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, 2017March 31, 2021
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-30653
Galaxy Gaming, Inc.
(Exact name of small business issuer as specified in its charter)
Nevada |
| 20-8143439 |
(State or other jurisdiction of incorporation or organization) |
| (IRS Employer |
|
|
|
| ||
(Address of principal executive offices) | ||
| ||
(702) 939-3254 | ||
(Issuer’s telephone number) |
(Former name, former address and former fiscal year, if changed since last report)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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company.
Large accelerated filer |
| ☐ |
| Accelerated filer |
| ☐ |
|
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| |||
Non-accelerated filer |
|
|
| Smaller reporting company |
| ☒ |
|
|
|
|
|
|
|
Emerging growth company |
| ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. ☐
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 39,565,59122,075,638 common shares as of November 8, 2017.May 10, 2021.
QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2021
TABLE OF CONTENTS
|
| |
PART I
|
| |
Item 1: | 3 | |
Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
Item 3: |
| |
Item 4: |
| |
|
PART II
|
|
Item 1: |
| |
Item 2: |
| |
Item 6: |
|
2
PART I - FINANCIAL INFORMATION
Our financial statements included in this Form 10-Q are as follows:
3
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
| September 30, |
|
| December 31, |
| ||
ASSETS |
| 2017 |
|
| 2016 |
| ||
Current assets: |
| (Unaudited) |
|
|
|
|
| |
Cash and cash equivalents |
| $ | 3,161,666 |
|
| $ | 2,304,761 |
|
Restricted cash |
|
| 93,270 |
|
|
| 84,577 |
|
Accounts receivable, net of allowance for bad debts of $38,015 and $31,125, respectively |
|
| 2,396,087 |
|
|
| 2,137,245 |
|
Inventory, net |
|
| 525,543 |
|
|
| 427,105 |
|
Prepaid expense and other |
|
| 307,157 |
|
|
| 194,747 |
|
Total current assets |
|
| 6,483,723 |
|
|
| 5,148,435 |
|
Property and equipment, net |
|
| 293,488 |
|
|
| 356,253 |
|
Products leased and held for lease, net |
|
| 300,168 |
|
|
| 212,131 |
|
Goodwill and other intangible assets, net |
|
| 11,825,005 |
|
|
| 12,846,019 |
|
Deferred tax assets, net |
|
| 367,057 |
|
|
| 367,057 |
|
Other assets, net |
|
| 23,000 |
|
|
| 82,050 |
|
Total assets |
| $ | 19,292,441 |
|
| $ | 19,011,945 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 329,193 |
|
| $ | 461,913 |
|
Accrued expenses |
|
| 1,722,039 |
|
|
| 1,109,428 |
|
Income taxes payable |
|
| 662,159 |
|
|
| 786,430 |
|
Deferred revenue |
|
| 1,050,416 |
|
|
| 1,014,731 |
|
Deferred rent, current portion |
|
| 21,494 |
|
|
| 14,938 |
|
Current portion of long-term debt and capital lease obligations |
|
| 1,121,289 |
|
|
| 1,230,285 |
|
Other current liabilities |
|
| 119,960 |
|
|
| 90,960 |
|
Total current liabilities |
|
| 5,026,550 |
|
|
| 4,708,685 |
|
Deferred rent, net |
|
| 21,037 |
|
|
| 37,704 |
|
Capital lease obligations, net |
|
| 22,589 |
|
|
| 46,978 |
|
Common stock warrant liability |
|
| 1,333,333 |
|
|
| 923,616 |
|
Long-term debt, net |
|
| 7,620,230 |
|
|
| 8,669,151 |
|
Total liabilities |
|
| 14,023,739 |
|
|
| 14,386,134 |
|
Commitments and Contingencies (See Note 10) |
|
|
|
|
|
|
|
|
Stockholders’ equity |
|
|
|
|
|
|
|
|
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; 39,565,591 and 39,315,591 shares issued and outstanding, respectively |
|
| 39,566 |
|
|
| 39,316 |
|
Additional paid-in capital |
|
| 3,697,536 |
|
|
| 3,109,473 |
|
Accumulated earnings |
|
| 1,531,600 |
|
|
| 1,477,022 |
|
Total stockholders’ equity |
|
| 5,268,702 |
|
|
| 4,625,811 |
|
Total liabilities and stockholders’ equity |
| $ | 19,292,441 |
|
| $ | 19,011,945 |
|
ASSETS |
| March 31, 2021 |
|
| December 31, 2020 |
| ||
Current assets: |
| (Unaudited) |
|
|
|
|
| |
Cash and cash equivalents |
| $ | 6,081,421 |
|
| $ | 5,993,388 |
|
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 |
|
| 1,272,611 |
|
|
| 1,229,795 |
|
Prepaid expenses |
|
| 892,829 |
|
|
| 1,167,068 |
|
Other current assets |
|
| 149,716 |
|
|
| 10,803 |
|
Total current assets |
|
| 12,621,385 |
|
|
| 11,562,833 |
|
Property and equipment, net |
|
| 125,160 |
|
|
| 116,724 |
|
Operating lease right-of-use assets |
|
| 1,311,349 |
|
|
| 1,367,821 |
|
Assets deployed at client locations, net |
|
| 217,379 |
|
|
| 232,156 |
|
Goodwill |
|
| 1,091,000 |
|
|
| 1,091,000 |
|
Other intangible assets, net |
|
| 15,487,625 |
|
|
| 16,086,896 |
|
Other assets |
|
| 261,235 |
|
|
| 117,164 |
|
Total assets |
| $ | 31,115,133 |
|
| $ | 30,574,594 |
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 451,946 |
|
| $ | 467,792 |
|
Accrued expenses |
|
| 2,162,033 |
|
|
| 1,333,032 |
|
Revenue contract liability |
|
| 106,250 |
|
|
| 29,167 |
|
Current portion of long-term debt |
|
| 1,913,355 |
|
|
| 2,222,392 |
|
Current portion of operating lease liabilities |
|
| 213,531 |
|
|
| 195,411 |
|
Total current liabilities |
|
| 4,847,115 |
|
|
| 4,247,794 |
|
Long-term operating lease liabilities |
|
| 1,163,743 |
|
|
| 1,215,680 |
|
Long-term liabilities, net |
|
| 49,396,992 |
|
|
| 49,691,184 |
|
Interest rate swap liability |
|
| 16,187 |
|
|
| 66,009 |
|
Deferred tax liabilities, net |
|
| 150,892 |
|
|
| 150,892 |
|
Total liabilities |
|
| 55,574,929 |
|
|
| 55,371,559 |
|
Commitments and Contingencies (See Note 11) |
|
|
|
|
|
|
|
|
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; 22,075,638 and 21,970,638 shares issued and outstanding, respectively |
|
| 22,076 |
|
|
| 21,971 |
|
Additional paid-in capital |
|
| 11,126,070 |
|
|
| 10,798,536 |
|
Accumulated deficit |
|
| (35,566,426 | ) |
|
| (35,655,163 | ) |
Accumulated other comprehensive (loss) income |
|
| (41,516 | ) |
|
| 37,691 |
|
Total stockholders’ deficit |
|
| (24,459,796 | ) |
|
| (24,796,965 | ) |
Total liabilities and stockholders’ deficit |
| $ | 31,115,133 |
|
| $ | 30,574,594 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
GALAXY GAMING, INC.
CONDENSED STATEMENTSCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
| |||||||||||||||
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| March 31, 2021 |
|
| March 31, 2020 |
| ||||||
Revenue: |
|
|
|
|
| (Restated) |
|
|
|
|
|
| (Restated) |
|
|
|
|
|
|
|
|
| ||
Product leases and royalties |
| $ | 3,830,351 |
|
| $ | 3,190,823 |
|
| $ | 10,955,055 |
|
| $ | 9,229,815 |
| ||||||||
Product sales and service |
|
| 69 |
|
|
| 1,146 |
|
|
| 9,469 |
|
|
| 10,425 |
| ||||||||
Licensing fees |
| $ | 4,282,901 |
|
| $ | 4,494,318 |
| ||||||||||||||||
Total revenue |
|
| 3,830,420 |
|
|
| 3,191,969 |
|
|
| 10,964,524 |
|
|
| 9,240,240 |
|
| $ | 4,282,901 |
|
| $ | 4,494,318 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of ancillary products and assembled components |
|
| 50,369 |
|
|
| 26,763 |
|
|
| 133,517 |
|
|
| 78,075 |
|
|
| 14,304 |
|
|
| 21,812 |
|
Selling, general and administrative |
|
| 2,362,601 |
|
|
| 1,553,556 |
|
|
| 6,808,659 |
|
|
| 4,819,373 |
|
|
| 2,711,052 |
|
|
| 2,992,052 |
|
Research and development |
|
| 139,185 |
|
|
| 89,513 |
|
|
| 403,618 |
|
|
| 270,734 |
|
|
| 118,701 |
|
|
| 155,653 |
|
Depreciation and amortization |
|
| 440,130 |
|
|
| 419,540 |
|
|
| 1,323,772 |
|
|
| 1,252,860 |
|
|
| 717,254 |
|
|
| 469,805 |
|
Share-based compensation |
|
| 384,925 |
|
|
| 41,075 |
|
|
| 553,313 |
|
|
| 91,006 |
|
|
| 316,640 |
|
|
| 157,596 |
|
Total costs and expenses |
|
| 3,377,210 |
|
|
| 2,130,447 |
|
|
| 9,222,879 |
|
|
| 6,512,048 |
|
|
| 3,877,951 |
|
|
| 3,796,918 |
|
Income from operations |
|
| 453,210 |
|
|
| 1,061,522 |
|
|
| 1,741,645 |
|
|
| 2,728,192 |
|
|
| 404,950 |
|
|
| 697,400 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement income |
|
| — |
|
|
| 697,214 |
|
|
| — |
|
|
| 697,214 |
| ||||||||
Interest income |
|
| 382 |
|
|
| 21,774 |
| ||||||||||||||||
Interest expense |
|
| (432,466 | ) |
|
| (227,632 | ) |
|
| (1,316,045 | ) |
|
| (741,045 | ) |
|
| (180,910 | ) |
|
| (167,671 | ) |
Loss on extinguishment of debt |
|
| — |
|
|
| (515,037 | ) |
|
| — |
|
|
| (515,037 | ) | ||||||||
Foreign currency exchange gains (losses) |
|
| 59,624 |
|
|
| (5,926 | ) |
|
| 125,576 |
|
|
| 354,301 |
| ||||||||
Change in estimated fair value of warrant liability |
|
| (86,308 | ) |
|
| 2,933 |
|
|
| (409,717 | ) |
|
| 2,933 |
| ||||||||
Interest income |
|
| — |
|
|
| 56 |
|
|
| — |
|
|
| 202 |
| ||||||||
Share redemption consideration |
|
| (195,482 | ) |
|
| (195,482 | ) | ||||||||||||||||
Foreign currency exchange loss |
|
| (8,975 | ) |
|
| (127,291 | ) | ||||||||||||||||
Change in estimated fair value of interest rate swap liability |
|
| 49,822 |
|
|
| (76,163 | ) | ||||||||||||||||
Total other expense |
|
| (459,150 | ) |
|
| (48,392 | ) |
|
| (1,600,186 | ) |
|
| (201,432 | ) |
|
| (335,163 | ) |
|
| (544,833 | ) |
(Loss) income before provision for income taxes |
|
| (5,940 | ) |
|
| 1,013,130 |
|
|
| 141,459 |
|
|
| 2,526,760 |
| ||||||||
Provision for income taxes |
|
| (21,990 | ) |
|
| (351,412 | ) |
|
| (86,881 | ) |
|
| (873,768 | ) | ||||||||
Net (loss) income |
| $ | (27,930 | ) |
| $ | 661,718 |
|
| $ | 54,578 |
|
| $ | 1,652,992 |
| ||||||||
Net (loss) income per share, basic and diluted |
| $ | (0.00 | ) |
| $ | 0.02 |
|
| $ | 0.00 |
|
| $ | 0.04 |
| ||||||||
Income before benefit (provision) for income taxes |
|
| 69,787 |
|
|
| 152,567 |
| ||||||||||||||||
Benefit (provision) for income taxes |
|
| 18,950 |
|
|
| (35,962 | ) | ||||||||||||||||
Net income |
|
| 88,737 |
|
|
| 116,605 |
| ||||||||||||||||
Foreign currency translation adjustment |
|
| (79,207 | ) |
|
| — |
| ||||||||||||||||
Comprehensive income |
| $ | 9,530 |
|
| $ | 116,605 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net income per share: |
|
|
|
|
|
|
|
| ||||||||||||||||
Basic |
| $ | 0.00 |
|
| $ | 0.01 |
| ||||||||||||||||
Diluted |
| $ | 0.00 |
|
| $ | 0.01 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 39,432,982 |
|
|
| 39,315,591 |
|
|
| 39,368,521 |
|
|
| 39,372,944 |
|
|
| 18,838,221 |
|
|
| 18,022,761 |
|
Diluted |
|
| 39,432,982 |
|
|
| 39,465,676 |
|
|
| 41,216,750 |
|
|
| 39,559,494 |
|
|
| 20,173,443 |
|
|
| 19,239,294 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
CONDENSED STATEMENTSCONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN STOCKHOLDERS’ DEFICIT
(Unaudited)
|
| Nine Months Ended |
| |||||
|
| September 30, 2017 |
|
| September 30, 2016 |
| ||
Cash flows from operating activities: |
|
|
|
|
| (restated) |
| |
Net income |
| $ | 54,578 |
|
| $ | 1,652,992 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 1,323,772 |
|
|
| 1,252,860 |
|
Amortization of debt issuance costs and debt discount |
|
| 218,910 |
|
|
| 136,710 |
|
Bad debt expense |
|
| 6,000 |
|
|
| — |
|
Loss on extinguishment of debt |
|
| — |
|
|
| 515,037 |
|
Change in estimated fair value of warrant liability |
|
| 409,717 |
|
|
| (2,933 | ) |
Share-based compensation |
|
| 553,313 |
|
|
| 91,006 |
|
Unrealized foreign exchange (gains) losses on cash and cash equivalents |
|
| (92,243 | ) |
|
| 31,886 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Restricted cash |
|
| (8,693 | ) |
|
| 10,009 |
|
Accounts receivable |
|
| (264,842 | ) |
|
| (108,674 | ) |
Inventory |
|
| (271,149 | ) |
|
| (181,319 | ) |
Prepaid expenses and other current assets |
|
| (112,410 | ) |
|
| 8,922 |
|
Accounts payable |
|
| (132,720 | ) |
|
| (858,404 | ) |
Income tax payable |
|
| (124,271 | ) |
|
| 822,482 |
|
Accrued expenses |
|
| 612,611 |
|
|
| 152,871 |
|
Deferred revenue |
|
| 35,685 |
|
|
| 152,938 |
|
Other current liabilities |
|
| 29,000 |
|
|
| (15,069 | ) |
Deferred rent |
|
| (10,111 | ) |
|
| (3,555 | ) |
Net cash provided by operating activities |
|
| 2,227,147 |
|
|
| 3,657,759 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Investment in intangible assets |
|
| (43,917 | ) |
|
| — |
|
Acquisition of property and equipment |
|
| (52,352 | ) |
|
| (43,345 | ) |
Net cash used in investing activities |
|
| (96,269 | ) |
|
| (43,345 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from stock option exercises |
|
| 35,000 |
|
|
| — |
|
Debt issuance costs |
|
| (17,091 | ) |
|
| — |
|
Proceeds received from long-term debt |
|
| — |
|
|
| 932,126 |
|
Principal payments on capital lease obligations |
|
| (23,087 | ) |
|
| (51,698 | ) |
Principal payments on long-term debt |
|
| (1,361,038 | ) |
|
| (3,209,922 | ) |
Net cash used in financing activities |
|
| (1,366,216 | ) |
|
| (2,329,494 | ) |
Effect of exchange rate changes on cash |
|
| 92,243 |
|
|
| (31,886 | ) |
Net increase in cash and cash equivalents |
|
| 856,905 |
|
|
| 1,253,034 |
|
Cash and cash equivalents – beginning of period |
|
| 2,304,761 |
|
|
| 570,623 |
|
Cash and cash equivalents – end of period |
| $ | 3,161,666 |
|
| $ | 1,823,657 |
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 1,099,738 |
|
| $ | 753,250 |
|
Inventory transferred to assets held for lease |
| $ | 172,711 |
|
| $ | 108,577 |
|
Cash paid for income taxes |
| $ | 150,000 |
|
| $ | 35,000 |
|
Supplemental non-cash financing activities information: |
|
|
|
|
|
|
|
|
Issuance of warrants in conjunction with term loan |
| $ | — |
|
| $ | 809,631 |
|
Points paid on term loan |
| $ | — |
|
| $ | 262,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| |
|
| Common Stock |
|
| Additional Paid-in |
|
| Accumulated |
|
| Other Comprehensive |
|
| Total Shareholders' |
| |||||||||
|
| 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 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 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 | ) |
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| Three Months Ended |
| |||||
|
| March 31, 2021 |
|
| March 31, 2020 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
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 |
|
| 12,243 |
|
|
| 9,159 |
|
Bad debt expense |
|
| 76,160 |
|
|
| 166,002 |
|
Change in estimated fair value of interest rate swap liability |
|
| (49,822 | ) |
|
| 76,163 |
|
Share-based compensation |
|
| 316,640 |
|
|
| 157,596 |
|
Unrealized foreign exchange (gain) loss |
|
| (3,573 | ) |
|
| 77,557 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (1,139,395 | ) |
|
| 369,313 |
|
Inventory |
|
| (70,010 | ) |
|
| (86,885 | ) |
Income tax receivable/payable |
|
| (42,816 | ) |
|
| 35,962 |
|
Prepaid expenses and other current assets |
|
| 138,788 |
|
|
| (197,283 | ) |
Other assets |
|
| (144,072 | ) |
|
| — |
|
Accounts payable |
|
| (66,044 | ) |
|
| 8,784 |
|
Accrued expenses |
|
| 834,001 |
|
|
| (365,512 | ) |
Revenue contract liability |
|
| 77,083 |
|
|
| 4,186 |
|
Operating lease liabilities |
|
| (33,817 | ) |
|
| (69,305 | ) |
Net cash provided by operating activities |
|
| 767,829 |
|
|
| 841,448 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Investment in intangible assets |
|
| (49,900 | ) |
|
| — |
|
Acquisition of property and equipment |
|
| (31,892 | ) |
|
| (1,448 | ) |
Net cash used in investing activities |
|
| (81,792 | ) |
|
| (1,448 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from draw on revolving loan |
|
| — |
|
|
| 1,000,000 |
|
Proceeds from stock option exercises |
|
| 10,999 |
|
|
| 7,500 |
|
Principal payments on long-term debt |
|
| (568,637 | ) |
|
| (405,498 | ) |
Net cash (used in) provided by financing activities |
|
| (557,638 | ) |
|
| 602,002 |
|
Effect of exchange rate changes on cash |
|
| (40,366 | ) |
|
| (77,557 | ) |
Net increase in cash and cash equivalents |
|
| 88,033 |
|
|
| 1,364,445 |
|
Cash and cash equivalents – beginning of period |
|
| 5,993,388 |
|
|
| 9,686,698 |
|
Cash and cash equivalents – end of period |
| $ | 6,081,421 |
|
| $ | 11,051,143 |
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 112,487 |
|
| $ | 152,949 |
|
Cash paid for income taxes |
| $ | 500 |
|
| $ | — |
|
Supplemental schedule of non-cash activities: |
|
|
|
|
|
|
|
|
Debt modification fee payable |
| $ | 50,185 |
|
| $ | — |
|
Inventory transferred to assets deployed at client locations |
| $ | 29,849 |
|
| $ | 26,056 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
7
GALAXY GAMING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS AND RESTATEMENT
Unless the context indicates otherwise, references to “Galaxy Gaming, Inc.,” “we,” “us,” “our,” or the “Company,” refer to Galaxy Gaming, Inc., a publicly reporting Nevada corporation (“Galaxy Gaming”).
Nature of operations. We are an established global gaming company specializing in the design, development, manufacturing,acquisition, assembly, marketing and acquisitionlicensing of proprietary casino table games and associated technology, platforms and systems for the casino gaming industry. We are a leading supplier of gaming entertainment products worldwide and provide a diverse offering of qualityCasinos use our proprietary products and services at competitive prices designed to enhance the player experience.
Restatement. The financial statements as oftheir gaming operations and for the threeimprove their profitability, productivity and nine months ended September 30, 2016 have been restated to correct the following errors noted during the preparation of the financial statements for the year ended December 31, 2016: (i) the amortization of original issue discount related to notes payable to Prime Table Games LLC and Prime Table Games UK (the “PTG Notes”) was not previously deducted from taxable income in our federal tax returns from 2011 through 2015 or to derive the income tax provision for the three and nine months ended September 30, 2016, which resulted in an understatement of deferred tax assets and an overstatement of the income tax provision in those periods; and (ii) foreign currency exchange gains and losses related to the PTG Notes were incorrectly reported as other comprehensive income instead of earnings (i.e., non-operating income). The restatements to reflect the correction of both errors are referred to herein collectively as the "Restatement."
The table below sets forth the amounts as originally reported for the categories presented in the condensed statements of operations that were affected by the Restatement, the effect of the Restatement and the restated amounts for the three and nine months ended September 30, 2016:
|
| Three Months Ended September 30, 2016 |
|
| Nine Months Ended September 30, 2016 |
| ||||||||||||||||||
Statements of Income |
| As originally reported |
|
| Impact of restatement |
|
| As restated |
|
| As originally reported |
|
| Impact of restatement |
|
| As restated |
| ||||||
Selling, general and administrative |
| $ | 1,576,480 |
|
| $ | (22,924 | ) |
| $ | 1,553,556 |
|
| $ | 4,850,785 |
|
| $ | (31,412 | ) |
| $ | 4,819,373 |
|
Provision for income taxes |
|
| (602,619 | ) |
|
| 251,207 |
|
|
| (351,412 | ) |
|
| (990,639 | ) |
|
| 116,871 |
|
|
| (873,768 | ) |
Foreign currency exchange (losses) gains |
|
| — |
|
|
| (5,926 | ) |
|
| (5,926 | ) |
|
| — |
|
|
| 354,301 |
|
|
| 354,301 |
|
Loss on extinguishment of debt |
|
| (87,578 | ) |
|
| (427,459 | ) |
|
| (515,037 | ) |
|
| (87,578 | ) |
|
| (427,459 | ) |
|
| (515,037 | ) |
Net income |
|
| 820,972 |
|
|
| (159,254 | ) |
|
| 661,718 |
|
|
| 1,577,867 |
|
|
| 75,125 |
|
|
| 1,652,992 |
|
The table below sets forth the amounts as originally reported for the categories presented in the condensed statements of cash flows that were affected by the Restatement, the effect of the Restatement and the restated amounts for the nine months ended September 30, 2016:
Statement of Cash Flow |
| As originally reported |
|
| Impact of restatement |
|
| As restated |
| |||
Net income |
| $ | 1,577,867 |
|
| $ | 75,125 |
|
| $ | 1,652,992 |
|
Loss on extinguishment of debt |
|
| 87,578 |
|
|
| 427,459 |
|
|
| 515,037 |
|
Deferred income tax provision |
|
| 54,370 |
|
|
| (54,370 | ) |
|
| — |
|
Unrealized foreign exchange losses on cash and cash equivalents |
|
| — |
|
|
| 31,886 |
|
|
| 31,886 |
|
Increase in accounts receivable |
|
| (107,969 | ) |
|
| (705 | ) |
|
| (108,674 | ) |
Decrease in other current assets |
|
| 43,017 |
|
|
| (43,017 | ) |
|
| — |
|
Decrease in prepaid expenses and other current assets |
|
| 6,608 |
|
|
| 2,314 |
|
|
| 8,922 |
|
Decrease in accounts payable |
|
| (858,954 | ) |
|
| 550 |
|
|
| (858,404 | ) |
Increase in income taxes payable |
|
| 936,269 |
|
|
| (113,787 | ) |
|
| 822,482 |
|
Increase in accrued expenses |
|
| 141,841 |
|
|
| 11,030 |
|
|
| 152,871 |
|
Net cash provided by operating activities |
|
| 3,321,274 |
|
|
| 336,485 |
|
|
| 3,657,759 |
|
Principal payments on notes payable |
|
| (2,873,437 | ) |
|
| (336,485 | ) |
|
| (3,209,922 | ) |
Net cash used in financing activities |
|
| (1,993,009 | ) |
|
| (336,485 | ) |
|
| (2,329,494 | ) |
7
NOTE 2. SIGNIFICANT BUSINESS DEVEVELOPMENTS
Resignation of Chairman, Chief Executive Officer (“CEO”) and President. On July 24, 2017, Robert B. Saucier resigned from his positions as Chairman of the Board, CEO and President in order to aid us in our expanded regulatory jurisdictional ambitions. Concurrently with Mr. Saucier’s resignation, the Board of Directors (the “Board”) appointed Mr. Saucier to serve as Executive Vice President of Business Development and Chief Product Officer. In these new positions, he receives an annual salary of $225,000 and is eligible to receive performance-based bonuses and incentives,security, as well as employee benefitsto 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 United Kingdom, Europe and Africa 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 perquisites. Mr. Saucier’s resignation was notcompanies to iGaming operators throughout the result of any disagreements with the Company, and he remains a member of the Board.
Appointment of new President and CEO. EffectiveJuly 24, 2017, the Board appointed Todd P. Cravens to serve as President and CEO. Mr. Cravens was previously serving as our Vice President of Business Development, a position he had held since January 1, 2017.
Mr. Cravens’ employment agreement related to his position as Vice President of Business Development was terminated and superseded with a new employment agreement to reflect his new positions and responsibilities.
Pursuant to the new employment agreement (the “Cravens Employment Agreement”), Mr. Cravens receives an annual base salary of $230,000, is eligible for bonuses if and as approved by the Compensation Committee of the Board and was granted options to purchase our common stock. See Note 14 for further detail on the options granted. The term of the Cravens Employment Agreement is through July 26, 2020. Mr. Cravens is entitled to certain severance payments in the event his employment with us is terminated by us without cause following a change of control, or following termination of the Cravens Employment Agreement by Mr. Cravens.
Appointment of new Director. On July 26, 2017, the Board appointed Mark A. Lipparelli as a member of the Board to fill a newly-created board seat and elected Mr. Lipparelli to serve as Chairman of the Board. On August 31, 2017, we entered into a Board of Directors Services Agreement (the “Lipparelli Agreement”), pursuant to which Mr. Lipparelli receives monthly compensation of $7,500 and all customary and usual fringe benefits generally available to non-employee directors of the Board, and was granted shares of restricted common stock of the Company. See Note 12 for further detail on the restricted common stock granted.
Voting and dispositive control transfer agreements. On September 22, 2017, the Nevada Gaming Commission (the “NGC”) granted us licensure as a manufacturer and distributor of gaming products, which approval triggered the effectiveness of five Voting and Dispositive Control Transfer Agreements (the “VDCTA Agreements”). The VDCTA Agreements collectively served to transfer voting and dispositive control of certain shares owned of record by Triangulum Partners, LLC, a New Mexico limited liability company (“Triangulum”) to named recipients (each a “Recipient” and collectively, the “Recipients”).
We and the Recipients (named below) previously entered into the VDCTA Agreements on August 18, 2017. However, the VDCTA Agreements did not become effective until September 22, 2017, concurrently with the NGC granting us a license as a manufacturer and distributor of gaming products in accordance with the stated terms of the VDCTA Agreements. The term of the VDCTA Agreements is while Mr. Saucier’s application for licensure with the NGC is pending.
The VDCTA Agreements were made and entered into by and among Triangulum, a limited liability company of which the managing member is Mr. Saucier, and each of the Recipients. Prior to the VDCTA Agreements, Triangulum owned and controlled shares equal to approximately 60.12% of our total issued and outstanding common stock.
The Recipients of the voting and dispositive control of the shares under the VDCTA Agreements are as follows:world.
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
|
* The percentages listed in the table are based on 39,365,591 total outstanding shares and do not include other shares held by such Recipients.
Messrs. Lipparelli, Waters, DesRosiers and Zender are members of our Board. During the term of the VDCTA Agreements, Triangulum granted an irrevocable proxy to each of the Recipients to vote theShare Redemption. On May 6, 2019, we redeemed all 23,271,667 shares of our common stock coveredheld by Triangulum Partners, LLC (“Triangulum”), an entity controlled by Robert B. Saucier, Galaxy Gaming's founder, and, prior to the VDCTA Agreements,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 Obligation”). See Note 10.
There is ongoing litigation between the Company and conveyedTriangulum related to each Recipient the right to “Transfer”redemption and other matters. See Note 11.
Membership Interest Purchase Agreement. On August 21, 2020, the shares, defined as a “sale, transfer, tender, assignment, encumbrance, gift, pledge, hedge, swap, or other disposition, directly or indirectly”Company completed the acquisition of 100% of the member interests in Progressive Games Partners LLC (“PGP”). The entirety of the 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 Company’s balance sheet. The cash portion of the purchase price was $6,425,000, and the 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 shares issued are being held in escrow pending the performance of the assets acquired during the twelve months following the acquisition. See Note 7 to our audited financial statements included in 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 March 31, 2021 (the “2020 10-K”) for further details. The Company also acquired certain receivables and payables in the net amount of $581,885, which was to be remitted to the sellers of PGP as the receivables and payables were settled. As of March 31, 2021, the remaining balance owed to the sellers was $55,186.
Management determined that, for accounting purposes, the PGP transaction did not meet the definition of a business combination and, therefore, 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 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.
Given the uncertainties around casino re-openings, we instituted a phased billing approach for our clients through fiscal year 2020, which resulted in us realizing substantially less revenue than we might otherwise expect. In addition, because of COVID-19-related financial pressures on our physical casino customers, there can be no assurance that our accounts receivable will be paid timely for revenues earned prior to the shutdowns. Finally, the Company was notified by some of the land-based casinos that they would be extending their payment terms.
We also rely on third-party suppliers and manufacturers in China, many of whom were shut down or severely cut back production during some portion of 2020. Although this has not had a material effect on our supply chain, any right or interest therein.future disruption of our suppliers and their contract manufacturers may impact our sales and operating results going forward.
8
Because of the uncertainties of COVID-19, the Company drew on its Revolving Loan in the amount of $1,000,000 on March 12, 2020. Pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Federal Reserve created the Main Street Priority Loan Program (“MSPLP”) to provide financing for small and medium-sized businesses. On October 26, 2020, the Company borrowed $4,000,000 from Zions Bancorporation N.A., dba Nevada State Bank under this program. See Note 10.
NOTE 3.2. 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 have been reflected herein. misleading)As permitted by and all disclosures to present fairly our financial position and the rulesresults of our operations and regulations ofcash flows for the SEC, certain informationperiods presented.
These unaudited interim condensed financial statements should be read in conjunction with the financial statements and footnote disclosures normallythe related notes thereto included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations. our 2020 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.
In the opinion of management, the accompanying unaudited interim condensed financial statements contain all necessary adjustments, consisting only of those of a recurring nature, and disclosures to present fairly our financial position and the results of its operations and cash flows for the periods presented. 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, 2016, filed with the SEC on April 14, 2017 (the “2016 10-K”).
Basis of accounting.The financial statements have been prepared on the accrual basis of accounting in conformity with U.S. GAAP. Revenues are recognized when earned and expenses are recognized when they are incurred. We do not have significant cost of revenue, as most of our revenue is derived from the licensing of intellectual properties. As a result, we do not separately present cost of revenue and gross profit in our statements of operations.
Significant Accounting Policies. See Note 2 in Item 8. “Financial Statements and Supplementary Data” included in our 2016 10-K.
Use of estimates and assumptions. We are required to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our companyCompany and the industry as a whole, and information available from other outside sources. Our estimates affect reported amounts for assets, liabilities, revenues, expenses and related disclosures. Actual results may differ from initial estimates.
Consolidation. The financial statements are presented on a consolidated basis and include the results of the Company and its wholly owned subsidiary, PGP. All intercompany transactions and balances have been eliminated in consolidation.
Reclassifications. Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period financial statement presentations.
Recently adopted accounting standardsCash 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. In July 2015,Inventory consists of ancillary products such as signs, layouts and bases for the FASB issued ASU No. 2015-11,various games and electronic devices and components to support all our Inventory: Simplifying the Measurement of Inventory.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 now required to be measuredvalued at the lower of cost or net realizable value whileor cost, which is determined by the conceptaverage 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 marketaccumulated 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 eliminated. reduced, and an impairment loss will be recognized. The ASUCompany 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.
9
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 net realizablefair 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 selling processfair 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 ordinary courseconsolidated 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 less reasonably predictable costsas one operating segment which generates revenue from the licensing of completion, disposalintellectual property.
10
Share-based compensation. We recognize compensation expense for all restricted stock and transportation.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 “Financial Statements and Supplementary Financial Information” included in our 2020 10-K.
Recently adopted accounting standards. Simplifying the Accounting for Income Taxes. In December 2019, the FASB issued Accounting Standard Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. ASU 2015-112019-12 is effective for the fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We have adopted the new standard effective January 1, 2017 using the required prospective2021, and its adoption approach, which did not have a material effect on our financial condition, results of operations or cash flows.
Stock-based compensation. In March 2016, the FASB issued No. ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. We adopted ASU 2016-09 effective January 1, 2017 using the prospective adoption approach, which diddoes not have a material impact on our consolidated financial condition, results of operations or cash flows.statements.
New accounting standards not yet adopted
Revenue Recognition. adopted. Financial Instruments – Credit Losses. In May 2014,February 2020, the FASB issued ASU No. 2014-092020-02, Financial Instruments – Credit Losses (Topic 606), 326).Revenue from Contracts with Customers, which is a comprehensive new revenue recognition standard that will supersede virtually all existing revenue ASU 2020-02 provides updated guidance including industry-specific guidance. Under the new standard, revenue will be recognized when control of the promised goods or services is transferred to customers inon how an amount that reflects the consideration to which we expect to be entitled in exchange for those goodsentity should measure credit losses on financial instruments and services. The standard creates a five-step model that will generally require companies to use more judgment and make more estimates than under current guidance when considering the terms of contracts along with all relevant facts and circumstances. These include the identification of customer contracts and separating performance obligations, the determination of transaction price that potentially includes an estimate of variable consideration, allocating the transaction price to each separate performance obligation, and recognizing revenue in line with the pattern of transfer.
9
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defersdelayed the effective date of ASU 2014-09 by one year to now be effectiveTopic 326 for fiscal years, and interimsmaller reporting periods within those years, beginning after December 15, 2017. Early adoption of the standard is permitted but not before the original effective date of December 15, 2016. The ASU may be adopted using a full retrospective approach or a modified retrospective approach (reporting the cumulative effect as of the date of adoption.
We continue to assess the anticipated impact of adopting ASC 606 on our financial statements. The primary impacts of the adoption of ASC 606 are expected to be the following: (a) we will recognize an asset that represents the incremental costs of obtaining and fulfilling the contracts in existence at December 31, 2017 under the caption of prepaid expense and other assets. Such costs will be amortized on a straight-line basis over the expected term of the underlying contracts; and (b) revenues generated by our European distributors (which sublicense our intellectual properties to gaming establishments in Europe in accordance with license agreements entered into between us and such distributors) will be presented as gross revenue under the caption “product leases and royalties” and fees earned by such distributors will be presented as selling, general and administrative expenses. Currently, revenues generated by our European distributors are presented net of fees earned under the caption “product leases and royalties.”
ASC 606 will significantly increase revenue disclosure requirements. We currently do not anticipate significant changes to our business processes and systems to support the adoption of ASC 606 and are currently assessing the impact on our internal controls. We will continue to monitor and assess the impact of any changes to ASC 606 and interpretations as they become available.
Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amended guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The adoption of this guidance is expected to result in a significant portion of our operating leases being recognized on our balance sheets. The guidance requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 is effective forcompanies until fiscal years beginning after December 15, 2018 and interim periods within those fiscal years with earlier2022. Early adoption is permitted. We are currently evaluating the impact of adopting this guidance.
Restricted Cash. In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires amounts generally described as restricted cash and cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. Upondo not believe the adoption of ASU 2016-08, restricted cash will be included within beginning and ending cash and cash equivalents amounts on our statements of cash flows, which we do not expectthis guidance will have a material impact on our financial statements. statements or related disclosures.
Goodwill Impairment.NOTE 3. REVENUE RECOGNITION
Revenue recognition. In January 2017,We generate revenue primarily from the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifyinglicensing of our intellectual property. We recognize revenue under recurring fee license contracts monthly as we satisfy our performance obligation, which consists of granting the Test for Goodwill Impairment, which simplifiescustomer the current two-step goodwill impairment testright to use our intellectual property. Amounts billed are determined based on flat rates or usage rates stipulated in the customer contract.
Disaggregation of revenue
The following table disaggregates our revenue by eliminating Step 2 of the test. This guidance requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment chargegeographic location for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. This guidance is effective for fiscal years beginning after December 15, 2019following periods:
|
| Three Months Ended March 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
North America and Caribbean |
| $ | 2,451,896 |
|
| $ | 3,130,465 |
|
Europe, Middle East and Africa |
|
| 1,831,005 |
|
|
| 1,363,853 |
|
Total revenue |
| $ | 4,282,901 |
|
| $ | 4,494,318 |
|
Contract liabilities. Amounts billed and interim periods within those fiscal years,cash received in advance of performance obligations fulfilled are recorded as contract liabilities and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Werecognized as performance obligations are currently evaluating the impact of adopting this guidance.fulfilled.
Contract Assets. The Company’s contract assets consist solely of unbilled receivables which are recorded when the Company recognizes revenue in advance of billings. Unbilled receivables totaled $545,928 and $502,860 for the periods ended March 31, 2021 and December 31, 2020 and are included in the accounts receivable balance in the accompanying balance sheets.
NOTE 4. INVENTORY
Inventory net consisted of the following at September 30, 2017 and December 31, 2016:at:
|
| March 31, |
|
| December 31, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2021 |
|
| 2020 |
| ||||
Raw materials and component parts |
| $ | 270,863 |
|
| $ | 171,478 |
|
| $ | 369,479 |
|
| $ | 300,244 |
|
Finished goods |
|
| 96,834 |
|
|
| 128,956 |
|
|
| 339,207 |
|
|
| 368,281 |
|
Work-in-process |
|
| 182,846 |
|
|
| 151,671 |
| ||||||||
Inventory, gross |
|
| 550,543 |
|
|
| 452,105 |
| ||||||||
Less: inventory reserve |
|
| (25,000 | ) |
|
| (25,000 | ) | ||||||||
Inventory, net |
| $ | 525,543 |
|
| $ | 427,105 |
|
| $ | 708,686 |
|
| $ | 668,525 |
|
10
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment, net, consisted of the following at September 30, 2017 and December 31, 2016:at:
| March 31, |
|
| December 31, |
| |||||||||||
|
| 2017 |
|
| 2016 |
|
| 2021 |
|
| 2020 |
| ||||
Furniture and fixtures |
| $ | 280,694 |
|
| $ | 269,471 |
|
| $ | 312,639 |
|
| $ | 312,639 |
|
Automotive vehicles |
|
| 215,127 |
|
|
| 202,143 |
|
|
| 215,127 |
|
|
| 215,127 |
|
Office and computer equipment |
|
| 361,451 |
|
|
| 332,544 |
| ||||||||
Leasehold improvements |
|
| 156,843 |
|
|
| 156,843 |
|
|
| 35,532 |
|
|
| 32,547 |
|
Computer equipment |
|
| 117,645 |
|
|
| 105,114 |
| ||||||||
Office equipment |
|
| 53,483 |
|
|
| 37,871 |
| ||||||||
Property and equipment, gross |
|
| 823,792 |
|
|
| 771,442 |
|
|
| 924,749 |
|
|
| 892,857 |
|
Less: accumulated depreciation |
|
| (530,304 | ) |
|
| (415,189 | ) |
|
| (799,589 | ) |
|
| (776,133 | ) |
Property and equipment, net |
| $ | 293,488 |
|
| $ | 356,253 |
|
| $ | 125,160 |
|
| $ | 116,724 |
|
For the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, depreciation expense related to property and equipment of $115,117was $23,456 and $97,326, respectively, is included in depreciation and amortization expense.
Accumulated depreciation of leasehold improvements totaled $105,322 and $82,183 as of September 30, 2017 and December 31, 2016,$22,994, respectively.
NOTE 6. PRODUCTS LEASED AND HELD FOR LEASEASSETS DEPLOYED AT CLIENT LOCATIONS
Products leased and held for lease,
Assets deployed at client locations, net, consisted of the following at September 30, 2017 and December 31, 2016:at:
| March 31, |
|
| December 31, |
| |||||||||||
|
| 2017 |
|
| 2016 |
|
| 2021 |
|
| 2020 |
| ||||
Enhanced table systems |
| $ | 546,539 |
|
| $ | 424,364 |
|
| $ | 909,507 |
|
| $ | 890,560 |
|
Less: accumulated depreciation |
|
| (246,371 | ) |
|
| (212,233 | ) |
|
| (692,128 | ) |
|
| (658,404 | ) |
Products leased and held for lease, net |
| $ | 300,168 |
|
| $ | 212,131 |
| ||||||||
Assets deployed at client locations, net |
| $ | 217,379 |
|
| $ | 232,156 |
|
For the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, depreciation expense related to products leasedassets deployed at client locations was $44,626 and held for lease of $84,674 and $38,595, respectively, is included in depreciation and amortization expense.$64,312, respectively.
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and finite-livedGoodwill. 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, 2017 and December 31, 2016:
|
| 2017 |
|
| 2016 |
| ||
Goodwill |
| $ | 1,091,000 |
|
| $ | 1,091,000 |
|
Finite-lived intangible assets: |
|
|
|
|
|
|
|
|
Patents |
|
| 13,615,967 |
|
|
| 13,615,967 |
|
Customer relationships |
|
| 3,400,000 |
|
|
| 3,400,000 |
|
Trademarks |
|
| 2,740,000 |
|
|
| 2,740,000 |
|
Non-compete agreements |
|
| 660,000 |
|
|
| 660,000 |
|
Internally-developed software |
|
| 102,968 |
|
|
| — |
|
Other intangible assets, gross |
|
| 20,518,935 |
|
|
| 20,415,967 |
|
Less: accumulated amortization |
|
| (9,784,930 | ) |
|
| (8,660,948 | ) |
Other intangible assets, net |
|
| 10,734,005 |
|
|
| 11,755,019 |
|
Goodwill and other intangible assets, net |
| $ | 11,825,005 |
|
| $ | 12,846,019 |
|
Included in amortization expense was $1,123,980 and $1,116,938 related to the above intangible assets for the nine months ended September 30, 2017 and 2016, respectively.
11
Estimated amortization expense to be recorded for the twelve months ending September 30, 2018 through 2022 and thereafter is as follows:at:
September 30, |
| Total |
| |
2018 |
| $ | 1,498,873 |
|
2019 |
|
| 1,498,873 |
|
2020 |
|
| 1,481,712 |
|
2021 |
|
| 1,391,218 |
|
2022 |
|
| 1,390,676 |
|
Thereafter |
|
| 3,472,653 |
|
Total amortization |
| $ | 10,734,005 |
|
|
| March 31, |
|
| December 31, |
| ||
| 2021 |
|
| 2020 |
| |||
Patents |
| $ | 13,507,997 |
|
| $ | 13,507,997 |
|
Customer relationships |
|
| 13,942,115 |
|
|
| 13,942,115 |
|
Trademarks |
|
| 2,880,967 |
|
|
| 2,880,967 |
|
Non-compete agreements |
|
| 660,000 |
|
|
| 660,000 |
|
Software |
|
| 233,315 |
|
|
| 183,415 |
|
Other intangible assets, gross |
|
| 31,224,394 |
|
|
| 31,174,494 |
|
Less: accumulated amortization |
|
| (15,736,769 | ) |
|
| (15,087,598 | ) |
Other intangible assets, net |
| $ | 15,487,625 |
|
| $ | 16,086,896 |
|
For the three months ended March 31, 2021 and 2020, amortization expense related to other intangible assets was $649,171 and $382,499, respectively.
12
Estimated future amortization expense is as follows:
| Total |
| ||
2022 |
| $ | 2,609,479 |
|
2023 |
|
| 2,023,514 |
|
2024 |
|
| 1,446,909 |
|
2025 |
|
| 1,425,776 |
|
2026 |
|
| 1,424,276 |
|
Thereafter |
|
| 6,557,671 |
|
Total amortization |
| $ | 15,487,625 |
|
NOTE 8. ACCRUED EXPENSES
Accrued expenses consisted of the following at September 30, 2017 and December 31, 2016:at:
|
| 2017 |
|
| 2016 |
|
| March 31, |
|
| December 31, |
| ||||
TableMAX license fee |
| $ | 736,428 |
|
| $ | 470,512 |
| ||||||||
|
| 2021 |
|
| 2020 |
| ||||||||||
Share redemption consideration |
| $ | 706,258 |
|
| $ | 510,776 |
| ||||||||
Commissions and royalties |
|
| 722,023 |
|
|
| 398,096 |
| ||||||||
Payroll and related |
|
| 664,140 |
|
|
| 405,553 |
|
|
| 461,095 |
|
|
| 173,487 |
|
Professional fees |
|
| 152,962 |
|
|
| 59,567 |
| ||||||||
Commissions and royalties |
|
| 110,353 |
|
|
| 54,551 |
| ||||||||
Interest |
|
| 98,398 |
|
|
| 95,879 |
| ||||||||
Income tax payable |
|
| 46,629 |
|
|
| 42,218 |
| ||||||||
Other |
|
| 58,156 |
|
|
| 119,245 |
|
|
| 127,630 |
|
|
| 112,576 |
|
Total accrued expenses |
| $ | 1,722,039 |
|
| $ | 1,109,428 |
|
| $ | 2,162,033 |
|
| $ | 1,333,032 |
|
TableMAX license fee
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 March 31, 2021, our leases have remaining lease terms ranging from three months to 69 months.
Supplemental balance sheet information related to leases is as follows:
| As of March 31, 2021 | |||||
|
| Amount |
|
| Classification | |
Operating leases: |
|
|
|
|
|
|
Operating lease right-of-use lease assets |
| $ | 1,311,349 |
|
|
|
|
|
|
|
|
|
|
Operating lease current liabilities |
| $ | 213,531 |
|
| Current portion of operating lease liabilities |
|
|
|
|
|
|
|
Operating lease long-term liabilities |
|
| 1,163,743 |
|
| Long-term operating lease liabilities |
|
|
|
|
|
|
|
Total operating lease liabilities |
| $ | 1,377,274 |
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term: |
|
|
|
|
|
|
Operating leases |
| 5.6 years |
|
|
| |
|
|
|
|
|
|
|
Weighted-average discount rate: |
|
|
|
|
|
|
Operating leases |
|
| 4.2 | % |
|
|
The components of lease expense are as follows:
| Three Months Ended March 31, 2021 | |||||
|
| Amount |
|
| Classification | |
Operating lease cost |
| $ | 69,828 |
|
| Selling, general and administrative expense |
|
|
|
|
|
|
|
Supplemental cash flow information related to leases is as follows:
| Three Months Ended March 31, 2021 | |||||
|
| Amount |
|
| Classification | |
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
Operating cash flows from operating leases |
| $ | 69,828 |
|
| Net income |
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease liabilities: |
|
|
|
|
|
|
Operating leases |
| $ | — |
|
| Supplemental cash flow information |
As of March 31, 2021, future maturities of our operating lease liabilities are as follows:
| Amount |
| ||
2022 |
| $ | 213,532 |
|
2023 |
|
| 210,892 |
|
2024 |
|
| 226,496 |
|
2025 |
|
| 245,204 |
|
2026 |
|
| 266,645 |
|
Thereafter |
|
| 214,505 |
|
Total lease liabilities |
| $ | 1,377,274 |
|
NOTE 10. LONG-TERM LIABILITIES
Long-term liabilities consisted of the following at:
| March 31, |
|
| December 31, |
| |||
|
| 2021 |
|
| 2020 |
| ||
Nevada State Bank credit agreement |
| $ | 8,022,300 |
|
| $ | 8,413,184 |
|
Main Street Priority Loan |
|
| 4,000,000 |
|
|
| 4,000,000 |
|
Redemption Consideration Obligation |
|
| 39,096,401 |
|
|
| 39,096,401 |
|
Vehicle notes payable |
|
| 17,040 |
|
|
| 22,614 |
|
Insurance notes payable |
|
| 347,015 |
|
|
| 519,194 |
|
Long-term liabilities, gross |
|
| 51,482,756 |
|
|
| 52,051,393 |
|
Less: Unamortized debt issuance costs |
|
| (172,409 | ) |
|
| (137,817 | ) |
Long-term liabilities, net of debt issuance costs |
|
| 51,310,347 |
|
|
| 51,913,576 |
|
Less: Current portion |
|
| (1,913,355 | ) |
|
| (2,222,392 | ) |
Long-term liabilities, net |
| $ | 49,396,992 |
|
| $ | 49,691,184 |
|
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. Because Triangulum disputes the promissory note issued by the Company and 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 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 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 termsA&R Credit Agreement, outstanding balances accrue interest based on one-month U.S. dollar London interbank offered rate (“LIBOR”) plus an applicable margin of a five-year licensing agreement (the “TMAX Agreement”) with TableMAX Corporation (“TMAX”)3.50% or 4.00%, a provider of electronic table games and platforms headquartered in Las Vegas, Nevada, we previously had exclusive worldwide rights (excluding one international territory and two U.S. states) to the TMAX electronic gaming platform and certain related game titles. Pursuant to the terms of the TMAX Agreement, the licensee fee payable to TMAX is dependent upondepending on our generating profitable operating results specifically from the use of TMAX products. To the extent there are net profitsTotal Leverage Ratio (as defined in the TMAXA&R Credit Agreement),. Effective December 31, 2021, LIBOR will no longer serve as a percentagereference 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 such net profits is payable to TMAX depending onLIBOR.
The A&R Credit Agreement contains affirmative and negative financial covenants (as defined in the numberA&R Credit Agreement) and other restrictions customary for borrowings of TMAX product installations. The TMAX Agreement expired during 2016, andthis nature. In particular, we are currently negotiatingrequired 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 licensing fee thatquarter 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 payable to TMAX.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.
NOTE 9. CAPITAL LEASE OBLIGATIONS
Capital lease obligations consistedThe 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 following at September 30, 2017MSPLP, together with all accrued and December 31, 2016: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.
|
| 2017 |
|
| 2016 |
| ||
Capital lease obligation – leasehold improvements |
| $ | 54,921 |
|
| $ | 78,008 |
|
Less: Current portion |
|
| (32,332 | ) |
|
| (31,030 | ) |
Total capital lease obligations – long-term |
| $ | 22,589 |
|
| $ | 46,978 |
|
For the years ending September 30,As of March 31, 2021, future annual payments for capital leases obligationsmaturities of our long-term liabilities are as follows:
September 30, |
| Total |
| |
2018 |
| $ | 32,332 |
|
2019 |
|
| 22,589 |
|
Total minimum lease payments |
| $ | 54,921 |
|
Twelve Months Ending March 31, |
| Total |
| |
2022 |
| $ | 1,913,355 |
|
2023 |
|
| 2,655,500 |
|
2024 |
|
| 4,417,500 |
|
2025 |
|
| 600,000 |
|
2026 |
|
| 2,800,000 |
|
Thereafter |
|
| 39,096,401 |
|
Long-term liabilities, gross |
| $ | 51,482,756 |
|
12
Long-term debt consisted of the following at September 30, 2017 and December 31, 2016:
|
| 2017 |
|
| 2016 |
| ||
Term loan |
| $ | 9,712,500 |
|
| $ | 10,500,000 |
|
Notes payable, related party |
|
| — |
|
|
| 509,135 |
|
Equipment notes payable |
|
| 133,935 |
|
|
| 162,274 |
|
Insurance notes payable |
|
| — |
|
|
| 36,063 |
|
Notes payable, gross |
|
| 9,846,435 |
|
|
| 11,207,472 |
|
Less: |
|
|
|
|
|
|
|
|
Unamortized debt issuance costs |
|
| (513,151 | ) |
|
| (595,462 | ) |
Warrants issued |
|
| (624,097 | ) |
|
| (743,604 | ) |
Notes payable, net |
|
| 8,709,187 |
|
|
| 9,868,406 |
|
Less: Current portion |
|
| (1,088,957 | ) |
|
| (1,199,255 | ) |
Long-term debt, net |
| $ | 7,620,230 |
|
| $ | 8,669,151 |
|
Term loan. In August 2016, we entered into a term loan agreement (the “Term Loan Agreement”) for an aggregate principal amount of $10,500,000 (the "Term Loan"). Proceeds of the Term Loan were primarily used to prepay in full the outstanding notes payable to unrelated parties. The remainder of the proceeds from the Term Loan was used for general corporate purposes and working capital needs. The Term Loan is secured by a senior lien on substantially all of our assets. In conjunction with the Term Loan, we also entered into a warrant agreement (the “Warrant Agreement”), pursuant to which we issued the lenders a six-year warrant to purchase 1,965,780 shares of our common stock (the “Warrants”). See Note 14. The estimated fair value of the Warrants on the grant date was determined to be $809,632 using the Black-Scholes option pricing model, and was recorded as a reduction of the related debt. The estimated fair value of the Warrants on the grant date is being amortized ratably over the term of the Warrants to interest expense.
Under the Term Loan, we are subject to quarterly financial covenants that, among other things, limit our annual capital expenditures (as defined in the Term Loan Agreement), and require us to maintain a specified leverage ratio and minimum EBITDA amounts, each of which are defined in the Term Loan agreement. We were in compliance with the financial covenants of the Term Loan Agreement as of September 30, 2017.
During the initial twelve-month period of the Term Loan, the outstanding principal will accrue interest at the rate of 14.0% per annum. Thereafter, the outstanding principal will accrue interest at the lesser of 14.0% per annum or 12.5% per annum for any quarterly period in which we achieve a specified leverage ratio.
The Term Loan required quarterly interest-only payments through December 31, 2016, after which we are required to make quarterly principal payments of $262,500 plus accrued interest. The remaining principal and any unpaid interest will be payable in full on August 29, 2021. Voluntary prepayments of the Term Loan, in full or in part, are permitted after the first anniversary of the Term Loan, subject to certain premiums. The Term Loan also requires certain mandatory prepayments in the amount of 100% of the proceeds from certain asset dispositions (other than in the ordinary course of business) and certain other extraordinary events, and 25% of the proceeds from the sale and issuance of capital stock.
The foregoing summary of the Term Loan Agreement and the Warrant Agreement is qualified in its entirety by reference to the respective agreements, which are found as Exhibits 99.1 and 99.2, respectively, to our Form 8-K filed with the SEC on August 29, 2016.
Notes payable, related party. In connection with an asset purchase agreement executed in December 2007, we executed a note payable to an entity owned and controlled by Mr. Saucier (the “Related Party Note Payable”). The Related Party Note Payable required annual principal and interest payments of $109,908, at a fixed interest rate of 7.3% through December 2018, at which time there was a balloon payment due of $354,480. On August 11, 2017, we repaid in full the then-outstanding principal balance along with accrued and unpaid interest (in the aggregate amount of $459,683) on the Related Party Note Payable. This payment constituted a Restricted Payment as defined in our Term Loan, and we received a waiver with respect to the payment from the administrative agent for the Term Loan.
13
As of September 30, 2017, maturities of our long-term debt obligations are as follows:
September 30, |
| Total |
| |
2018 |
| $ | 1,088,957 |
|
2019 |
|
| 1,090,223 |
|
2020 |
|
| 1,076,750 |
|
2021 |
|
| 6,584,849 |
|
2022 |
|
| 5,656 |
|
Total notes payable |
|
| 9,846,435 |
|
Less: |
|
|
|
|
Unamortized debt issuance costs |
|
| (513,151 | ) |
Warrants issued |
|
| (624,097 | ) |
Notes payable, net |
| $ | 8,709,187 |
|
NOTE 11. COMMITMENTS AND CONTINGENCIES
Concentration of risk.We are exposed to risks associated with a clientclients who represent a significant portion of total revenues. For the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, respectively, we had the following client revenue concentration:concentrations:
|
| Location |
| 2017 Revenue |
|
| 2016 Revenue |
| ||
Client A |
| North America |
|
| 13.6% |
|
|
| 13.6% |
|
| 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We are also exposed to risks associated with the expiration of our patents. In 2015, domestic and international patents for two of our products expired, which accounted for approximately $5,370,094 or 49.0% of our revenue for the nine months ended September 30, 2017, as compared to $4,299,637 or 46.5% of our revenue for the nine months ended September 30, 2016. We continue to generate higher revenue from these products despite the expiration of the underlying patents and, accordingly, we do not expect the expiration of these patents to have a significant adverse impact on our future financial statements.
Operating lease. In February 2014, we entered into a lease (the “Spencer Lease”) for a new corporate office with an unrelated third party. The five-year Spencer Lease is for an approximately 24,000 square foot space, which is comprised of approximately 16,000 square feet of office space and 8,000 square feet of warehouse space. The property is located in Las Vegas, Nevada.
The initial term of the Spencer Lease commenced on April 1, 2014 and expires on June 30, 2019. We were obligated to pay approximately $153,000 in annual base rent in the first year, and the annual base rent is scheduled to increase by approximately 4% each year. We are also obligated to pay real estate taxes and other building operating costs. Subject to certain conditions, we have certain rights under the Spencer Lease, including rights of first offer to purchase the premises if the landlord elects to sell. We also have an option to extend the term of the Spencer Lease for two consecutive terms of three years each, at the then current fair market value rental rate determined in accordance with the terms of the Spencer Lease.
In connection with the commencement of the Spencer Lease, the landlord agreed to finance tenant improvements (“TI Allowance”) of $150,000. The base rent is increased by an amount sufficient to fully amortize the TI Allowance through the initial Spencer Lease term upon equal monthly payments of principal and interest, with interest imputed on the outstanding principal balance at the rate of 5.5% per annum. The TI Allowance has been classified as a capital lease on the condensed balance sheet.
Total rent expense was $217,650 and $208,961 for the nine months ended September 30, 2017 and 2016, respectively.
There are currently no operating lease commitments that extend beyond April 1, 2020. As of September 30, 2017, the amounts shown in the accompanying table reflect our estimates of annual future minimum lease obligations:
September 30, |
| Annual obligation |
| |
2018 |
| $ | 232,368 |
|
2019 |
|
| 179,190 |
|
Total obligations |
| $ | 411,558 |
|
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. We record accruals for such contingencies
As discussed in Note 1, we redeemed the shares of our common stock held by Triangulum, an entity controlled by Robert B. Saucier, the Company’s founder, and, prior to the extent we concluderedemption, the holder of a majority of our outstanding common stock.
On May 6, 2019, the Company redeemed the shares of our common stock held by Triangulum. Also on May 6, 2019, the Company filed a lawsuit seeking: (i) a declaratory judgment that it is probableacted lawfully and in full compliance with the Articles when it 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 a liability will be incurredthe redemption and the other relief sought by the Company are appropriate and in accordance with the Articles.
The defendants to the Triangulum Lawsuit responded to the complaint, and Triangulum filed counterclaims. Triangulum also filed a Motion seeking a mandatory injunction requiring the Company to either reissue shares to Triangulum or reissue shares to be held in a constructive trust for Triangulum (the “Injunction Motion”). On July 11, 2019, the Nevada district court denied Triangulum’s 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. The Company submitted its brief in opposition, and Triangulum filed its reply brief. Recently, on 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 the Company and its Directors moved to dismiss on a number of legal grounds (the “Motion to Dismiss”). The Court denied the 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 May 6, 2020, Saucier made a demand of the Company under our Bylaws and an Indemnification Agreement between Saucier and the Company, for indemnity and advancement of funds seeking repayment of his 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 (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. Saucier subsequently moved for attorneys' fees related loss canto the filing of the Advancement Lawsuit, which the Nevada district court granted, and the Company filed a notice of appeal to the Nevada Supreme Court. The Company filed its opening appeal 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 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 this appeal.
14
reasonably estimated. Our assessmentThe appeals to the Nevada Supreme Court by both Saucier and the Company in the Triangulum Lawsuit and the Advancement Lawsuit were referred to the Nevada Supreme Court’s mandatory Settlement Program. A consolidated settlement conference occurred on November 16, 2020, with no resolution of eachany of the issues on appeal or the lawsuit. The Nevada Supreme Court subsequently issued briefing schedules on the three appeals.
On November 24, 2020, Triangulum filed a Motion for Partial Summary Judgment in the Triangulum Lawsuit 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 may change basedof 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 future unexpected events. 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 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 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 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. We assumeperiod and accordingly, no obligationprovision for loss has been reflected in the accompanying financial statements related to update the status of pending litigation, except as may be required by U.S. GAAP, applicable law, statue or regulation. For a complete description of the facts and circumstances surrounding material litigation to which we are a party, see Note 12 in Item 8. “Financial Statements and Supplementary Data” included in our 2016 10-K.
these matters.
NOTE 12. STOCKHOLDERS’ EQUITY
In February 2017, a former employee forfeited 100,000 shares of unvested restricted stock and paid us $35,000 in connection with the exercise of 150,000 fully-vested stock options.
On August 31, 2017, in accordance with the Lipparelli Agreement, the Board authorized the issuance of 800,000 restricted shares of our common stock, which shares vest as follows: (i) as to the first 200,000 shares, on August 31, 2017, (ii) as to the next 200,000 shares, on January 2, 2018, and (iii) as to the next 400,000 shares, on January 2, 2019.
NOTE 13. INCOME TAXES
Our forecasted annual effective tax rate (“AETR”) at September 30, 2017March 31, 2021 was 56.6%12.92%, as compared to 34.2%23.57% at September 30, 2016. March 31, 2020. This decrease was primarily due to excess tax benefits from stock-based compensation, utilization of tax credits, foreign rate differential, Subpart F inclusion and a change in valuation allowance as a result of changes in estimates of current-year ordinary income considered in determining the forecasted AETR.
For the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, our effective tax rate (“ETR”) was 51.4%(27.15%) and 34.3%23.57%, respectively. The increasedecrease in the effective tax rate was primarily due to the permanent book-to-tax difference generated by changes in the estimated fair value of the warrant liability as of andETR for the ninethree months ended September 30, 2017.
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 quarter.
NOTE 14. STOCK WARRANTS, OPTIONS AND GRANTS13. SHARE-BASED COMPENSATION
Stock options.Options
On May 10, 2018, the Board ratified and confirmed the 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan is a broad-based plan under which shares of our common stock are authorized for issuance for awards, including stock options, stock appreciation rights, restricted stock, and cash incentive awards to members of our Board, executive officers, employees and independent contractors. As of March 31, 2021, a total of 6,550,750 shares of our common stock were authorized for issuance. As of March 31, 2021, 48,367 shares remained available for issuance as new awards under the 2014 Plan.
During the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, we issued 1,390,00030,000 and 427,500225,000 options to purchase our common stock, respectively, to members of our Board, independent contractors, executive officers, employees and employees.
On May 1, 2017, we entered into an employment agreement (the “Hagerty Employment Agreement”) with Harry C. Hagerty, pursuant to which Mr. Hagerty serves as our Secretary, Treasurer and Chief Financial Officer for a term that extends through April 30, 2020. Pursuant to the Hagerty Employment Agreement, Mr. Hagerty receives a base salary of $120,000 per annum and is eligible for bonuses if and as approved by the Compensation Committee of the Board. In addition, Mr. Hagerty has been granted options to purchase 400,000 shares of our Common Stock at an exercise price per share of $0.60, subject to vesting and other conditions.
On July 26, 2017, in connection with the Cravens Employment Agreement, Mr. Cravens was granted options to purchase up to 450,000 shares of our common stock, which vest as follows: (i) as to the first 150,000 shares of stock, on July 26, 2017, (ii) as to the next 150,000 shares of stock, on August 1, 2018, and (iii) as to the next 150,000 shares of stock, on August 1, 2019, all pursuant to the terms of a stock option grant agreement by and between us and Mr. Cravens. Provided that Mr. Cravens is a full-time employee on August 1, 2020, we agreed to grant to Mr. Cravens an option to purchase an additional 150,000 shares of our common stock with a strike price equal to the price per share of our common stock as reported on OTC Markets on August 1, 2020 (or the nearest trading date thereafter), which option will vest on August 1, 2020 (or the nearest trading date thereafter).
independent contractors. The fair value of all stock options granted for the ninethree months ended September 30, 2017March 31, 2021 and 20162020 was determined to be $652,895$38,012 and $96,137,$255,017, respectively, using the Black-Scholes option pricing model with the following assumptions:
|
| Nine months ended September 30, 2017 |
|
| Nine months ended September 30, 2016 |
|
| Options Issued 2021 |
|
| Options Issued 2020 |
| ||||
Dividend yield |
|
| 0% |
|
|
| 0% |
|
|
| 0 | % |
|
| 0 | % |
Expected volatility |
| 80% - 87% |
|
| 89% - 90% |
|
|
| 68.74 | % |
|
| 70.98 | % | ||
Risk free interest rate |
| 1.73% - 1.94% |
|
| 1.01% - 1.22% |
| ||||||||||
Risk-free interest rate |
|
| 0.48 | % |
|
| 1.39 | % | ||||||||
Expected life (years) |
|
| 5.00 |
|
|
| 5.00 |
|
|
| 5.00 |
|
|
| 5.00 |
|
15
A summary of stock option activity is as follows:
|
| Common stock options |
|
| Weighted- average exercise price |
|
| Aggregate intrinsic value |
|
| Weighted-average remaining contractual term (years) |
| ||||
Outstanding – December 31, 2016 |
|
| 1,496,250 |
|
| $ | 0.32 |
|
| $ | 385,017 |
|
|
| 3.57 |
|
Issued |
|
| 1,390,000 |
|
|
| 0.71 |
|
|
| — |
|
|
| — |
|
Exercised |
|
| (150,000 | ) |
|
| 0.23 |
|
|
| — |
|
|
| — |
|
Expired |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Outstanding – September 30, 2017 |
|
| 2,736,250 |
|
| $ | 0.52 |
|
| $ | 1,767,429 |
|
|
| 3.87 |
|
Exercisable – September 30, 2017 |
|
| 1,822,359 |
|
| $ | 0.46 |
|
| $ | 1,289,100 |
|
|
| 3.53 |
|
| Common Stock Options |
|
| Weighted- Average Exercise Price |
|
| Aggregate Intrinsic Value |
|
| Weighted- Average Remaining Contractual Term (Years) |
| |||||
Outstanding – December 31, 2020 |
|
| 2,982,000 |
|
| $ | 1.08 |
|
| $ | 2,101,780 |
|
|
| 2.35 |
|
Issued |
|
| 30,000 |
|
|
| 2.25 |
|
|
| — |
|
|
| — |
|
Exercised |
|
| (50,000 | ) |
|
| 0.22 |
|
|
| (130,188 | ) |
|
| — |
|
Forfeited |
|
| (41,666 | ) |
|
| 1.04 |
|
|
| — |
|
|
| — |
|
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) |
| ||||
Unvested – December 31, 2016 |
|
| 128,889 |
|
| $ | 0.34 |
|
| $ | 30,933 |
|
|
| 3.99 |
|
Granted |
|
| 1,390,000 |
|
|
| 0.71 |
|
|
| — |
|
|
| — |
|
Vested |
|
| (604,998 | ) |
|
| 0.73 |
|
|
| — |
|
|
| — |
|
Forfeited or expired |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Unvested – September 30, 2017 |
|
| 913,891 |
|
| $ | 0.65 |
|
| $ | 478,329 |
|
|
| 4.54 |
|
| Common Stock Options |
|
| Weighted- Average Exercise Price |
|
| Aggregate Intrinsic Value |
|
| Weighted- Average Remaining Contractual Term (Years) |
| |||||
Unvested – December 31, 2020 |
|
| 845,000 |
|
| $ | 1.55 |
|
| $ | 197,608 |
|
|
| 3.83 |
|
Granted |
|
| 30,000 |
|
|
| 2.25 |
|
|
| — |
|
|
| — |
|
Vested |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Forfeited |
|
| (41,666 | ) |
|
| 1.04 |
|
|
| — |
|
|
| — |
|
Unvested – March 31, 2021 |
|
| 833,334 |
|
| $ | 1.60 |
|
| $ | 1,086,009 |
|
|
| 3.71 |
|
As of September 30, 2017,March 31, 2021, our unrecognized stock-basedshare-based compensation expense associated with the stock options issued was $333,888,$549,503, which will be amortized over a weighted-average of 1.961.93 years.
Warrants.Restricted Awards
During the three months ended On August 29, 2016, in connection with the Term Loan Agreement,March 31, 2021, we issued the lenders the Warrants to purchase 1,965,780an aggregate of 55,000 restricted shares of our common stock valued at an initial exercise price$159,500 to our Board members in consideration of $0.30 per share. The number oftheir service on the Board. These shares of common stock issuable upon exercise ofvested immediately on the Warrants, and/or the exercise price of such shares, is subject to standard anti-dilution adjustments in the event of stock splits, reorganizations, stock dividends, and similar events. As of the date of the Warrant Agreement, the shares of common stock issuable upon a full exercise of the Warrants represented 5.0% of the total issued and outstandinggrant date. An additional 80,000 restricted shares of our common stock. The lendersstock valued at $181,600 were also granted the right, but not the obligation,issued to purchase up to 5.0%an employee of the total numberCompany on February 17, 2021. These shares were granted in consideration of new securities that we may, from time to time, sell and issue.
The Warrants expire on August 29, 2022, and may not be exercised priorthe individual’s service to the earliest of (a) the fifth anniversary of the Term Loan Agreement, (b) the dateCompany. These shares vest on which the obligations described in the Term Loan Agreement are satisfied in full, or (c) the date on which the lenders declare all or any portion of the outstanding amount of the Term Loan to be due and payable under the terms of the Term Loan Agreement (collectively, the "Trigger Date"). Exercise of the Warrants requires a sixty (60) day prior written notice, during which time we may exercise our Call Right described below.
The Warrant Agreement includes a call right (the "Call Right") whereby we can purchase the Warrants for a fixed sum of $1,333,333 upon providing the Warrant holders with a thirty (30) day prior written notice. Furthermore, the Warrant Agreement also includes a put right (the "Put Right") whereby the lenders may require us to purchase from the lenders all or any portion of the Warrants at a purchase price equal to the lesser of (a) the fair market value of the underlying shares of common stock as of the date of exercise of the Put Right, or (b) $1,333,333. The Put Right may not be exercised prior to the Trigger Date (as defined above), and the Put Right expires on August 29, 2022. The foregoing summary of the Term Loan Agreement and the Warrant Agreement is qualified in its entirety by reference to the respective agreements, which are found as Exhibits 99.1 and 99.2, respectively, to our Form 8-K filed with the SEC on August 29, 2016.
16
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
We estimate fair value for financial assets and liabilities in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”). ASC 820 defines fair value, provides guidance for measuring fair value, requires certain disclosures and discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). ASC 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
The estimated fair value of cash equivalents, restricted cash, accounts receivable and accounts payable approximates their carrying amount due to their short-term nature. The estimated fair value of our long-term debt and capital lease obligations approximates their carrying value based upon our expected borrowing rate for debt with similar remaining maturities and comparable risk.November 12, 2021. As of September 30, 2017,March 31, 2021, there were 2,236,133 restricted shares outstanding. Of the Warrantsrestricted shares outstanding, 260,000 restricted shares werethe only financial instrument measured at estimated fair value on a recurring basis based on level 2 inputs. unvested.
NOTE 16.14. SUBSEQUENT EVENTS
We evaluated subsequent events throughOn May 13, 2021, the dateCompany and NSB entered into a Forbearance to the A&R Credit Agreement, in which NSB agreed to forbear from exercising any of issuanceits rights or remedies that would result from potential breaches of the Minimum EBITDA and Total Leverage covenants for the quarters ending June 30, 2021 and September 30, 2021.
Galaxy made a share redemption consideration payment to Triangulum, in connection with the Redemption Consideration Obligation, in a timely fashion in May 2021.
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 statements. There have been no subsequent events that occurred during such period that would require adjustment to or disclosure in the financial statementscondition, results of operations and liquidity and capital resources as of and for the three and nine months ended September 30, 2017.
17
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The followingMarch 31, 2021 and 2020. This discussion of the financial condition and results of operations of the Company should be read in conjunctiontogether with the condensedour audited consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaningItem 8 Financial Statements and Supplementary Financial Information included in our 2020 10-K. Some of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act, and is subject to the safe harbors created by those sections. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. Such forward-looking statements speak only as of the date of this report; we undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us in this report, as well as the disclosures made in the Galaxy Gaming, Inc. Annual Report on Form 10-K for the year ended December 31, 2016 filed on April 14, 2017 (the “2016 10-K”), and other filings we make with the Securities and Exchange Commission, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, operating results, financial condition and stock price.
Due to possible uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statementsinformation contained in this Quarterly Report, which speak only as of the date of this Quarterly Report, or to make predictions about future performance based solely on historical financial performance. We disclaim any obligation to updatediscussion includes forward-looking statements containedthat involve risks and uncertainties; therefore our “Special Note Regarding Forward-Looking Statements” should be reviewed for a discussion of important factors that could cause actual results to differ materially from the results described in, this Quarterly Report.or implied by, such forward-looking statements.
OVERVIEW
We develop, acquire, manufactureassemble and market technology and entertainment-based products and services for the gaming industry for placement on the casino floor.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 electronic tables and other ancillary equipment. In addition, we license intellectual property to legal internet gaming operators. Our products and services are offered in highly regulated markets throughout the world. Our products and services are manufacturedassembled at our headquarters and manufacturing facility in Las Vegas, Nevada, as well as outsourced for certain sub-assemblies in the United States.
Additional information regarding our products and product categories may be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2016 10-K and on our web site, www.galaxygaming.com. Information found on the web site should not be considered part of this report.
As discussed in Note 1 to our condensed financial statements included in Item 1 of this report, financial statements for the three and nine months ended September 30, 2016 have been restated to correct certain errors noted during the preparation of the financial statements for the year ended December 31, 2016. The restatements to reflect the correction of these errors are referred to herein collectively as the "Restatement." For further information regarding the Restatement, see our Current Report on Form 8-K filed with the SEC on April 3, 2017.
18
Results of operations for the three months ended September 30, 2017.March 31, 2021 and 2020. For the three months ended September 30, 2017, our continuing operationsMarch 31, 2021, we generated gross revenues of $3,830,420$4,282,901 compared to gross revenues of $3,191,969$4,494,318 for the comparable prior-year period, representing a decrease of $211,417, or 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 during the 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. The decrease in our land-based revenue was offset by an increase of 638,451, or 20.0%. This increase was primarily attributable toin our focus on Premium Games such as online gaming revenues.High Card Flush, Heads Up Hold ’em and Player’s Edge, which command a higher price point per unit, and the improved performance of side bet games such as 21+3 and Bonus Craps.
Selling, general and administrative expenses for the three months ended September 30, 2017March 31, 2021 were $2,362,601$2,711,052 compared to $1,553,556$2,992,052 for the comparable priorprior-year period,, representing an increasea decrease of $809,045,$281,000, or 52.1%9.4%. Significant quarter-over-quarter changes in selling, general and administrative expenses consisted of the following categories:
|
| Three Months Ended September 30, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Compensation and related |
| $ | 1,078,284 |
|
| $ | 591,233 |
|
Professional and compliance fees |
|
| 477,171 |
|
|
| 231,875 |
|
Employee compensation and related expenses increased as a result of our investments in personnel as we continue to grow and attract new talent, as well as higher sales commissionsThis decrease was primarily due to increased revenuesa decrease in 2017. Professionalcompensation-related expenses and compliance fees have increased duetravel and entertainment expenses directly related to on-going regulatory applicationsthe COVID-19 crisis. In 2021, the Company incurred $249,436 in various jurisdictions.legal expenses associated with the Triangulum Lawsuit.
Research and development expenses for the three months ended September 30, 2017March 31, 2021 were $139,185,$118,701, compared to $89,513$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. Also, consulting expenses decreased due to the Company no longer using certain third-party research and development firms.
Share-based compensation expenses for the three months ended March 31, 2021 were $316,640, as compared to $157,596 for the comparable prior-year period, representing an increase of $49,672,$159,044, or 55.5%100.9%. This increase was primarily due to increased costs associated with testingthe quarterly restricted shares granted to our products currentlyBoard members being issued at a 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 development.November 2020 and February 2021.
Stock-based compensation expensesAs a result of the changes described above, income from operations decreased $292,450 or 41.9% to $404,950 for the three months ended September 30, 2017 were $384,925, asMarch 31, 2021, compared to $41,075income of $697,400 for the comparable prior-year period, representing an increase of $343,850,period.
Total interest expense increased $13,239, or 837.1%. The increase was primarily due7.9%, to stock options and restricted shares of common stock issued in 2017 to executive officers, board members and independent contractors.
Income from operations decreased $608,312 or 57.3% to $453,210$180,910 for the three months ended September 30, 2017,March 31, 2021, compared to $1,061,522 for the comparable prior-year period. This decrease was primarily attributable to higher selling, general and administrative and share-based compensation expenses.
During the three months ended September 30, 2016, we entered into a settlement agreement with Red Card Gaming, Inc. and AGS, LLC to settle all claims and counter-claims related to contract dispute litigation. As a result of the settlement agreement, we recognized settlement income of $697,214, which includes a $350,000 payment from AGS and a release of $347,214 in accrued contingent consideration owed to AGS.
Total interest expense increased $204,834, or 90.0%, to $432,466 for the three months ended September 30, 2017, compared to $227,632$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 interest expense was primarily due2021 compared to $195,482 in 2020. The share redemption consideration is related to the Term Loan refinance transaction completed in August 2016.Triangulum Redemption Consideration Obligation.
Income tax benefit was ($18,950) for the three months ended September 30, 2016, we repaid in fullMarch 31, 2021, compared to income tax provision of $35,962 for the PTG Notes and wrote off thecomparable prior-year period. The change is primarily a result of favorable discrete items related unamortized debt discounts, which resulted in ato excess tax benefits from stock-based compensation.
20
Adjusted EBITDA.Adjusted EBITDA includes adjustments to net income to exclude interest, income taxes, depreciation, amortization, share based compensation, foreign currency exchange loss, of extinguishment of debt of $515,037.
The change in estimated fair value of warrants issued in connection with the Term Loan resulted in other expense of $86,308 for the three months ended September 30, 2017, compared to other income of $2,933 for the comparable prior-year period. The estimated fair value is determined using the Black-Scholes pricing model.
Income tax provision was $21,990 for the three months ended September 30, 2017, compared to $351,412 for the comparable prior-year period. This change was primarily attributable to the decrease in income before provision for income taxes and the permanent book-to-tax difference generated by changes in the estimated fair value of the warrantinterest rate swap liability as of and for the three months ended September 30, 2017.
19
Results of operations for the nine months ended September 30, 2017. For the nine months ended September 30, 2017, our continuing operations generated gross revenues of $10,964,524 compared to gross revenues of $9,240,240 for the comparable prior-year period, representing an increase of $1,724,284, or 18.7%. This increase was primarily attributable to our focus on Premium Games such as High Card Flush, Heads Up Hold ’em and Player’s Edge, which command a higher price point per unit,severance and the improved performance of side bet games such as 21+3 and Bonus Craps. Selling, general and administrativeother expenses were $6,808,659 for the nine months ended September 30, 2017, compared to $4,819,373 for the comparable prior period, representing an increase of $1,989,286, or 41.3%. Significant year-over-year changes in selling, general and administrative expenses consisted of the following categories:
|
| Nine Months Ended September 30, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Compensation and related |
| $ | 2,852,292 |
|
| $ | 1,731,032 |
|
Professional and compliance fees |
|
| 1,459,045 |
|
|
| 1,125,434 |
|
Employee compensation and related expenses increased as a result of our investments in personnel as we continue to grow and attract new talent, as well as higher sales commissions due to increased revenues in 2017. Professional and compliance fees have increased due to on-going regulatory applications in various jurisdictions.
Research and development expenses for the nine months ended September 30, 2017 were $403,618, compared to $270,734 for the comparable prior-year period, representing an increase of $132,884, or 49.1%. This increase was primarily due to increased costs associated with testing our products currently in development.
Stock-based compensation expenses for the nine months ended September 30, 2017 were $553,313, as compared to $91,006 for the comparable prior-year period, representing an increase of $462,307, or 508.0%. The increase was primarily due to stock options and restricted shares of common stock issued in 2017 to executive officers, board members and independent contractors.
Income from operations decreased $986,547, or 36.2%, to $1,741,645 for the nine months ended September 30, 2017, compared to $2,728,192 for the comparable prior-year period. This decrease was primarily attributable to higher selling, general and administrative and share-based compensation expenses.
During the nine months ended September 30, 2016, we entered into a settlement agreement with Red Card Gaming, Inc. and AGS, LLC to settle all claims and counter-claims related to contract dispute litigation. As a result of the settlement agreement, we recognized settlement income of $697,214, which includes a $350,000 payment from AGS and a release of $347,214 in accrued contingent consideration owed to AGS.
Total interest expense increased $575,000, or 77.6%, to $1,316,045 for the nine months ended September 30, 2017, compared to $741,045 for the comparable prior-year period. The increase in interest expense was primarily due to the Term Loan refinance transaction completed in August 2016.
During the nine months ended September 30, 2016, we repaid in full the PTG Notes and wrote off the related unamortized debt discounts, which resulted in a loss of extinguishment of debt of $515,037.
The change in estimated fair value of warrants issued in connection with the Term Loan resulted in other expense of $409,717 for the nine months ended September 30, 2017, compared to other income of $2,933 for the comparable prior-year period. The estimated fair value is determined using the Black-Scholes pricing model.
Income tax provision was $86,881 for the nine months ended September 30, 2017, compared to $873,768 for the comparable prior-year period. This change was attributable to the decrease in income before provision for income taxes and the permanent book-to-tax difference generated by changes in the estimated fair value of the warrant liability as of and for the nine months ended September 30, 2017.
20
Adjusted EBITDA.Adjusted EBITDA includes adjustment to net income to exclude interest, taxes, depreciation, amortization, share based compensation, losslitigation on extinguishment of debt, foreign currency exchange gains, change in estimated fair value of warrant liability, and settlement income.. Adjusted EBITDA is not a measure of performance defined in accordance with U.S. 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, |
| ||||||||||
Adjusted EBITDA Reconciliation: |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
|
|
|
|
|
| (Restated) |
|
|
|
|
|
| (Restated) |
| ||
Net (loss) income |
| $ | (27,930 | ) |
| $ | 661,718 |
|
| $ | 54,578 |
|
| $ | 1,652,992 |
|
Interest income |
|
| — |
|
|
| (56 | ) |
|
| — |
|
|
| (202 | ) |
Interest expense |
|
| 432,466 |
|
|
| 227,632 |
|
|
| 1,316,045 |
|
|
| 741,045 |
|
Income tax provision |
|
| 21,990 |
|
|
| 351,412 |
|
|
| 86,881 |
|
|
| 873,768 |
|
Depreciation and amortization |
|
| 440,130 |
|
|
| 419,540 |
|
|
| 1,323,772 |
|
|
| 1,252,860 |
|
Loss on extinguishment of debt |
|
| — |
|
|
| 515,037 |
|
|
| — |
|
|
| 515,037 |
|
Share based compensation expense |
|
| 384,925 |
|
|
| 41,075 |
|
|
| 553,313 |
|
|
| 91,006 |
|
Foreign currency exchange gains |
|
| (59,624 | ) |
|
| 5,926 |
|
|
| (125,576 | ) |
|
| (354,301 | ) |
Change in estimated fair value of warrant liability |
|
| 86,308 |
|
|
| (2,933 | ) |
|
| 409,717 |
|
|
| (2,933 | ) |
Settlement income |
|
| — |
|
|
| (697,214 | ) |
|
| — |
|
|
| (697,214 | ) |
Adjusted EBITDA |
| $ | 1,278,265 |
|
| $ | 1,522,137 |
|
| $ | 3,618,730 |
|
| $ | 4,072,058 |
|
|
| Three Months Ended March 31, |
| |||||
Adjusted EBITDA Reconciliation: |
| 2021 |
|
| 2020 |
| ||
Net income |
| $ | 88,737 |
|
| $ | 116,605 |
|
Interest expense |
|
| 180,910 |
|
|
| 167,671 |
|
Share redemption consideration |
|
| 195,482 |
|
|
| 195,482 |
|
Interest income |
|
| (382 | ) |
|
| (21,774 | ) |
Depreciation and amortization |
|
| 717,254 |
|
|
| 469,805 |
|
Share-based compensation |
|
| 316,640 |
|
|
| 157,596 |
|
Foreign currency exchange loss |
|
| 8,975 |
|
|
| 127,291 |
|
Change in estimated fair value of interest rate swap liability |
|
| (49,822 | ) |
|
| 76,163 |
|
(Benefit) provision for income taxes |
|
| (18,950 | ) |
|
| 35,962 |
|
Severance expense |
|
| 3,750 |
|
|
| 2,500 |
|
Special project expense(1) |
|
| 249,436 |
|
|
| 173,271 |
|
Adjusted EBITDA |
| $ | 1,692,030 |
|
| $ | 1,500,572 |
|
(1) | Includes expenses associated with the Triangulum 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. In 2020, as a result of COVID, we were required to raise funds from financing sources in order to maintain operations. In addition to our normal operations, we may make acquisitions of products, technologies or entire businesses. Our ability to access capital for operations or for acquisitions will depend on conditions in the capital markets and investors’ perceptions of our business prospects and such conditions and perceptions may not always favor us.
As of September 30, 2017,March 31, 2021, we had total current assets of $6,483,723$12,621,385 and total assets of $19,292,441.$31,115,133. This compares to $5,148,435$11,562,833 and $19,011,945,$30,574,594, respectively, as of December 31, 2016.2020. The increase in current assets and total assets as of September 30, 2017March 31, 2021 was primarily impacted bydue to an increase in cash and cash equivalents andthe accounts receivable. Cash increased significantly due to reduced principal payments on the Term Loan as compared to the PTG Notes, partially offset by cash used to pay off the Related Party Note Payable in August 2017. receivable balance.
Our total current liabilities as of September 30, 2017 were $5,026,550 and $4,708,685March 31, 2021 increased to $4,847,115 from $4,247,794 as of December 31, 2016. This increase was2020, primarily driven bydue to the Company accruing for 2021 employee bonuses and an increase in accrued expenses (primarily due toroyalties in our online gaming business.
Despite the increase in TableMAX license fee accrual and payroll and related accruals). OurCOVID-19 crisis, our business model continues to be highlywas profitable and cash-flow positive in Q1 2021. Based on our current forecast of operations, we believe we will have several optionssufficient liquidity to ensure we are ablefund our operations and to meet the obligations under our short-term and long-term obligations.financing arrangements as the come due.
We have undertaken certain growth initiativescontinue to expand our recurring revenue base. As such we have made investmentsfile applications for new or enhanced licenses in personnel and research related to the development of our enhanced table systems. Additionally, we increased our sales and marketing budget and spent monies on regulatory efforts for the purpose of expanding our distribution network. We are also subject to several regulatory investigations and proceedingsjurisdictions, 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.
At September 30, 2017, we do not have any available third-party lines or letters of credit or any written or oral commitments from officers or shareholders to provide us with loans or advances to support our operations or fund potential acquisitions.
Our operating activities provided $2,227,147 in cash of $767,829 for the ninethree months ended September 30, 2017,March 31, 2021, compared to $3,657,759cash provided of $841,448 for the nine months ended September 30, 2016.comparable prior period. The decrease in operating cash flow was primarily due to the decreases inlower net income income tax payable and loss on extinguishmentfor the period as a result of debt recorded in 2016, partially offset by changes in estimated fair value of warrant liability, share-based compensation and increases in accounts payable and accrued expenses.the COVID-19 crisis.
Additionally, investingInvesting activities used cash of $96,269$81,792 for the ninethree months ended September 30, 2017. The cash flows from investing activities areMarch 31, 2021, compared to $1,448 for the comparable prior period. This was primarily due to the acquisition ofan increase in expenditures for software and property and equipment. equipment in Q1 2021.
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Cash used in financing activities during the ninethree months ended September 30, 2017March 31, 2021 was $1,366,216, $557,638, which wasresulted primarily due tofrom principal payments towardson long-term debt and capital leases.debt. This compares to $602,002 cash provided by financing activities for the comparable prior period.
We intend to fund our continuing operations through increased sales and cash flow. However, the issuance of debt or equity financing arrangements may be required to fund expenditures or other cash requirements. There can be no assurance that we will be successful in raising additional funding, if necessary, and even if we are successful, it may not be on advantageous terms to us. If we are not able to
21
secure additional funding, the implementation of our business plan could be impaired. In addition, we may incur higher capital expenditures in the future to expand our operations. We may from time to time acquire products and businesses complementary to our business. We may also incur significant expenses when applying for new licenses or in complying with current jurisdictional requirements. As a public entity, we may issue shares of our common stock and preferred stock in private or public offerings to obtain financing, capital or to acquire other businesses that can improve our performance and growth. To the extent that we seek to acquire other businesses in exchange for our common stock, fluctuations in our stock price could have a material adverse effect on our ability to complete acquisitions.
Critical accounting policies. The discussion of ourOur consolidated financial condition and results of operations is based upon our financial statements which have been prepared in accordance with U.S. GAAP. CriticalWe consider the following accounting policies are those policies that, in management's view, areto 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 portrayalcustomer 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 financial conditiona reporting asset is below the carrying amount. If found to be impaired, the carrying amounts will be reduced, and results of operations. See Note 2of our financial statements included in Item 8. “Financial Statements and Supplementary Data” of our 2016 10-K for further detail on these critical accounting policies.an impairment loss will be recognized.
Off balanceLong-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 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.
Off-balance sheet arrangements. As of September 30, 2017,March 31, 2021, there were no off balanceoff-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 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, 2017March 31, 2021 our disclosure controls and procedures were effective.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
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 – OTHEROTHER INFORMATION
InWe have been named in and have brought lawsuits in the ordinarynormal course of conductingbusiness. See Note 11 above and Note 11 to our business, we are, from time to time, involved in various legal proceedings, administrative proceedings, regulatory government investigations and other matters, including those in which we are a plaintiff, that are complex in nature and have outcomes that are difficult to predict. In accordance with topic ASC Topic 450, 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 oraudited 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. For a complete description of the facts and circumstances surrounding material litigation to which we are a party, see Note 12statements included in Item 8.8 “Financial Statements and Supplementary Data” includedFinancial Information” in our See Note 2 in Item 8. “Financial Statements and Supplementary Data” included in our 20162020 10-K. There are no material updates to matters previously reported on our 2016 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On July 26, 2017, in connection with the Cravens Employment Agreement, Mr. Cravens was granted options to purchase up to 450,000 March 31, 2021, we issued an aggregate of 55,000 restricted shares of our common stock which vest as follows: (i) asvalued at $159,500 to the first 150,000 shares of stock, on July 26, 2017, (ii) as to the next 150,000 shares of stock, on August 1, 2018,Messrs. Lipparelli, Isaacs, Waters, and (iii) as to the next 150,000 shares of stock, on August 1, 2019, all pursuant to the terms of a Stock Option Grant Agreement by and between us and Mr. Cravens. Provided that Mr. Cravens is a full-time employee on August 1, 2020, we agreed to grant to Mr. Cravens an option to purchase an additional 150,000 shares of our common stock with a strike price equal to the price per share of our common stock as reported on OTC Markets on August 1, 2020 (or the nearest trading date thereafter), which option will vest on August 1, 2020 (or the nearest trading date thereafter).
On September 30, 2017, we issued options to purchase up to 75,000 shares of our common stock to four members of our Board Zender, in consideration of their service on the Board during the three months ended March 31, 2021. These shares vested immediately on the grant date. An additional 80,000 restricted shares of our common stock valued at an exercise price of $1.17 per share. Each$181,600 were issued to Mr. Cravens on February 17, 2021. These shares were granted in consideration of the aforementioned optionsindividual’s service to purchase common stock was exercisable as of the date of grant. The options must be exercised within five years from the date of grant or 90 days from the date of the recipient’s departure from the Board.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.
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10.1 |
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| 8-K |
| 000-30653 |
| 10.1 |
| March 31, 2021 |
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31.1 |
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31.2 |
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32.1 |
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101 |
| Financials in XBRL format |
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| X |
* In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed “filed” for the purposes of Section 18 of the Securities and Exchange Act of 1934 or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
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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.
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| Galaxy Gaming, Inc. | ||
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| By: |
| /s/ TODD P. CRAVENS |
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| Todd P. Cravens |
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| President and Chief Executive Officer (Principal Executive Officer) |
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| Galaxy Gaming, Inc. | ||
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Date: |
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| By: |
| /s/ HARRY C. HAGERTY |
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| Harry C. Hagerty |
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| Chief Financial Officer (Principal Accounting Officer) |
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