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Galaxy Gaming, Inc. - Quarter Report: 2023 June (Form 10-Q)

10-Q

 

 

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 June 30, 2023

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

 

img155326664_0.jpg 

Galaxy Gaming, Inc.

(Exact name of small business issuer as specified in its charter)

 

Nevada

 

20-8143439

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

 

 

6480 Cameron Street Ste. 305 – Las Vegas, NV 89118

(Address of principal executive offices)

 

(702) 939-3254

(Issuer’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading symbol

 

Name of exchange on which registered

Common stock

 

GLXZ

 

OTCQB marketplace

 

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the issuer has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

 

Emerging growth company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. ☐

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 24,466,881 common shares as of August 1, 2023.

 

 


 

GALAXY GAMING, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 2023

TABLE OF CONTENTS

 

PART I

 

Item 1:

Financial Statements (unaudited)

3

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

19

Item 4:

Controls and Procedures

19

 

PART II

 

Item 1:

Legal Proceedings

20

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

20

Item 6:

Exhibits

21

 

2


 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

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

Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 (unaudited)

4

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2023 and 2022 (unaudited)

5

Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the three and six months ended June 30, 2023 and 2022 (unaudited)

6

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022 (unaudited)

7

Notes to Condensed Consolidated Financial Statements (unaudited)

8

 

3


 

GALAXY GAMING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

ASSETS

 

June 30,
2023

 

 

December 31,
2022

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

18,727,722

 

 

$

18,237,513

 

Accounts receivable, net of allowance of $155,614 and $183,242, respectively

 

 

3,901,834

 

 

 

3,449,753

 

Income tax receivable

 

 

517,395

 

 

 

515,259

 

Prepaid expenses

 

 

1,003,200

 

 

 

1,402,824

 

Other current assets

 

 

 

 

 

588,838

 

Total current assets

 

 

24,150,151

 

 

 

24,194,187

 

Property and equipment, net

 

 

127,481

 

 

 

143,438

 

Operating lease right-of-use assets

 

 

883,958

 

 

 

1,002,749

 

Assets deployed at client locations, net

 

 

1,538,799

 

 

 

1,399,708

 

Goodwill

 

 

1,091,000

 

 

 

1,091,000

 

Other intangible assets, net

 

 

13,484,984

 

 

 

13,906,111

 

Other assets

 

 

283,649

 

 

 

273,323

 

Total assets

 

$

41,560,022

 

 

$

42,010,516

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

630,715

 

 

$

1,129,869

 

Accrued expenses

 

 

3,276,207

 

 

 

3,697,504

 

Revenue contract liability

 

 

126,135

 

 

 

16,667

 

Current portion of operating lease liabilities

 

 

252,845

 

 

 

248,317

 

Current portion of long-term debt

 

 

685,978

 

 

 

940,084

 

Total current liabilities

 

 

4,971,880

 

 

 

6,032,441

 

Long-term operating lease liabilities

 

 

704,250

 

 

 

830,289

 

Long-term debt and liabilities, net

 

 

52,765,523

 

 

 

52,960,772

 

Deferred tax liabilities, net

 

 

54,878

 

 

 

72,401

 

Total liabilities

 

 

58,496,531

 

 

 

59,895,903

 

Commitments and Contingencies (See Note 7)

 

 

 

 

 

 

Stockholders’ deficit

 

 

 

 

 

 

Preferred stock, 10,000,000 shares authorized; $0.001 par value; 0 shares issued and outstanding

 

 

 

 

 

 

Common stock, 65,000,000 shares authorized; $0.001 par value; 24,466,881 and 24,411,098 shares issued and outstanding, respectively

 

 

24,467

 

 

 

24,411

 

Additional paid-in capital

 

 

18,065,398

 

 

 

17,575,396

 

Accumulated deficit

 

 

(34,849,077

)

 

 

(35,316,540

)

Accumulated other comprehensive loss

 

 

(177,297

)

 

 

(168,654

)

Total stockholders’ deficit

 

 

(16,936,509

)

 

 

(17,885,387

)

Total liabilities and stockholders’ deficit

 

$

41,560,022

 

 

$

42,010,516

 

 

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

 

4


 

GALAXY GAMING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2023

 

 

June 30, 2022

 

 

June 30, 2023

 

 

June 30, 2022

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Licensing fees

 

$

7,525,336

 

 

$

5,676,195

 

 

$

14,947,870

 

 

$

11,594,794

 

Total revenue

 

 

7,525,336

 

 

 

5,676,195

 

 

 

14,947,870

 

 

 

11,594,794

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of ancillary products and assembled components

 

 

499,590

 

 

 

50,439

 

 

 

851,600

 

 

 

103,029

 

Selling, general and administrative

 

 

3,634,178

 

 

 

3,483,918

 

 

 

7,418,835

 

 

 

6,527,277

 

Research and development

 

 

199,665

 

 

 

152,022

 

 

 

406,425

 

 

 

351,092

 

Depreciation and amortization

 

 

495,134

 

 

 

725,258

 

 

 

1,071,476

 

 

 

1,449,720

 

Share-based compensation

 

 

245,136

 

 

 

315,408

 

 

 

490,059

 

 

 

625,410

 

Total costs and expenses

 

 

5,073,703

 

 

 

4,727,045

 

 

 

10,238,395

 

 

 

9,056,528

 

Income from operations

 

 

2,451,633

 

 

 

949,150

 

 

 

4,709,475

 

 

 

2,538,266

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

139,007

 

 

 

2,259

 

 

 

223,757

 

 

 

4,492

 

Interest expense

 

 

(2,242,042

)

 

 

(1,697,435

)

 

 

(4,445,677

)

 

 

(3,384,457

)

Foreign currency exchange gain (loss)

 

 

24,848

 

 

 

(174,638

)

 

 

2,160

 

 

 

(234,901

)

Total other expense, net

 

 

(2,078,187

)

 

 

(1,869,814

)

 

 

(4,219,760

)

 

 

(3,614,866

)

Income (loss) before provision for income taxes

 

 

373,446

 

 

 

(920,664

)

 

 

489,715

 

 

 

(1,076,600

)

Provision for income taxes

 

 

(16,677

)

 

 

(194,977

)

 

 

(22,252

)

 

 

(53,003

)

Net income (loss)

 

 

356,769

 

 

 

(1,115,641

)

 

 

467,463

 

 

 

(1,129,603

)

Foreign currency translation adjustment

 

 

(25,280

)

 

 

(113,585

)

 

 

(8,643

)

 

 

(155,534

)

Comprehensive income (loss)

 

$

331,489

 

 

$

(1,229,226

)

 

$

458,820

 

 

$

(1,285,137

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.01

 

 

$

(0.05

)

 

$

0.02

 

 

$

(0.05

)

Diluted

 

$

0.01

 

 

$

(0.05

)

 

$

0.02

 

 

$

(0.05

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

25,217,122

 

 

 

24,665,496

 

 

 

25,203,498

 

 

 

24,506,442

 

Diluted

 

 

25,483,871

 

 

 

24,665,496

 

 

 

25,491,340

 

 

 

24,506,442

 

 

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

5


 

GALAXY GAMING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional Paid-in

 

 

Accumulated

 

 

Accumulated Other Comprehensive

 

 

Total Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Deficit

 

Beginning balance, December 31, 2022

 

 

24,411,098

 

 

$

24,411

 

 

$

17,575,396

 

 

$

(35,316,540

)

 

$

(168,654

)

 

$

(17,885,387

)

Net income

 

 

 

 

 

 

 

 

 

 

 

110,694

 

 

 

 

 

 

110,694

 

Foreign currency translation gain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,637

 

 

 

16,637

 

Share-based compensation

 

 

27,392

 

 

 

28

 

 

 

244,895

 

 

 

 

 

 

 

 

 

244,923

 

Balance, March 31, 2023

 

 

24,438,490

 

 

$

24,439

 

 

$

17,820,291

 

 

$

(35,205,846

)

 

$

(152,017

)

 

$

(17,513,133

)

Net income

 

 

 

 

 

 

 

 

 

 

 

356,769

 

 

 

 

 

 

356,769

 

Foreign currency translation loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,280

)

 

 

(25,280

)

Share-based compensation

 

 

28,391

 

 

 

28

 

 

 

245,107

 

 

 

 

 

 

 

 

 

245,135

 

Balance, June 30, 2023

 

 

24,466,881

 

 

$

24,467

 

 

$

18,065,398

 

 

$

(34,849,077

)

 

$

(177,297

)

 

$

(16,936,509

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional Paid-in

 

 

Accumulated

 

 

Accumulated Other Comprehensive

 

 

Total Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Deficit

 

Beginning balance, December 31, 2021

 

 

23,523,969

 

 

$

23,524

 

 

$

16,380,597

 

 

$

(33,543,351

)

 

$

(147,193

)

 

$

(17,286,423

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(13,962

)

 

 

 

 

 

(13,962

)

Foreign currency translation loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(41,949

)

 

 

(41,949

)

Stock options exercised

 

 

219,999

 

 

 

220

 

 

 

195,236

 

 

 

 

 

 

 

 

 

195,456

 

Share-based compensation

 

 

18,965

 

 

 

19

 

 

 

309,983

 

 

 

 

 

 

 

 

 

310,002

 

Balance, March 31, 2022

 

 

23,762,933

 

 

$

23,763

 

 

$

16,885,816

 

 

$

(33,557,313

)

 

$

(189,142

)

 

$

(16,836,876

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(1,115,641

)

 

 

 

 

 

(1,115,641

)

Foreign currency translation loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(113,585

)

 

 

(113,585

)

Surrender of options

 

 

(365,751

)

 

 

(366

)

 

 

(1,279,767

)

 

 

 

 

 

 

 

 

(1,280,133

)

Stock options exercised

 

 

671,665

 

 

 

672

 

 

 

733,641

 

 

 

 

 

 

 

 

 

734,313

 

Share-based compensation

 

 

47,236

 

 

 

47

 

 

 

315,361

 

 

 

 

 

 

 

 

 

315,408

 

Balance, June 30, 2022

 

 

24,116,083

 

 

$

24,116

 

 

$

16,655,051

 

 

$

(34,672,954

)

 

$

(302,727

)

 

$

(18,296,514

)

 

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

6


 

GALAXY GAMING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Six Months Ended

 

 

 

June 30, 2023

 

 

June 30, 2022

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

467,463

 

 

$

(1,129,603

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

1,071,476

 

 

 

1,449,720

 

Amortization of right-of-use assets

 

 

118,791

 

 

 

116,051

 

Amortization of debt issuance costs and debt discount

 

 

755,228

 

 

 

741,981

 

Bad debt recovery

 

 

(43,114

)

 

 

(14,717

)

Deferred income tax

 

 

(17,523

)

 

 

26,726

 

Share-based compensation

 

 

490,059

 

 

 

625,410

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(408,967

)

 

 

(385,529

)

Income tax receivable

 

 

(3,561

)

 

 

752,315

 

Prepaid expenses and other current assets

 

 

988,462

 

 

 

164,307

 

Other assets

 

 

(10,326

)

 

 

(91,792

)

Accounts payable

 

 

(499,154

)

 

 

153,067

 

Accrued expenses

 

 

(402,391

)

 

 

(289,371

)

Revenue contract liability

 

 

109,468

 

 

 

37,500

 

Operating lease liabilities

 

 

(121,511

)

 

 

(113,861

)

Net cash provided by operating activities

 

 

2,494,400

 

 

 

2,042,204

 

Cash flows from investing activities:

 

 

 

 

 

 

Investment in internally developed software

 

 

(463,954

)

 

 

(174,926

)

Acquisition of property and equipment

 

 

(15,494

)

 

 

(18,433

)

Acquisition of assets deployed at client locations

 

 

(294,111

)

 

 

(294,193

)

Net cash used in investing activities

 

 

(773,559

)

 

 

(487,552

)

Cash flows from financing activities:

 

 

 

 

 

 

Payments of debt issuance costs

 

 

(22,127

)

 

 

 

Proceeds from stock option exercises

 

 

 

 

 

304,517

 

Principal payments on long-term debt

 

 

(1,182,457

)

 

 

(632,724

)

Net cash used in financing activities

 

 

(1,204,584

)

 

 

(328,207

)

Effect of exchange rate changes on cash

 

 

(26,048

)

 

 

(35,528

)

Net increase in cash and cash equivalents

 

 

490,209

 

 

 

1,190,917

 

Cash and cash equivalents – beginning of period

 

 

18,237,513

 

 

 

16,058,714

 

Cash and cash equivalents – end of period

 

$

18,727,722

 

 

$

17,249,631

 

Supplemental cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

3,790,847

 

 

$

2,742,388

 

Cash paid for income taxes

 

$

38,350

 

 

$

 

Supplemental schedule of non-cash activities:

 

 

 

 

 

 

Net option settlement and tax withholding through additional paid-in capital

 

$

 

 

$

1,280,133

 

Right-of-use assets obtained in exchange for lease liabilities

 

$

 

 

$

71,901

 

 

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

Unless the context indicates otherwise, references to “Galaxy Gaming, Inc.,” “we,” “us,” “our,” or the “Company,” refer to Galaxy Gaming, Inc., a Nevada corporation (“Galaxy Gaming”).

We are an established global gaming company specializing in the design, development, acquisition, assembly, marketing and licensing of proprietary casino table games and associated technology, platforms and systems for the casino and iGaming industries. Casinos use our proprietary products and services to enhance their gaming operations and improve their profitability, productivity and security, as well as to offer popular cutting-edge gaming entertainment content and technology to their players. We market our products and services to online casinos worldwide, to land-based casino gaming companies in North America, the Caribbean, Central America, the United Kingdom, Europe and Africa, and to cruise ship companies. We license our products and services for use solely in regulated land-based gaming markets. We also license our content and distribute content from other companies to iGaming operators in legalized gaming markets throughout the world.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation. The accompanying condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules of the U.S. Securities and Exchange Commission "SEC". In the opinion of management, the accompanying unaudited interim condensed financial statements contain all necessary adjustments (including all those of a recurring nature and those necessary in order for the financial statements to be not misleading) and all disclosures to present fairly our financial position and the results of our operations and cash flows for the periods presented.

These unaudited interim condensed financial statements should be read in conjunction with the financial statements and the related notes as of and for the year ended December 31, 2022 included in our 2022 Form 10-K ("2022 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.

Use of estimates and assumptions. We are required to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our Company and the industry as a whole, and information available from other outside sources. Our estimates affect reported amounts for assets, liabilities, revenues, expenses and related disclosures. Actual results may differ from initial estimates.

Consolidation. The financial statements are presented on a consolidated basis and include the results of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

 

Reclassifications. Certain accounts and financial statement captions in the prior period have been reclassified to conform to the current period financial statement presentations and had no effect on net income (loss).

Cash and cash equivalents. Our cash and cash equivalents consist of bank deposits. With the exception of funds held outside the U.S., these deposits are in insured banking institutions, which are insured up to $250,000 per account. To date, we have not experienced uninsured losses. In general, we invest amounts in excess of the insurance maximums in a money market fund that invests solely in US government and agency securities.

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 quarterly 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.

Goodwill. Goodwill (Note 4) is assessed for impairment at least annually or at other times during the year if events or circumstances indicate that it is more-likely-than-not that the fair value of a reporting asset is below the carrying amount. If found to be impaired, the carrying amount will be reduced, and an impairment loss will be recognized.

8


 

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

Customer relationships

 

9 - 22 years

Trademarks

 

20 - 30 years

Intellectual property

 

12 years

Non-compete agreements

 

9 years

Software

 

3 years

 

Other intangible assets (Note 4) 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 and six months ended June 30, 2023.

 

Software relates primarily to assets where costs are capitalizable during the application development phase. External labor-related costs associated with product development are included in software.

Fair value of financial instruments. We estimate fair value for financial assets and liabilities in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”). ASC 820 defines fair value, provides guidance for measuring fair value, requires certain disclosures and discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). ASC 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

The estimated fair values of cash equivalents, accounts receivable and accounts payable approximate their carrying amounts due to their short-term nature. The estimated fair value of our long-term debt approximates its carrying value based upon our expected borrowing rate for debt with similar remaining maturities and comparable risk. The Company currently has no financial instruments measured at estimated fair value on a recurring basis based on valuation reports provided by counterparties.

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 condensed consolidated balance sheets 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 5).

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

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

Segment 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 have two operating segments (land-based gaming ("GG Core") and online gaming ("GG Digital")) which are aggregated into one reporting segment.

 

Employment agreement amendment. On June 15, 2022, the Company entered into amendment number 3 (the "Amendment") to the employment agreement, dated July 27, 2017 (and previously amended by amendments number 1 and number 2), between the Company and Todd P. Cravens, the Company’s President and Chief Executive Officer. The Amendment (i) extends the term of the agreement from July 27, 2022, to July 26, 2024; (ii) provides for a potential equity incentive grant of stock for calendar year 2022 and calendar year 2023, with (x) a grant of 20,000 shares if the Company achieves 80% of its EBITDA Budget target (as defined by management and as adopted by the Board for the calendar year) for calendar year 2022, (y) a grant of 20,000 shares if the Company achieves 80% of its

9


 

EBITDA Budget target (as adopted by the Board for the calendar year) for calendar year 2023, and (z) an additional grant under the following performance goals for each of calendar year 2022 and 2023: a) 100% of EBITDA Target – 20,000 shares, b) 110% of EBITDA Target – 30,000 shares, and c) 115% of EBITDA Target – 40,000 shares; and (iii) increases Mr. Cravens' annual compensation to $300,000 effective as of August 1, 2022.

 

The shares granted in connection with the employment agreement vest one year from the date of grant. Should Mr. Cravens leave the Company or be terminated with good cause prior the vesting date he will forfeit any and all rights to the shares. Pursuant to the Amendment, the Board maintains reasonable, good faith discretion to make adjustments to the Company's EBITDA performance relating to the Company’s management incentive program, where appropriate in each year, to account for factors contributing positively and negatively to the Company's actual recorded EBITDA performance that could be considered (by the Board) unrelated to or not driven by the Company's performance.

 

In addition, should there be a circumstance that may trigger a change of control, as defined in the Company's 2014 Equity Incentive Plan (as amended, the "2014 Equity Plan"), in either the 2022 or 2023 calendar years, if not already granted, the 20,000 shares from each of the 2022 and 2023 CEO executive Incentive from the 80% EBITDA target, will be granted immediately. The Board retains discretion to be exercised reasonably and in good faith to accelerate the grant of remaining shares under the 2022 and 2023 equity incentives set forth in the Amendment.

The balance of the employment agreement, as previously amended, remains in full force and effect.

 

Option surrender. The Company's 2014 Equity Plan allows option holders to satisfy the exercise price of stock options, and the related tax withholding resulting from such exercise, by cash and by other means of "cashless" exercise, including: (a) by tendering, either actually or by attestation, shares of stock; (b) by irrevocably authorizing a third party to sell shares of stock (or a sufficient portion of the shares) acquired upon exercise of the option and to remit to the Company a sufficient portion of the sale proceeds to pay the exercise price and any tax withholding resulting from such exercise; (c) with respect to options, payment through a net exercise such that, without the payment of any funds, the option holder may exercise the option and receive the net number of shares of stock equal in value to (i) the number of shares of stock as to which the option is being exercised, multiplied by (ii) a fraction, the numerator of which is the fair market value less the exercise price, and the denominator of which is such fair market value (the number of net shares of stock to be received shall be rounded down to the nearest whole number of shares of stock); (d) by personal, certified or cashiers’ check; (e) by other property deemed acceptable by the committee administering the 2014 Equity Plan; or (f) by any combination thereof.

 

On June 23, 2022, pursuant to the 2014 Equity Plan and a Stock Option Grant Notice and Stock Option Agreement dated July 27, 2017, Mr. Cravens exercised options and satisfied the exercise price and applicable tax withholding through a net settlement by surrendering to the Company options to purchase shares having a fair market value equal to the sum of the exercise price and the taxes. The exercise price and related tax withholding totaled $1,280,133 and was recorded as a reduction to additional paid-in capital and common stock. Withholding tax relating to the transaction will be settled on August 10, 2023.

Other significant accounting policies. Our significant accounting policies are described in our 2022 10-K. There have been no material changes to those policies.

Financial Instruments – Credit Losses. In February 2020, the FASB issued ASU No. 2020-02, Financial Instruments – Credit Losses (Topic 326). ASU 2020-02 provides updated guidance on how an entity should measure credit losses on financial instruments. We do not believe the adoption of this guidance will have a material impact on our condensed consolidated financial statements or related disclosures.

Reference Rate Reform. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. The amendments were effective upon issuance and provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. We have completed our evaluation of significant contracts. Contracts reviewed will be modified to apply a new reference rate, primarily the Secured

10


 

Overnight Financing Rate ("SOFR") where applicable. As a result, the guidance has not had, and is not expected to have, a material impact on our consolidated financial statements.

NOTE 3. REVENUE RECOGNITION

Revenue recognition. 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 customer contract.

We also sell gaming systems with a perpetual right to use our intellectual property. Control transfers and we recognize revenue at a point in time when the gaming system is available for use by a customer, which is no earlier than the shipment of the products to the customer or an intermediary for the customer.

Disaggregation of revenue

The following table disaggregates our revenue by geographic location for the following listed periods. All of the royalty expense that is charged to a contra-revenue in our GG Digital operating segment has been allocated to the Europe, Middle East and Africa region in both periods presented. In prior filings, it was allocated to the Americas.

 

 

 

Three Months
Ended June 30,

 

 

Six Months
Ended June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

The Americas

 

$

4,855,217

 

 

$

3,080,460

 

 

$

9,326,849

 

 

$

6,125,825

 

Europe, Middle East and Africa

 

 

2,670,119

 

 

 

2,595,735

 

 

 

5,621,021

 

 

 

5,468,969

 

Total revenue

 

$

7,525,336

 

 

$

5,676,195

 

 

$

14,947,870

 

 

$

11,594,794

 

 

Contract liabilities. Amounts billed and cash received in advance of performance obligations fulfilled are recorded as contract liabilities and recognized as revenue when performance obligations are 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 $607,041 and $1,107,544 as of June 30, 2023 and December 31, 2022, respectively, and are included in the accounts receivable balance in the accompanying condensed consolidated balance sheets.

Customer agreements. On May 10, 2023, the Company (as the licensor) and a client (as the licensee) entered into an Amended and Restated Agreement (the “Agreement”). The Agreement amends and restates a previous agreement between the parties, dated June 2, 2015, for the provision of licenses for certain table game content and related intellectual property which the Company, succeeded to as successor in interest by merger with Progressive Games Partners, LLC. The Agreement contains definitions, representations and warranties, and terms that are customary in licensing agreements.

 

The agreement guarantees a minimum payment from the Licensee of €6 million per each year ended March 31, for years 1 through 4 of the contract. The amount is to be billed and paid in equal monthly installments. The installment is billed and paid independent of usage from the Licensee, which may be higher or lower than the installment amount on a monthly basis. At June 30, 2023, the Company has deferred $125,472 in revenue, which represents monthly amounts billed in excess of the monthly usage from the Licensee. The deferred revenue will be recognized at the end of the contract year at March 31, 2024, if aggregate performance during the contract year has not equaled or exceeds €6 million.

 

For years 5 through 10 of the contract, the amount to be billed is based on the actual usage from the Licensee. Invoices will be billed and paid on a monthly basis. Revenue for years 5 through 10 will be recognized when actual usage is incurred.

Intellectual property agreements. From time to time, the Company purchases or licenses intellectual property from third-parties and the Company, in turn, utilizes that intellectual property in certain games sold to clients. In these purchase agreements, the Company may agree to pay the seller of the intellectual property a fee, if and when, the Company receives revenue from games containing the intellectual property.

On June 8, 2023, the Company entered into a license and distribution agreement (the "License Agreement") with a Licensor, pursuant to which the Company licenses and has rights to distribute a game from Licensor. The License Agreement contains definitions, representations and warranties, and terms that are customary in licensing agreements. The License Agreement is for a set term that may be extended on an annual basis at the end of the term. The License Agreement sets forth royalties to be paid to Licensor during the term and includes intellectual property licensing.

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NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS

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

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

 

 

June 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Patents

 

$

13,507,799

 

 

$

13,507,997

 

Customer relationships

 

 

14,040,856

 

 

 

14,040,856

 

Trademarks

 

 

2,880,967

 

 

 

2,880,967

 

Intellectual property

 

 

2,000,000

 

 

 

2,000,000

 

Non-compete agreements

 

 

660,000

 

 

 

660,000

 

Software

 

 

1,432,318

 

 

 

968,362

 

Other intangible assets, gross

 

 

34,521,940

 

 

 

34,058,182

 

Less: accumulated amortization

 

 

(21,036,956

)

 

 

(20,152,071

)

Other intangible assets, net

 

$

13,484,984

 

 

$

13,906,111

 

For the three and six months ended June 30, 2023 and 2022, amortization expense related to other intangible assets was $406,554 and $655,008, and $884,885 and $1,308,338, respectively.

NOTE 5. 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 June 30, 2023, no renewal option periods were included in any estimated minimum lease term as the options were not deemed reasonably certain to be exercised. Our leases have remaining lease terms ranging from 6 months to 45 months.

Supplemental balance sheet information related to leases is as follows:

 

 

 

As of June 30, 2023

 

 

Amount

 

 

Classification

Operating leases:

 

 

 

 

 

Operating lease right-of-use lease assets

 

$

883,958

 

 

 

 

 

 

 

 

 

Operating lease current liabilities

 

$

252,845

 

 

 Current portion of operating lease liabilities

 

 

 

 

 

 

Operating lease long-term liabilities

 

 

704,250

 

 

 Long-term operating lease liabilities

 

 

 

 

 

 

Total operating lease liabilities

 

$

957,095

 

 

 

 

 

 

 

 

 

Weighted-average remaining lease term:

 

 

 

 

 

Operating leases

 

 

3.62

 

 

 

 

 

 

 

 

 

Weighted-average discount rate:

 

 

 

 

 

Operating leases

 

 

4.4

%

 

 

 

12


 

The components of lease expense are as follows:

 

 

 

Three Months Ended June 30, 2023

 

 

Amount

 

 

Classification

Operating lease cost

 

$

72,071

 

 

Selling, general and administrative expense

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2023

 

 

Amount

 

 

Classification

Operating lease cost

 

$

144,142

 

 

Selling, general and administrative expense

 

Supplemental cash flow information related to leases is as follows:

 

 

 

Six Months Ended June 30, 2023

 

 

Amount

 

 

Classification

Cash paid for amounts included in the
   measurement of lease liabilities:

 

 

 

 

 

Operating cash flows from operating leases

 

$

144,162

 

 

 Net income

 

As of June 30, 2023, future maturities of our operating lease liabilities are as follows:

 

 

 

Amount

 

For the remaining six months ending December 31, 2023

 

$

146,715

 

Years ending December 31,

 

 

 

2024

 

$

288,892

 

2025

 

 

294,507

 

2026

 

 

302,011

 

2027

 

 

2,985

 

Total minimum lease payments

 

 

1,035,110

 

Less: imputed interest

 

 

(78,015

)

Total operating lease liability

 

 

957,095

 

Less: current portion

 

 

(252,845

)

Long-term portion

 

$

704,250

 

 

NOTE 6. LONG-TERM LIABILITIES

Long-term liabilities consisted of the following at:

 

 

June 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Fortress credit agreement

 

$

58,476,929

 

 

$

59,400,000

 

Insurance notes payable

 

 

85,978

 

 

 

340,084

 

Long-term debt and liabilities, gross

 

 

58,562,907

 

 

 

59,740,084

 

Less: Unamortized debt issuance costs

 

 

(5,111,406

)

 

 

(5,839,228

)

Long-term debt and liabilities, net of debt issuance costs

 

 

53,451,501

 

 

 

53,900,856

 

Less: Current portion of long-term debt

 

 

(685,978

)

 

 

(940,084

)

Long-term debt and liabilities, net

 

$

52,765,523

 

 

$

52,960,772

 

 

Fortress Credit Agreement. On November 15, 2021, the Company entered into a senior secured term loan agreement with Fortress Credit Corp. (“Fortress Credit Agreement”) in the amount of $60.0 million. The proceeds of the loan were used to (i) pay approximately $39.5 million to Triangulum as full payment of the settlement amount due under the previously filed settlement agreement between Galaxy Gaming and Triangulum, as set forth above; (ii) repay approximately $11.1 million due and owing to NSB under the MSPLP and under the Amended and Restated Credit Agreement, dated as of May 13, 2021, made between Galaxy Gaming and Zions Bancorporation, N.A. dba Nevada State Bank, a Nevada state banking corporation, and (iii) approximately $4.1 million was used to pay fees and expenses. The remaining approximately $5.3 million was added to the Company’s cash on hand and used for corporate and operating purposes.

13


 

The Fortress Credit Agreement bears interest at a rate equal to, at the Company’s option, either (a) LIBOR (or a successor rate, determined in accordance with the Fortress Credit Agreement) plus 7.75%, subject to a reduction to 7.50% upon the achievement of a net leverage target or (b) a base rate determined by reference to the greatest of (i) the federal funds rate plus 0.50%, (ii) the prime rate as determined by reference to The Wall Street Journal’s “Prime Rate” and (iii) the one-month adjusted LIBOR rate plus 1.00%, plus 6.75%, subject to a reduction to 6.50% upon the achievement of a net leverage target. The Fortress Credit Agreement has a final maturity of November 13, 2026. The obligations under the Fortress Credit Agreement are guaranteed by the Company’s subsidiaries and are secured by substantially all of the assets of the Company and its subsidiaries. The Fortress Credit agreement requires, among other things, principal payments of $150,000 per quarter and includes an annual sweep of 50% of excess cash flow commencing in 2023 based on results for the prior fiscal year. The Fortress Credit Agreement contains affirmative and negative financial covenants (as defined in the Fortress Credit Agreement) and other restrictions customary for borrowings of this nature. The Company was required to maintain a Total Net Leverage Ratio of no more than 6.00x for the quarter ended June 30, 2023. As of June 30, 2023, the Company was in compliance with the covenants in the Fortress Credit Agreement. The Fortress Credit Agreement has no prepayment penalty after November 15, 2023.

In connection with entering into the Fortress Credit Agreement, the Company also issued warrants to purchase a total of up to 778,320 shares of the Company’s common stock to certain affiliates of Fortress at a price per share of $0.01 (the “Warrants”). The Warrants are exercisable at any time, subject to certain restrictions.

In response to ASU No. 2020-04, Reference Rate Reform (Topic 848), on the earlier of (i) the date that all Available Tenors of the LIBOR rate have either permanently or indefinitely ceased to be provided by the LIBOR Rate's administrator ("IBA") and (ii) the Early Option Effective Date, if the then-current Benchmark is the LIBOR Rate, the Benchmark Replacement will replace LIBOR under the Fortress Credit Agreement. The Benchmark Replacement is (a) the sum of: (i) Term SOFR and (ii) 0.11448% for an Available Tenor of one-month's duration, 0.26161% for an Available Tenor of three-months duration, and 0.42826% for an Available Tenor of six months duration, or (b) the sum of: (i) Daily Simple SOFR and (ii) the spread adjustment selected or recommended by the Relevant Governmental Body for the replacement of the tenor of USD LIBOR with a SOFR-based rate having approximately the same length as the interest payment period.

As of June 30, 2023, future maturities of our long-term liabilities are as follows:

 

 

 

Total

 

Years ended December 31,

 

 

 

2023

 

$

385,978

 

2024

 

 

600,000

 

2025

 

 

600,000

 

2026

 

 

56,976,929

 

Long-term liabilities, gross

 

$

58,562,907

 

 

NOTE 7. COMMITMENTS AND CONTINGENCIES

Concentration of risk. We are exposed to risks associated with clients who represent a significant portion of total revenues. For the six months ended June 30, 2023 and 2022, respectively, we had the following client concentrations:

 

 

 

Location

 

Six Months Ended June 30, 2023
Revenue

 

 

Six Months Ended June 30, 2022
Revenue

 

 

Accounts
Receivable
June 30, 2023

 

 

Accounts
Receivable
December 31, 2022

 

Client A

 

Europe

 

 

21.0

%

 

 

27.8

%

 

$

1,062,830

 

 

$

552,493

 

Client B

 

North America

 

 

17.8

%

 

 

1.6

%

 

$

697,100

 

 

$

132,500

 

Client C

 

North America

 

 

6.6

%

 

 

8.7

%

 

$

116,381

 

 

$

414,234

 

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. There are no current or threatened legal proceedings against the Company.

 

14


 

NOTE 8. INCOME TAXES

Our forecasted annual effective tax rate (“AETR”) at June 30, 2023 was 4.6%, as compared to 8.4% at June 30, 2022. This decrease was primarily the impacts from changes in foreign rate differential, adjustments in foreign derived intangible income and a change in valuation allowance as compared to current-year forecasted ordinary income considered in determining the forecasted AETR.

For the six months ended June 30, 2023 and 2022, our effective tax rate (“ETR”) was 4.6% and (4.9)%, respectively. The increase in the ETR for the six months ended June 30, 2023 is a result of favorable discrete items related to excess tax benefits from stock-based compensation in the prior year quarter that were not present in the current year quarter.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The following is a discussion and analysis of our financial condition, results of operations and liquidity and capital resources as of and for the three and six months ended June 30, 2023 and 2022. This discussion should be read together with our audited consolidated financial statements and related notes included in Item 8 Financial Statements and Supplementary Financial Information included in our 2022 10-K. Some of the information contained in this discussion includes forward-looking statements that involve risks and uncertainties; therefore our “Special Note Regarding Forward-Looking Statements” should be reviewed for a discussion of important factors that could cause actual results to differ materially from the results described in, or implied by, such forward-looking statements.

OVERVIEW

We develop, acquire, assemble and market technology and entertainment-based products and services for the gaming industry for placement on casino floors and on legal internet gaming sites. Our products and services primarily relate to licensed casino operators’ table games activities and focus on either increasing their profitability and productivity 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 are assembled at our headquarters in Las Vegas, Nevada, as well as outsourced for certain sub-assemblies in the United States.

Results of operations for the three months ended June 30, 2023 and 2022 For the three months ended June 30, 2023, we generated revenues of $7,525,336 compared to $5,676,195 for the comparable prior-year period, representing an increase of $1,849,141, or 32.6%. Net revenues in our GG Core operating segment increased 43.1% from $3,733,654 to $5,341,017. This increase was attributable primarily to shipment of perpetual right to use gaming systems to a single customer. Net revenues in our GG Digital operating segment increased 12.4% from $1,942,542 to $2,184,319. Our online gaming revenues increased due to our online customers' growth in their traditional markets and their entry into new markets.

Selling, general and administrative expenses for the three months ended June 30, 2023 were $3,634,178 compared to $3,483,918 for the comparable prior-year period, representing an increase of $150,260, or 4.3%. The increase was due to higher payroll costs due to higher headcount, offset by lower legal costs for the period.

Research and development expenses for the three months ended June 30, 2023 were $199,665 compared to $152,022 for the comparable prior-year period, representing an increase of $47,643, or 31.3%. The increase was due to higher payroll costs from higher headcount and employee bonuses for the period.

Share-based compensation expenses for the three months ended June 30, 2023 were $245,136, as compared to $315,408 for the comparable prior-year period, representing an decrease of $70,272, or 22.3%. The decrease was due primarily to a change in the level and the composition of fees paid to members of our Board of Directors in 2023 and lower share-based compensation for officers and consultants.

As a result of the changes described above, income from operations increased $1,502,483 to $2,451,633 for the three months ended June 30, 2023, compared to income from operations of $949,150 for the comparable prior-year period.

Total interest expense increased $544,607, or 32.1%, to $2,242,042 for the three months ended June 30, 2023 compared to $1,697,435 for the comparable prior-year period. The increase was attributable to higher rates of interest on the current borrowings.

Income tax expense was $16,677 for the three months ended June 30, 2023, compared to income tax expense of $194,977 for the comparable prior-year period. The decrease in expense is primarily the result of changes in the deferred tax balances and discrete excess benefits from stock-based compensation in the prior period that did not occur in the current period.

Results of operations for the six months ended June 30, 2023 and 2022. For the six months ended June 30, 2023 we generated revenues of $14,947,870 compared to $11,594,794 for the comparable prior-year period, representing an increase of $3,353,076, or 28.9%. Net revenues in our GG Core operating segment increased 39.1% from $7,559,642 to $10,512,897. This increase was attributable primarily to shipment of perpetual right to use gaming systems to a single customer. Net revenues in our GG Digital operating segment increased 9.9% from $4,035,151 to $4,434,973. Our online gaming revenues increased due to our online customers' growth in their traditional markets and their entry into new markets.

Selling, general and administrative expenses for the six months ended June 30, 2023 were $7,418,835 compared to $6,527,277 for the comparable prior-year period, representing an increase of $891,558, or 13.7%. This increase was due to higher maintenance cost on assets deployed at client locations, internal labor and related expenses (base salary, commissions, payroll-related taxes, bonus accrual and travel), increased information technology expenses, and increased trade show expenses.

16


 

Research and development expenses for the six months ended June 30, 2023 were $406,425, compared to $351,092 for the comparable prior-year period, representing an increase of $55,333, or 15.8%. The increase was due to higher payroll costs from higher headcount and employee bonuses for the period.

Share-based compensation expenses for the six months ended June 30, 2023 were $490,059, as compared to $625,410 for the comparable prior-year period, representing a decrease of $135,351, or 21.6%. The decrease was due primarily to a change in the level and the composition of fees paid to members of our Board of Directors in 2023 and lower share-based compensation for officers and consultants.

As a result of the changes described above, income from operations increased $2,171,209 to $4,709,475 for the six months ended June 30, 2023, compared to income from operations of $2,538,266 for the comparable prior-year period.

Total interest expense increased $1,061,220, or 31.4%, to $4,445,677 for the six months ended June 30, 2023, compared to $3,384,457 for the comparable prior-year period. The increase was attributable to higher rates of interest on the current borrowings.

Income tax expense was $22,252 for the six months ended June 30, 2023, compared to income tax benefit of $53,003 for the comparable prior-year period. The decrease in expense is primarily the result of changes in the deferred tax balances and discrete excess benefits from stock-based compensation in the prior year period that did not occur in the current year period.

Adjusted EBITDA. Adjusted EBITDA includes adjustments to net income to exclude interest, income taxes, depreciation, amortization, share-based compensation, foreign currency exchange loss (gain) and severance and other expenses related to litigation. Adjusted EBITDA is not a measure of performance defined in accordance with U.S. GAAP. However, Adjusted EBITDA is used by management to evaluate our operating performance. Management believes that disclosure of the Adjusted EBITDA metric offers investors, regulators and other stakeholders a view of our operations in the same manner management evaluates our performance. When combined with U.S. GAAP results, management believes Adjusted EBITDA provides a comprehensive understanding of our financial results. Adjusted EBITDA should not be considered as an alternative to net income or to net cash provided by operating activities as a measure of operating results or of liquidity. It may not be comparable to similarly titled measures used by other companies, and it excludes financial information that some may consider important in evaluating our performance. A reconciliation of U.S. GAAP net income to Adjusted EBITDA is as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

Adjusted EBITDA Reconciliation:

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net income (loss)

 

$

356,769

 

 

$

(1,115,641

)

 

$

467,463

 

 

$

(1,129,603

)

Interest expense

 

 

2,242,042

 

 

 

1,697,435

 

 

 

4,445,677

 

 

 

3,384,457

 

Interest income

 

 

(139,007

)

 

 

(2,259

)

 

 

(223,757

)

 

 

(4,492

)

Depreciation and amortization

 

 

495,134

 

 

 

725,258

 

 

 

1,071,476

 

 

 

1,449,720

 

Share-based compensation

 

 

245,136

 

 

 

315,408

 

 

 

490,059

 

 

 

625,410

 

Foreign currency exchange (gain) loss

 

 

(24,848

)

 

 

174,638

 

 

 

(2,160

)

 

 

234,901

 

Provision for income taxes

 

 

16,677

 

 

 

194,977

 

 

 

22,252

 

 

 

53,003

 

Severance expense

 

 

26,209

 

 

 

6,750

 

 

 

26,209

 

 

 

28,477

 

Special project expense (benefit) - Triangulum

 

 

 

 

 

 

 

 

 

 

 

(86,959

)

Special project expense - Other

 

 

 

 

 

361,821

 

 

 

5,321

 

 

 

476,904

 

Adjusted EBITDA

 

$

3,218,112

 

 

$

2,358,387

 

 

$

6,302,540

 

 

$

5,031,818

 

 

Liquidity and capital resources. We have generally been able to fund our continuing operations, our investments, and the interest expense and principal amortization under our existing borrowings through cash flow from operations. We may require additional capital to undertake acquisitions or to repay in full our indebtedness. Our ability to access capital for these activities 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 June 30, 2023, we had total current assets of $24,150,151 and total assets of $41,560,022. This compares to $24,194,187 and $42,010,516, respectively, as of December 31, 2022. The decrease in total assets at June 30, 2023 was primarily due to the amortization of leases and intangibles in the 2023 period.

Our total current liabilities as of June 30, 2023 decreased to $4,971,880 from $6,032,441 as of December 31, 2022, primarily due to the payment of accrued royalties, accrued bonuses, and payments against D&O insurance liabilities.

Based on our current forecast of operations, we believe we will have sufficient liquidity to fund our operations for at least the next 12 months and to meet the obligations under our financing arrangements as they come due.

17


 

We continue to file applications for new or enhanced licenses in several jurisdictions, which may result in significant future legal and regulatory expenses. A significant increase in such expenses may require us to postpone growth initiatives or investments in personnel, inventory and research and development of our products. It is our intention to continue such initiatives and investments. However, to the extent we are not able to achieve our growth objectives or raise additional capital, we will need to evaluate the reduction of operating expenses.

Our operating activities provided cash of $2,494,400 for the six months ended June 30, 2023, compared to $2,042,204 provided for the comparable prior period. The positive operating cash flow was primarily due to collection of tax credits and lower prepaid expenses.

Investing activities used cash of $773,559 for the six months ended June 30, 2023, compared to cash used of $487,552 for the comparable prior period. This increase in cash used was primarily due to the investment in internally developed software in the 2023 period.

Cash used in financing activities during the six months ended June 30, 2023 was $1,204,584. This compares to $328,207 cash used by financing activities for the comparable prior period. The increase in cash used was due to higher principal payments on our borrowings in the 2023 period.

Critical accounting policies. Our significant accounting policies are described in our 2022 10-K. There have been no material changes to those policies.

Off-balance sheet arrangements. As of June 30, 2023, there were no off-balance sheet arrangements.

Recently issued accounting pronouncements. We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.

18


 

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 June 30, 2023, our disclosure controls and procedures were effective.

No change in our internal control over financial reporting occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the effectiveness of internal controls

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives, and our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

19


 

PART II – OTHER INFORMATION

We have been named in and have brought lawsuits in the normal course of business. See Note 7 above and Note 10 to our audited financial statements included in Item 8 “Financial Statements and Supplementary Financial Information” in our 2022 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On June 30, 2023, 28,391 restricted shares of our common stock valued at $70,126 were issued to members of our Board of Directors in partial consideration for their service in Q2 2023. These shares were fully vested upon issuance. These securities were issued pursuant to 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.

 

20


 

ITEM 6. EXHIBITS

Exhibit

Number

 

Description

 

Form

 

File No.

 

Exhibit

 

Filing Date

 

Filed

Herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

10.1

 

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

 

8-K

 

000-30653

 

10.1

 

May 17, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.2

 

Settlement Agreement with former Chairman and Chief Executive Officer, Robert Saucier and Triangulum Partners LLC dated October 7, 2021

 

8-K

 

000-30653

 

10.1

 

October 8, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.3

 

Credit Agreement dated November 15, 2021, with Fortress Credit Corp.

 

8-K

 

000-30653

 

10.1

 

November 17, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.4

 

Consent and Waiver to Term Loan Credit Agreement, dated November 15, 2021, by among Galaxy Gaming, Inc., a Nevada corporation, the lenders from time to time party and Fortress Credit Corp., as administrative agent and Collateral agent

 

8-K

 

000-30653

 

10.1

 

March 22, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.5

 

Cooperation Agreement, dated April 20, 2022, by and between the Company and Tice Brown

 

8-K

 

000-30653

 

10.1

 

April 25, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.6

 

Amendment #3 to the Employment Agreement between the Company and Todd Cravens

 

8-K

 

000-30653

 

10.1

 

June 21, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.7

 

Board of Directors Service Agreement with Meredith Brill, Director

 

8-K

 

000-30653

 

10.1

 

July 15, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.8

 

First Amendment to Board of Directors Service Agreement with Meredith Brill, Director

 

8-K

 

000-30653

 

10.1

 

July 26, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.9

 

Changes to Board Compensation

 

8-K

 

000-30653

 

10.1

 

January 27, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.10

 

Press Release Announcing the Date of Virtual Annual Meeting of Stockholders to be Held on June 14, 2023

 

8-K

 

000-30653

 

99.1

 

March 20, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.11

 

Press Release Announcing the Date of Virtual Annual Meeting of Stockholders to be Held on June 14, 2023

 

8-K/A

 

000-30653

 

99.1

 

March 22, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.12

 

Amended and Restated Online Game License Agreement with Evolution Malta Limited

 

8-K

 

000-30653

 

10.1

 

May 15, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.13

 

Redacted License Agreement with the Talisman Group LLC

 

8-K

 

000-30653

 

10.1

 

June 16, 2023

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

31.1

 

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

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

31.2

 

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

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

32.1

 

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

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21


 

101.INS

 

Inline XBRL Instance Document – the instance does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document

 

 

 

 

 

 

 

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

 

 

 

 

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

 

 

 

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

 

 

 

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

 

 

 

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

 

 

 

 

 

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL document

 

 

 

 

 

 

 

 

 

 

 

22


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Galaxy Gaming, Inc.

 

 

 

Date:

 

August 11, 2023

 

 

 

 

 

 

 

By:

 

/s/ TODD P. CRAVENS

 

 

 

 

Todd P. Cravens

 

 

 

 

President and Chief Executive Officer

(Principal Executive Officer)

 

 

 

 

 

 

 

Galaxy Gaming, Inc.

 

 

 

Date:

 

August 11, 2023

 

 

 

 

 

 

 

By:

 

/s/ HARRY C. HAGERTY

 

 

 

 

Harry C. Hagerty

 

 

 

 

Chief Financial Officer

(Principal Accounting Officer)

 

23