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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2020

OR

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

For the transition period from       to

Commission file number: 000-30653

 

Galaxy Gaming, Inc.

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

 

 

Nevada

 

20-8143439

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

 

 

6767 Spencer Street, Las Vegas, NV 89119

(Address of principal executive offices)

 

(702) 939-3254

(Issuer’s telephone number)

 

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

 

Title of each class

 

Trading symbol

 

Name of exchange on which registered

Common stock

 

GLXZ

 

OTCQB marketplace

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

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

 

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

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 18,281,277 common shares as of June 23, 2020.

 



 

 

GALAXY GAMING, INC.

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

TABLE OF CONTENTS

 

 

 

2


PART I

 

ITEM 1. FINANCIAL STATEMENTS

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

 

 

3


GALAXY GAMING, INC.

CONDENSED BALANCE SHEETS

(Unaudited)

 

ASSETS

 

March 31,

2020

 

 

December 31,

2019

 

Current assets:

 

(Unaudited)

 

 

 

 

 

Cash, cash equivalents and restricted cash

 

$

11,051,143

 

 

$

9,686,698

 

Accounts receivable, net of allowance of $122,354 and $77,433, respectively

 

 

2,564,271

 

 

 

3,099,586

 

Inventory, net

 

 

726,483

 

 

 

665,654

 

Income tax receivable

 

 

224,385

 

 

 

260,347

 

Prepaid expense and other current assets

 

 

958,216

 

 

 

761,650

 

Total current assets

 

 

15,524,498

 

 

 

14,473,935

 

Property and equipment, net

 

 

123,363

 

 

 

144,909

 

Operating lease right-of-use assets

 

 

237,559

 

 

 

37,689

 

Assets deployed at client locations, net

 

 

367,266

 

 

 

405,522

 

Goodwill

 

 

1,091,000

 

 

 

1,091,000

 

Other intangible assets, net

 

 

7,048,144

 

 

 

7,430,643

 

Deferred tax assets, net

 

 

399,283

 

 

 

399,283

 

Total assets

 

$

24,791,113

 

 

$

23,982,981

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

775,088

 

 

$

766,305

 

Accrued expenses

 

 

1,085,368

 

 

 

1,450,879

 

Revenue contract liability

 

 

1,298,451

 

 

 

1,294,265

 

Current portion of long-term debt

 

 

1,599,103

 

 

 

1,634,527

 

Current portion of operating lease liabilities

 

 

214,012

 

 

 

19,140

 

Total current liabilities

 

 

4,972,022

 

 

 

5,165,116

 

Long-term operating lease liabilities

 

 

23,972

 

 

 

18,978

 

Long-term debt, net

 

 

46,929,382

 

 

 

46,291,014

 

Interest rate swap liability

 

 

216,658

 

 

 

140,495

 

Total liabilities

 

 

52,142,034

 

 

 

51,615,603

 

Commitments and Contingencies (See Note 11)

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit)

 

 

 

 

 

 

 

 

Preferred stock, 10,000,000 shares authorized, $0.001 par value;

   0 shares issued and outstanding, respectively

 

 

 

 

 

 

Common stock, 65,000,000 shares authorized; $0.001 par value;

   18,106,277 and 18,017,944 shares issued and outstanding, respectively

 

 

18,106

 

 

 

18,018

 

Additional paid-in capital

 

 

5,960,644

 

 

 

5,795,636

 

Accumulated deficit

 

 

(33,329,671

)

 

 

(33,446,276

)

Total stockholders’ deficit

 

 

(27,350,921

)

 

 

(27,632,622

)

Total liabilities and stockholders’ deficit

 

$

24,791,113

 

 

$

23,982,981

 

 

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

 

4


GALAXY GAMING, INC.

CONDENSED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31, 2020

 

 

March 31, 2019

 

Revenue:

 

 

 

 

 

 

 

 

Product leases, royalties and other

 

$

4,494,318

 

 

$

5,346,751

 

Total revenue

 

 

4,494,318

 

 

 

5,346,751

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of ancillary products and assembled components

 

 

21,812

 

 

 

82,391

 

Selling, general and administrative

 

 

2,992,052

 

 

 

3,540,870

 

Research and development

 

 

155,653

 

 

 

299,180

 

Depreciation and amortization

 

 

469,805

 

 

 

482,064

 

Share-based compensation

 

 

157,596

 

 

 

223,604

 

Total costs and expenses

 

 

3,796,918

 

 

 

4,628,109

 

Income from operations

 

 

697,400

 

 

 

718,642

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

21,774

 

 

 

715

 

Interest expense

 

 

(363,153

)

 

 

(168,013

)

Foreign currency exchange (loss) gain

 

 

(127,291

)

 

 

36,476

 

Change in estimated fair value of interest rate swap liability

 

 

(76,163

)

 

 

(26,142

)

Total other expense

 

 

(544,833

)

 

 

(156,964

)

Income before provision for income taxes

 

 

152,567

 

 

 

561,678

 

Provision for income taxes

 

 

(35,962

)

 

 

(101,014

)

Net income

 

$

116,605

 

 

$

460,664

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.01

 

 

$

0.01

 

Diluted

 

$

0.01

 

 

$

0.01

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

18,022,761

 

 

 

40,370,338

 

Diluted

 

 

19,239,294

 

 

 

42,242,557

 

 

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

5


GALAXY GAMING, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

 

 

 

Common Stock

 

 

Additional

Paid in

 

 

Accumulated

Earnings

 

 

Total

Shareholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

(Deficit)

 

 

Equity (Deficit)

 

Beginning balance, December 31, 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

)

 

 

 

 

Common Stock

 

 

Additional

Paid in

 

 

Accumulated

Earnings

 

 

Total

Shareholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

(Deficit)

 

 

Equity (Deficit)

 

Beginning balance, December 31, 2018

 

 

39,921,591

 

 

$

39,922

 

 

$

4,733,701

 

 

$

2,683,478

 

 

$

7,457,101

 

Net income

 

 

 

 

 

 

 

 

 

 

 

460,664

 

 

 

460,664

 

Stock options exercised

 

 

98,332

 

 

 

98

 

 

 

36,134

 

 

 

 

 

 

36,232

 

Share based compensation expense

 

 

470,200

 

 

 

470

 

 

 

223,134

 

 

 

 

 

 

223,604

 

Balance, March 31, 2019

 

 

40,490,123

 

 

$

40,490

 

 

$

4,992,969

 

 

$

3,144,142

 

 

$

8,177,601

 

 

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

6


GALAXY GAMING, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31, 2020

 

 

March 31, 2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

116,605

 

 

$

460,664

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization of intangible assets

 

 

469,805

 

 

 

473,493

 

Amortization of lease right-of-use assets

 

 

69,301

 

 

 

69,711

 

Amortization of debt issuance costs and debt discount

 

 

9,159

 

 

 

9,776

 

Bad debt expense

 

 

166,002

 

 

 

31,762

 

Change in estimated fair value of interest rate swap liability

 

 

76,163

 

 

 

26,142

 

Share-based compensation

 

 

157,596

 

 

 

223,604

 

Unrealized foreign exchange loss (gain) on cash, cash equivalents and restricted cash

 

 

77,557

 

 

 

(29,296

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

369,313

 

 

 

(158,003

)

Inventory

 

 

(86,885

)

 

 

(148,120

)

Income tax receivable

 

 

35,962

 

 

 

101,014

 

Prepaid expenses and other current assets

 

 

(197,283

)

 

 

(32,274

)

Accounts payable

 

 

8,784

 

 

 

385,259

 

Accrued expenses

 

 

(365,512

)

 

 

(656,817

)

Revenue contract liability

 

 

4,186

 

 

 

(82,656

)

Operating lease liabilities

 

 

(69,305

)

 

 

(65,376

)

Other current liabilities

 

 

 

 

 

(7,455

)

Net cash provided by operating activities

 

 

841,448

 

 

 

601,428

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Investment in intangible assets

 

 

 

 

 

(12,250

)

Acquisition of property and equipment

 

 

(1,448

)

 

 

(6,940

)

Net cash used in investing activities

 

 

(1,448

)

 

 

(19,190

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from draw on revolving loan

 

 

1,000,000

 

 

 

 

Proceeds from stock option exercises

 

 

7,500

 

 

 

36,232

 

Principal payments on finance lease obligations

 

 

 

 

 

(8,481

)

Principal payments on long-term debt

 

 

(405,498

)

 

 

(356,623

)

Net cash provided by (used in) financing activities

 

 

602,002

 

 

 

(328,872

)

Effect of exchange rate changes on cash

 

 

(77,557

)

 

 

29,296

 

Net increase in cash, cash equivalents and restricted cash

 

 

1,364,445

 

 

 

282,662

 

Cash, cash equivalents and restricted cash – beginning of period

 

 

9,686,698

 

 

 

6,311,563

 

Cash, cash equivalents and restricted cash – end of period

 

$

11,051,143

 

 

$

6,594,225

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

152,949

 

 

$

160,557

 

Supplemental schedule of non-cash activities:

 

 

 

 

 

 

 

 

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

 

$

269,171

 

 

$

293,350

 

Inventory transferred to assets deployed at client locations

 

$

26,056

 

 

$

58,016

 

 

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

7


GALAXY GAMING, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. NATURE OF OPERATIONS AND RECENT DEVELOPMENTS

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

We are an established global gaming company specializing in the design, development, assembly, marketing and acquisition of proprietary casino table games and associated technology, platforms and systems for the casino gaming industry. Casinos use our proprietary products and services to enhance their gaming floor operations and improve their profitability, productivity and security, as well as to offer popular cutting-edge gaming entertainment content and technology to their players. We market our products and services to land-based and riverboat gaming companies located in North America, the Caribbean, Central America, the British Isles, Europe and Africa and to cruise ship companies and internet gaming sites worldwide.

On May 6, 2019, we redeemed all 23,271,667 shares of our common stock held by Triangulum Partners, LLC (“Triangulum”), an entity controlled by Robert B. Saucier, Galaxy Gaming's founder, and, prior to the redemption, the holder of a majority of our outstanding common stock. The redemption of Triangulum’s shares was given effect pursuant to our Articles of Incorporation (the “Articles”), which expressly provide that if certain events occur in relation to a stockholder that is required to undergo a gaming suitability review or similar investigative process, we have the option to purchase all or any part of such stockholder’s shares at a price per share that is equal to the average closing share price over the thirty calendar days preceding the purchase. The average closing share price over the thirty calendar days preceding the redemption was $1.68 per share.

As consideration for the redemption, we issued a promissory note payable to Triangulum in the face amount of $39,096,401 (the “Triangulum Promissory Note”). See Note 10.

 

There is ongoing litigation between the Company and Triangulum related to the redemption and other matters. See Note 11.

On February 25, 2020, Galaxy Gaming entered into a Membership Interest Purchase Agreement, dated February 25, 2020 (the “Purchase Agreement”), between the Company and the membership interest holders of Progressive Games Partners LLC (“PGP”). Pursuant to the Purchase Agreement, the Company will pay $12.425 million to acquire all of the issued equity interest of PGP. Of the consideration, at least $6.425 million, but no more than $10.425 million will be paid in cash, with the balance of the consideration being paid in newly issued shares of the Company’s common stock valued at $1.91 per share. Completion of the purchase is subject to various customary closing conditions, including but not limited to (i) further due diligence by Galaxy, (ii) any necessary gaming approvals having been obtained from the relevant gaming authorities, (iii) no material adverse effect or other specified adverse events occurring with respect to Galaxy or PGP, (iv) subject to certain exceptions, the accuracy of the representations and warranties of the parties, and (v) performance and compliance in all material respects with agreements and covenants contained in the Purchase Agreement.

Coronavirus. On March 11, 2020, the World Health Organization declared a pandemic related to the COVID-19 outbreak, which led to a global health emergency. The public-health impact of the outbreak continues to remain largely unknown and still evolving. The related health crisis could continue to adversely affect the global economy, resulting in continued economic downturn that could impact demand for our products.

On March 17, 2020, the Company announced that it suspended billing to customers who had closed their doors due to the COVID-19 outbreak. As a result, we did not earn revenue for the use of our games by our physical casino customers during the time that they were closed. In general, the online gaming customers who license our games through our distributor remained and continue to remain in operation in spite of the COVID-19 crisis. We earned revenue from them during the crisis and expect to continue to do so, but potentially at levels that may be lower than we previously received.

As of the date of this filing, many land-based casinos have begun to re-open with significantly reduced occupancy and other limitations. As they reopen, it will take additional time for their operations to return to pre-crisis levels. Given the uncertainties around casino re-openings, we instituted a phased billing approach for our clients through fiscal year 2020, which will result in us realizing substantially less revenue than we might otherwise expect. In addition, because of COVID-19-related financial pressures on our physical casino customers, there can be no assurance that our accounts receivable we will be paid timely (or at all) for revenues earned prior to the shutdowns. Finally, some of our casino clients have notified vendors (including us) that they will lengthen payment terms for a period of time after reopening as they attempt to preserve their own liquidity.

We rely on third-party suppliers and manufacturers in China, many of whom were shut down or severely cut back production during the shutdown. This did not have a material effect on our supply chain. However, any future disruption of our suppliers and their contract manufacturers may impact our sales and operating results going forward.

8


Because of the uncertainties of COVID-19, the Company drew on its Revolving Loan in the amount of $1,000,000 on March 12, 2020. As of the date of this filing, the Company believes that it has adequate liquidity to meet its near-term obligations. Further, we do not currently believe that the recent casino closures will result in an impairment of our assets or a default under our loan agreements. If the effects of the COVID-19 crisis endure or there is a second period of casino closures, we may be required to reassess our obligations, including our ability to pay employee compensation and benefits.

The COVID-19 crisis may change the behavior of gaming patrons. Most of our clients operate places of public accommodation, and their patrons may reduce visitation and play as a precaution. Further, governmental authorities may continue to impose reduced hours of operation or limit the capacity of such places of public accommodation. A long-term reduction in play could have a material adverse impact on our results of operations. Depending on the length and severity of any such adverse impact, we may fail to comply with our obligations, including covenants in our credit agreement, and we may need to reassess the carrying value of our assets.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

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

These unaudited interim condensed financial statements should be read in conjunction with the financial statements and the related notes thereto included in our Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on March 30, 2020 (the “2019 10-K”).

The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.

Basis of accounting. The financial statements have been prepared on the accrual basis of accounting in conformity with U.S. GAAP. Revenues are recognized as income when earned and expenses are recognized when they are incurred. We do not have significant categories of cost of revenues. Expenses such as wages, consulting expenses, legal, regulatory and professional fees and rent are recorded when the expense is incurred.

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

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

Reclassifications. Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period financial statement presentations.

Other significant accounting policies. See Note 2 in Item 8. “Financial Statements and Supplementary Financial Information” included in our 2019 10-K.

Recently adopted accounting standards

Fair Value Measurement. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 addresses the required disclosures around fair value measurement, removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. We have adopted the new standard effective January 1, 2020, which did not have a material effect on our financial statements or related disclosures.

9


New accounting standards not yet adopted

Financial Instruments – Credit Losses. In February 2020, the FASB issued ASU No. 2020-02, Financial Instruments – Credit Losses (Topic 326). ASU 2020-02 provides updated guidance on how an entity should measure credit losses on financial instruments and delayed the effective date of Topic 326 for certain small public companies and other private companies until fiscal years beginning after December 5, 2022. Early adoption is permitted. We do not believe the adoption of this guidance will have a material impact on our financial statements or related disclosures.

NOTE 3. REVENUE RECOGNITION

 

Revenue recognition. We generate revenue primarily from the licensing of our intellectual property. We also, occasionally, receive a one-time sale of certain products and/or reimbursement of our equipment.

 

License fees. We derive product lease and royalty revenue from negotiated recurring fee license agreements and the performance of our products. We account for these agreements as month-to-month contracts and recognize revenue each month as we satisfy our performance obligations by granting access to intellectual property to our clients. In addition, revenue associated with performance-based agreements is recognized during the month that the usage of the product or intellectual property occurs.  

 

Some of our intellectual property requires the installation of certain equipment and both the intellectual property and the related equipment are licensed in one bundled package. We have determined that the equipment is not distinct from the intellectual property and, therefore, we have only one performance obligation. As a result, the allocation of the transaction price to different performance obligations is not necessary.

 

Product sales. Occasionally, we sell certain incidental products or receive reimbursement of our equipment after the commencement of the new license agreement. Revenue from such sales is recognized as a separate performance obligation when we ship the items.  

Disaggregation of revenue

 

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

 

 

 

Three Months

Ended March 31,

 

 

 

2020

 

 

2019

 

North America and Caribbean

 

$

3,130,465

 

 

$

3,844,525

 

Europe, Middle East and Africa

 

 

1,363,853

 

 

 

1,502,226

 

Total revenue

 

$

4,494,318

 

 

$

5,346,751

 

 

Revenue contract liability  

 

For a portion of our business, we invoice our clients monthly in advance for unlimited use of our intellectual property licenses and recognize a revenue contract liability that represents such advanced billing to our clients for unsatisfied performance. We reduce the revenue contract liability and recognize revenue when we transfer those goods or services and, therefore, satisfy our performance obligation.

The table below summarizes changes in the revenue contract liability during the three months ended March 31, 2020:

 

Beginning balance – January 1, 2020

 

$

1,294,265

 

Increase (advanced billings)

 

 

3,817,076

 

Decrease (revenue recognition)

 

 

(3,812,890

)

Ending balance – March 31, 2020

 

$

1,298,451

 

 

Revenue recognized during the three months ended March 31, 2020 that was included in the beginning balance of revenue contract liability above was $1,279,682.

10


NOTE 4. INVENTORY

Inventory, net consisted of the following at: 

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Raw materials and component parts

 

$

394,479

 

 

$

359,349

 

Finished goods

 

 

371,793

 

 

 

343,305

 

Inventory, gross

 

 

766,272

 

 

 

702,654

 

Less: inventory reserve

 

 

(39,789

)

 

 

(37,000

)

Inventory, net

 

$

726,483

 

 

$

665,654

 

 

NOTE 5. PROPERTY AND EQUIPMENT

Property and equipment, net consisted of the following at: 

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Furniture and fixtures

 

$

312,639

 

 

$

312,639

 

Automotive vehicles

 

 

215,127

 

 

 

215,127

 

Office and computer equipment

 

 

303,744

 

 

 

302,296

 

Leasehold improvements

 

 

6,843

 

 

 

6,843

 

Property and equipment, gross

 

 

838,353

 

 

 

836,905

 

Less: accumulated depreciation

 

 

(714,990

)

 

 

(691,996

)

Property and equipment, net

 

$

123,363

 

 

$

144,909

 

 

For the three months ended March 31, 2020 and 2019, depreciation expense related to property and equipment was $22,994 and $27,140, respectively.

NOTE 6. ASSETS DEPLOYED AT CLIENT LOCATIONS

 

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Enhanced table systems

 

$

1,009,427

 

 

$

993,127

 

Less: accumulated depreciation

 

 

(642,161

)

 

 

(587,605

)

Assets deployed at client locations, net

 

$

367,266

 

 

$

405,522

 

 

For the three months ended March 31, 2020 and 2019, depreciation expense related to assets deployed at client locations was $64,312 and $69,137, respectively.

 

11


NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill. A goodwill balance of $1,091,000 was created as a result of an asset acquisition completed in October 2011 from Prime Table Games, LLC.

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Patents

 

$

13,485,000

 

 

$

13,485,000

 

Customer relationships

 

 

3,400,000

 

 

 

3,400,000

 

Trademarks

 

 

2,880,967

 

 

 

2,880,967

 

Non-compete agreements

 

 

660,000

 

 

 

660,000

 

Internally-developed software

 

 

183,415

 

 

 

183,415

 

Other intangible assets, gross

 

 

20,609,382

 

 

 

20,609,382

 

Less: accumulated amortization

 

 

(13,561,238

)

 

 

(13,178,739

)

Other intangible assets, net

 

$

7,048,144

 

 

$

7,430,643

 

 

For the three months ended March 31, 2020 and 2019, amortization expense related to the other intangible assets was $382,499 and $377,216, respectively.

Estimated future amortization expense is as follows:

 

Twelve Months Ending March 31,

 

Total

 

2021

 

$

1,457,258

 

2022

 

 

1,415,500

 

2023

 

 

829,535

 

2024

 

 

252,930

 

2025

 

 

252,930

 

Thereafter

 

 

2,839,991

 

Total amortization

 

$

7,048,144

 

 

NOTE 8. ACCRUED EXPENSES

Accrued expenses consisted of the following at: 

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Payroll and related

 

$

209,831

 

 

$

747,458

 

Interest

 

 

721,716

 

 

 

520,671

 

Commissions and royalties

 

 

35,186

 

 

 

78,528

 

Income tax payable

 

 

64,832

 

 

 

64,832

 

Other

 

 

53,803

 

 

 

39,390

 

Total accrued expenses

 

$

1,085,368

 

 

$

1,450,879

 

 

NOTE 9. LEASES

 

Lessee

 

We have operating leases for our corporate office, two satellite facilities in the state of Washington, and for certain equipment. We account for lease components (such as rent payments) separately from the non-lease components (such as common-area maintenance costs, real estate and sales taxes and insurance costs). The discount rate represents the interest rate implicit in each lease or our incremental borrowing rate at lease commencement date.

On December 31, 2019, we executed a second amendment to the corporate office lease to amend the lease expiration date from December 31, 2019 to December 31, 2020, with monthly base rents of $21,123 from January 1, 2020 to December 31, 2020. As a result of the amendment, we recorded a $246,998 increase to operating lease right-of-use assets and operating lease liabilities.

12


On September 24, 2019, we executed a third amendment to one of our satellite facilities to amend the lease expiration date from December 31, 2019 to December 31, 2021, with monthly base rents of $975.00 from January 1, 2020 to December 31, 2021. As a result of the amendment, we recorded a $22,173 increase to operating lease right-of-use assets and operating lease liabilities.

As of March 31, 2020, our leases have remaining lease terms ranging from two months to 27 months. Gross right-of-use assets recorded under operating leases was $560,047, respectively, and the related accumulated amortization was $322,488.

Supplemental balance sheet information related to leases is as follows:

 

 

 

As of March 31, 2020

 

 

Amount

 

 

Classification

Operating leases:

 

 

 

 

 

 

Operating lease right-of-use lease assets

 

$

237,559

 

 

 

 

 

 

 

 

 

 

Operating lease current liabilities

 

$

214,012

 

 

Current portion of operating lease liabilities

 

 

 

 

 

 

 

Operating lease long-term liabilities

 

 

23,972

 

 

Long-term operating lease liabilities

 

 

 

 

 

 

 

Total operating lease liabilities

 

$

237,984

 

 

 

 

 

 

 

 

 

 

Weighted-average remaining lease

   term:

 

 

 

 

 

 

Operating leases

 

1 year

 

 

 

 

 

 

 

 

 

 

Weighted-average discount rate:

 

 

 

 

 

 

Operating leases

 

 

5.7

%

 

 

 

The components of lease expense are as follows:

 

 

 

Three Months Ended March 31, 2020

 

 

Amount

 

 

Classification

Finance lease cost:

 

 

 

 

 

 

Amortization of right-of-use assets

 

$

 

 

Depreciation and amortization

Interest on lease liabilities

 

 

 

 

Interest expense

Total finance lease cost

 

$

 

 

 

 

 

 

 

 

 

 

Operating lease cost

 

$

71,712

 

 

Selling, general and administrative expense

 

 

 

 

 

 

 

 

Supplemental cash flow information related to leases is as follows:

 

 

 

Three Months Ended March 31, 2020

 

 

Amount

 

 

Classification

Cash paid for amounts included in the

   measure of lease liabilities:

 

 

 

 

 

 

Operating cash flows from finance leases

 

 

 

 

Net income

Financing cash flows from finance leases

 

 

 

 

Principal payments on finance lease obligations

Operating cash flows from operating leases

 

$

71,712

 

 

Net income

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange

   for lease liabilities:

 

 

 

 

 

 

Finance leases

 

 

 

 

Supplemental cash flow information

Operating leases

 

$

560,047

 

 

Supplemental cash flow information

 

13


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

 

Twelve Months Ending March 31,

 

Amount

 

2021

 

$

214,013

 

2022

 

 

21,584

 

2023

 

 

2,387

 

Total lease liabilities

 

$

237,984

 

 

Lessor

 

Our agreements with the casino clients for the license of proprietary tables games are outside of the scope of ASC 842 as such agreements are related to the license of intellectual property.

Our BJS agreements with clients convey to them the rights to use equipment. However, these agreements are month-to-month and there is no penalty for either party to terminate the agreements without permission from the other party. As a result, these agreements are not considered leases and, therefore, are outside of the scope of ASC 842 as well.

NOTE 10. LONG-TERM DEBT

Long-term debt consisted of the following at:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Nevada State Bank credit agreement

 

$

9,358,799

 

 

$

8,699,900

 

Triangulum promissory note

 

 

39,096,401

 

 

 

39,096,401

 

Vehicle notes payable

 

 

39,021

 

 

 

44,490

 

Insurance notes payable

 

 

118,966

 

 

 

177,894

 

Long-term debt, gross

 

 

48,613,187

 

 

 

48,018,685

 

Less: Unamortized debt issuance costs

 

 

(84,702

)

 

 

(93,144

)

Long-term debt, net

 

 

48,528,485

 

 

 

47,925,541

 

Less: Current portion

 

 

(1,599,103

)

 

 

(1,634,527

)

Long-term debt, long-term portion

 

$

46,929,382

 

 

$

46,291,014

 

 

Nevada State Bank (“NSB”) Credit Agreement. The Company entered into a Credit Agreement with ZB, N.A. dba Nevada State Bank (as amended, the “Credit Agreement”), which was last amended on October 14, 2019. The Credit Agreement provided for a Term Loan in the initial amount of $11,000,000 and a Revolving Loan in the amount of $1,000,000.

 

Under the Credit Agreement, outstanding balances accrue interest based on one-month US dollar London interbank offered rate (“LIBOR”) plus an Applicable Margin of 3.50% or 4.00%, depending on our Total Leverage Ratio (as defined in the amended Credit Agreement). Effective December 31, 2021, LIBOR will no longer serve as a reference rate for bank loans, among other investment classes. The Fourth Amendment to the Credit Agreement stipulates that an alternative reference rate will be selected and used in lieu of LIBOR.

On March 17, 2020, the Company drew down $1,000,000 on the Revolving Loan component of the Credit Agreement. At March 31, 2020, the principal amount outstanding under the Term Loan component of the Credit Agreement was $8,358,799, bringing the total amount outstanding under the Credit Agreement at March 31, 2020, to $9,358,799.

 

Triangulum Promissory Note. On May 6, 2019, we issued the Triangulum Promissory Note in the face amount of $39,096,401. The Triangulum Promissory Note has no mandatory amortization, is scheduled to mature on May 5, 2029, and bears interest at 2% per annum, with accrued interest payable annually in arrears. It is unsecured and is subordinated to our existing and future indebtedness in accordance with its terms. We may prepay principal and any accrued interest in full or in part at any time.

 

14


As of March 31, 2020, future maturities of our long-term debt obligations are as follows:    

 

Twelve Months Ending March 31,

 

Total

 

2021

 

$

1,599,103

 

2022

 

 

2,574,483

 

2023

 

 

1,664,400

 

2024

 

 

3,678,800

 

2025

 

 

 

Thereafter

 

 

39,096,401

 

Long-term debt, gross

 

 

48,613,187

 

Less:

 

 

 

 

Unamortized debt issuance costs

 

 

(84,702

)

Long-term debt, net

 

$

48,528,485

 

 

NOTE 11. COMMITMENTS AND CONTINGENCIES

 

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

 

 

 

Location

 

2020

Revenue

 

 

2019

Revenue

 

 

Accounts

Receivable

March 31, 2020

 

 

Accounts

Receivable

December 31, 2019

 

Client A

 

Europe

 

 

12.4

%

 

 

11.6

%

 

$

296,410

 

 

$

176,237

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.  An unexpected adverse judgment in any pending litigation could cause a material impact on our business operations, intellectual property, results of operations or financial position.  Unless otherwise expressly stated, we believe costs associated with litigation will not have a material impact on our financial position or liquidity but may be material to the results of operations in any given period and accordingly, no provision for loss has been reflected in the accompanying financial statements related to these matters.

NOTE 12. STOCKHOLDERS’ EQUITY (DEFICIT)

During the three months ended March 31, 2020, we issued an aggregate of 63,333 restricted shares of our common stock valued at $54,086, to our board members in consideration of their service on the Board. These shares vested immediately on the grant date.

NOTE 13. INCOME TAXES

 

Our forecasted annual effective tax rate (“AETR”) at March 31, 2020 was 23.6%, as compared to 22.7% at March 31, 2019. The slight increase was primarily due to changes in permanent book-to-tax differences for the three months ended March 31, 2020.

 

For the three months ended March 31, 2020 and 2019, our ETR was 23.6% and 18.0%, respectively. The increase in the effective tax rate for the three months ending March 31, 2020 is a result of favorable discrete items from the comparable prior-year period that are not recurring in the current period.

NOTE 14. STOCK OPTIONS

 

On May 10, 2018, the Board ratified and confirmed the 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan is a broad-based plan under which shares of our common stock are authorized for issuance for awards, including stock options, stock appreciation rights, restricted stock, and cash incentive awards to members of our Board, executive officers, employees and independent contractors. As of March 31, 2020, a total of 6,550,750 shares of our common stock were authorized for issuance. As of March 31, 2020, 606,701 shares remained available for issuance as new awards under the 2014 Plan.

 

15


Stock options. During the three months ended March 31, 2020 and 2019, we issued 225,000 and 150,000 options to purchase our common stock, respectively, to members of our Board, executive officers, employees and independent contractors. The fair value of all stock options granted for the three months ended March 31, 2020 and 2019 was determined to be $255,017 and $171,985, respectively, using the Black-Scholes option pricing model with the following assumptions:

 

 

 

Options Issued 2020

 

 

Options Issued 2019

 

Dividend yield

 

 

0

%

 

 

0

%

Expected volatility

 

 

70.98

%

 

 

72.00

%

Risk free interest rate

 

 

1.39

%

 

 

2.51

%

Expected life (years)

 

 

5.00

 

 

 

5.00

 

 

On February 21, 2019, we amended the employment agreement between the Company and Todd Cravens, our President and Chief Executive Officer (“Mr. Cravens”). Among other things, this amendment grants Mr. Cravens an option to purchase 150,000 shares of our common stock (the “2020 Option”). The 2020 Option, which vests on August 1, 2020 so long as Mr. Cravens remains a full-time employee of the Company on August 1, 2020, has an exercise price equal to the price per share of our common stock as reported on OTC Markets on August 1, 2020 (or the nearest trading date thereafter). If Mr. Cravens is terminated as a result of a change of control of the Company prior to August 1, 2020, the 2020 Option vests in full upon his termination at an exercise price of $1.90 per share (our common stock closing price on February 19, 2019).

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

 

A summary of stock option activity is as follows:

 

 

 

Common

Stock

Options

 

 

Weighted-

Average

Exercise

Price

 

 

Aggregate

Intrinsic

Value

 

 

Weighted-

Average

Remaining

Contractual

Term (Years)

 

Outstanding – December 31, 2019

 

 

3,175,000

 

 

$

0.92

 

 

$

2,692,025

 

 

 

2.79

 

Issued

 

 

225,000

 

 

 

1.93

 

 

 

 

 

 

 

Exercised

 

 

(25,000

)

 

 

0.30

 

 

 

 

 

 

 

Forfeited