significant decrease in revenue in the period not being fully offset by the decreased amount of expenses.~~favorable discrete items related to excess tax benefits from stock-based compensation.

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Adjusted EBITDA. Adjusted EBITDA includes adjustments to net income to exclude interest, income taxes, depreciation, amortization, share based compensation, ~~loss~~ ~~on extinguishment of debt,~~ foreign currency exchange ~~gains, changes~~loss, change in ~~the~~ estimated fair value of interest rate swap liability and severance and other ~~non-recurring losses and non-cash charges.~~expenses related to litigation. Adjusted EBITDA is not a measure of performance defined in accordance with generally accepted accounting principles in the United States of America (“U.S. ~~GAAP~~GAAP”). However, Adjusted EBITDA is used by management to evaluate our operating performance. Management believes that disclosure of the Adjusted EBITDA metric offers investors, regulators and other stakeholders a view of our operations in the same manner management evaluates our performance. When combined with U.S. GAAP results, management believes Adjusted EBITDA provides a comprehensive understanding of our financial results. Adjusted EBITDA should not be considered as an alternative to net income or to net cash provided by operating activities as a measure of operating results or of liquidity. It may not be comparable to similarly titled measures used by other companies, and it excludes financial information that some may consider important in evaluating our performance. A reconciliation of U.S. GAAP net income ~~from operations~~ to Adjusted EBITDA is as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
Adjusted EBITDA Reconciliation:	2020			2019			2020			2019			2021			2020
Net (loss) income	$	(1,297,499	)	$	580,234		$	(3,387,475	)	$	2,095,841
Net income													$	88,737		$	116,605
Interest expense		162,082			165,706			506,922			438,101			180,910			167,671
Share redemption consideration		195,482			195,482			586,446			380,454			195,482			195,482
Interest income		(1,412	)		(25,326	)		(25,313	)		(45,891	)		(382	)		(21,774	)
Depreciation and amortization		575,637			476,112			1,499,927			1,439,220			717,254			469,805
Share-based compensation		178,553			242,016			512,818			678,199			316,640			157,596
Foreign currency exchange (gain) loss		(20,014	)		69,470			95,976			57,299
Foreign currency exchange loss														8,975			127,291
Change in estimated fair value of interest rate swap liability		(55,330	)		(13,162	)		(21,650	)		78,440			(49,822	)		76,163
(Benefit) provision for income taxes		133,708			(210,132	)		(492,807	)		17,189			(18,950	)		35,962
Rebranding expense		—			82,650			—			95,150
Other non-recurring income		(15,320	)		—			(15,320	)		—
Severance expense		(3,243	)		185,000			20,058			185,000			3,750			2,500
Special project expense⁽¹⁾		183,059			469,249			836,415			1,235,220
Special project expense⁽¹⁾														249,436			173,271
Adjusted EBITDA	$	35,703		$	2,217,299		$	115,997		$	6,654,222		$	1,692,030		$	1,500,572

(1)	~~2020 includes~~Includes expenses associated with the Triangulum ~~Lawsuit. 2019 includes expenses associated with our strategic review, the Triangulum Lawsuit and the related contested proxy campaign.~~lawsuit.

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 resulted~~In 2020, as a result of COVID, we were required to raise funds from financing sources in ~~negative cash provided by~~order to maintain operations. In addition to our normal operations, ~~during the nine months ended September 30, 2020, and~~ we ~~expect modestly negative cash flow from~~may make acquisitions of products, technologies or entire businesses. Our ability to access capital for operations ~~in Q4 of 2020. However, based~~or for acquisitions will depend on ~~our forecast of a gradual recovery~~conditions in the casino gaming industry from the lows of Q2, combined with the $3.92 million in cash we received from the Main Street Loan Facility, we believe we have adequate liquidity to meet our short-term obligations. However, if COVID-19 continues to force casino closures or if the recovery from the closures is slower than we anticipate, the issuance of debt or equity financing arrangements may be required to fund future expenditures or other cash requirements. There can be no assurance that we will be successful in raising additional funding, if necessary,capital markets 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~~investors’ perceptions of our business ~~plan could be negatively affected. In addition, we~~prospects and such conditions and perceptions 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.not always favor us.

As of ~~September 30, 2020,~~March 31, 2021, we had total current assets of ~~$6,668,796~~$12,621,385 and total assets of ~~$27,146,778.~~$31,115,133. This compares to ~~$14,473,935~~$11,562,833 and ~~$24,252,151,~~$30,574,594, respectively, as of December 31, ~~2019.~~2020. The ~~decrease~~increase in current assets ~~as of 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~~March 31, 2021 was primarily due to an increase in ~~our Intangibles balance of $10.4 million, as a result of acquiring customer agreements in connection with~~ the ~~closing on the Purchase Agreement.~~accounts receivable balance.

Our total current liabilities as of ~~September 30, 2020~~March 31, 2021 increased to ~~$6,257,636~~$4,847,115 from ~~$5,422,939~~$4,247,794 as of December 31, ~~2019,~~2020, primarily due to the Company accruing for 2021 employee bonuses and an increase in accrued royalties in our ~~Accounts Payable balance and the Company drawing down on its $1,000,000 Revolving Loan on March 12, 2020. This increase was offset by decreases in Accrued Expenses and our Revenue Contract Liability.~~online gaming business.

Despite the COVID-19 crisis, our business was profitable and cash-flow positive in Q1 ~~2020. However,~~2021. Based on our ~~business was not profitable in Q2 or Q3~~current forecast of ~~2020. We anticipate modestly negative cash from~~ operations, ~~in Q4 of 2020. We~~we believe we will have sufficient ~~working capital~~liquidity to fund our operations and to meet ~~our short-term and long-term~~the obligations ~~as they become due. Further, we do not currently believe that the recent casino closures in the United Kingdom will result in an impairment of our assets or a default~~ under our ~~loan agreements.~~financing arrangements as the come due.

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 ~~used $1,261,133 in~~provided cash of $767,829 for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, compared to cash provided of ~~$3,294,333~~$841,448 for the comparable prior period. The decrease in operating cash flow was primarily due to ~~the~~lower net ~~loss~~income for the period ~~as a result of the COVID-19 crisis. This decrease was partially offset by changes in 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 ~~$6,305,047~~$81,792 for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, compared to ~~$59,895~~$1,448 for the comparable prior period. This was primarily due to ~~closing of the Purchase Agreement~~an increase in ~~August 2020.~~expenditures for software and property and equipment in Q1 2021.

Cash ~~provided by~~used in financing activities during the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 was ~~$620,728,~~$557,638, which resulted primarily 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 ~~$935,414~~$602,002 cash ~~used in~~provided by financing activities for the comparable prior period.

Critical accounting policies. ~~The discussion of our~~Our consolidated financial ~~condition and results of operations is based upon our financial~~ statements ~~which~~ have been prepared in accordance with U.S. GAAP. ~~Critical~~We consider the following accounting policies ~~are those policies that, in management's view, are~~to be the most important to understanding and evaluating our financial results:

Revenue recognition. We account for our revenue in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. We generate revenue primarily from the licensing of our intellectual property. We recognize revenue under recurring fee license contracts monthly as we satisfy our performance obligation, which consists of granting the customer the right to use our intellectual property. Amounts billed are determined based on flat rates or usage rates stipulated in the ~~portrayal~~customer contract.

Goodwill and other intangible assets. Goodwill and other intangible assets are assessed for impairment at least annually or at other times during the year if events or circumstances indicate that it is more likely than not that the fair value of ~~our~~a reporting asset is below the carrying amount. If found to be impaired, the carrying amounts will be reduced, and an impairment loss will be recognized.

Long-term liabilities. The Company issued a promissory note in the face amount of $39,096,401 to Triangulum on May 6, 2019 in connection with the share redemption disclosed in Note 1. The promissory note has not been given accounting effect in the Company’s financial ~~condition and results of operations.~~ ~~See Note 2 in Item 8. “Financial Statements and Supplementary Financial Information” included~~statements. The Company has instead recorded a long-term obligation payable to Triangulum, based on the redemption value specified in our ~~2019 10-K~~ ~~for further detail on these critical accounting policies.~~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.

Off-balance sheet arrangements. As of ~~September 30, 2020,~~March 31, 2021, 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~~Securities and Exchange Commission’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 submitted under the Exchange Act is accumulated and communicated to management including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of ~~September 30, 2020~~March 31, 2021 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

resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

InWe have been named in and have brought lawsuits in the ~~ordinary~~normal course of ~~conducting~~business. See Note 11 above and Note 11 to our ~~business, we are, from time to time, involved~~audited financial statements included in ~~various legal proceedings, administrative proceedings, regulatory government investigations~~Item 8 “Financial Statements 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, 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 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, 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 specifiedSupplementary Financial Information” in our ~~Articles of Incorporation. See Note 10.~~

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 alleges that the redemption and the other relief sought by us are appropriate and in accordance with the Articles (~~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. 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.

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.~~10-K.

As has been previously reported by the Company, in September 2018, we were served with a complaint by TMAX regarding the TMAX Agreement. We filed an answer denying the allegations and counterclaiming for breach of contract, abuse of process and fraud in the inducement, among other counterclaims. We also filed a partial motion for summary judgment seeking dismissal of the plaintiff’s claims. Pursuant to a motion to dismiss brought by the co-defendant and former CEO of TMAX, the suit was dismissed, subject to the right of the plaintiff to file an amended complaint on or before March 20, 2019.

The plaintiff did not file an amended complaint within the time period set by the Judge. After that time, the Company considered the matter closed. Despite not filing an Amended complaint within the allotted time, thereafter TMAX filed a Motion for Leave to Amend their Complaint, which was granted by the Judge on May 11, 2020. On May 26, 2020 TMAX filed an Amended Complaint against the Company and other Co-Defendants. In the Amended Complaint, TMAX asserted a claim against the Company for conversion of personal property. The Company will respond to the Amended Complaint denying the allegations.

ITEM 2. UNREGISTERED SALES OF ~~EQUI~~TYEQUITY SECURITIES AND USE OF PROCEEDS

On ~~September 30, 2020,~~March 31, 2021, we issued an aggregate of 55,000 restricted shares of our common stock valued at ~~$59,400~~$159,500 to Messrs. Lipparelli, Isaacs, Waters, and Zender, in consideration of their service on the Board during the three months ended ~~September 30, 2020.~~March 31, 2021. These shares vested immediately on the grant date. An additional 80,000 restricted shares of our common stock valued at $181,600 were issued to Mr. Cravens on February 17, 2021. These shares were granted in consideration of the individual’s service to the Company. These shares vest on November 12, 2021. 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.

ITEM 6. EXHIBITS

~~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~~

~~Amended and Restated Bylaws~~

~~Amendment #2 to the Employment Agreement dated July 27, 2017 between the Company and Todd P. Cravens~~

~~Membership Interest Purchase Agreement dated February 25, 2020, between the Company and the membership interest holders of PGP~~

~~Paycheck Protection Program Loan Agreement pursuant to the Coronavirus Aid, Relief and Economic Security Act~~

~~Forbearance and Fifth Amendment to the Credit Agreement dated August 16, 2019 with Zions Bancorporation N.A., dba Nevada State Bank~~

~~First Amendment to the Membership Interest Purchase Agreement dated February 25, 2020 between the Company and the membership interest holders of PGP~~

~~Sixth Amendment to the Credit Agreement dated August 16, 2019 with Zions Bancorporation N.A., dba Nevada State Bank~~

~~8-K~~

~~000-30653~~

~~3.2~~

~~10.1~~

~~10.2~~

~~10.1~~

~~February 14, 2020~~

~~February 19, 2020~~

~~February 26, 2020~~

~~April 21, 2020~~

~~August 14, 2020~~

~~August 24, 2020~~

~~October 26, 2020~~

~~31.1~~

~~Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~

~~31.2~~

~~Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~

~~32.1~~

~~Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002~~

~~101~~

~~Financials in XBRL format~~

Exhibit

Number

Description

Form

File No.

Exhibit

Filing Date

Filed

Herewith

10.1

Amended and Restated Credit Agreement dated March 29, 2021 with Zions Bancorporation, N.A. dba Nevada State Bank

8-K

000-30653

10.1

March 31, 2021

31.1

Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

Financials in XBRL format

SIGNATURES

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:	~~November 16, 2020~~May 14, 2021

	By:	/s/ TODD P. CRAVENS
		Todd P. Cravens
		President and Chief Executive Officer (Principal Executive Officer)

	Galaxy Gaming, Inc.

Date:	~~November 16, 2020~~May 14, 2021

	By:	/s/ HARRY C. HAGERTY
		Harry C. Hagerty
		Chief Financial Officer (Principal Accounting Officer)

2825

	Common Stock				Additional Paid in		Accumulated Earnings			Accumulated Other			Total Shareholders'
	Shares		Amount		Capital		(Deficit)			Comprehensive Income			Deficit
Beginning balance, December 31, 2019		18,017,944	$	18,018	$	5,795,636	$	(33,446,276	)	$	—		$	(27,632,622	)
Net income		—		—		—		116,605			—			116,605
Stock options exercised		25,000		25		7,475		—			—			7,500
Share-based compensation		63,333		63		157,533		—			—			157,596
Balance, March 31, 2020		18,106,277	$	18,106	$	5,960,644	$	(33,329,671	)	$	—		$	(27,350,921	)
Net loss		—		—		—		(2,206,582	)		—			(2,206,582	)
Stock options exercised		150,000		150		30,113		—			—			30,263
Share-based compensation		80,000		80		176,589		—			—			176,669
Balance, June 30, 2020		18,336,277	$	18,336	$	6,167,346	$	(35,536,253	)	$	—		$	(29,350,571	)
Shares issued in connection with PGP asset acquisition		3,141,361		3,141	$	3,986,387		—			—			3,989,528
Net loss		—		—		—		(1,297,499	)		—			(1,297,499	)
Foreign currency translation adjustment		—		—		—		—			(19,084	)		(19,084	)
Stock options exercised		50,000		50		11,950		—			—			12,000
Share-based compensation		55,000		55		178,498		—			—			178,553
Balance, September 30, 2020		21,582,638	$	21,582	$	10,344,181	$	(36,833,752	)	$	(19,084	)	$	(26,487,073	)

Beginning balance – January 1, 2020	$	1,294,265
Increase (advanced billings)		7,199,100
Decrease (revenue recognition)		(7,906,271	)
Ending balance – September 30, 2020	$	587,094

	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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company