Attached files
file | filename |
---|---|
EX-32.1 - EX-32.1 - Galaxy Gaming, Inc. | glxz-ex321_7.htm |
EX-31.2 - EX-31.2 - Galaxy Gaming, Inc. | glxz-ex312_6.htm |
EX-31.1 - EX-31.1 - Galaxy Gaming, Inc. | glxz-ex311_8.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2020
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: 21,582,638 common shares as of November 12, 2020.
GALAXY GAMING, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
TABLE OF CONTENTS
|
|
|
|
PART I
|
|
Item 1: |
3 |
|
Item 2: |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
20 |
Item 3: |
23 |
|
Item 4: |
23 |
|
|
PART II
|
|
Item 1: |
25 |
|
Item 2: |
27 |
|
Item 6: |
27 |
2
Our financial statements included in this Form 10-Q are as follows:
Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 (unaudited) |
4 |
5 |
|
6 |
|
7 |
|
Notes to Condensed Consolidated Financial Statements (unaudited) |
8 |
3
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS |
|
September 30, 2020 |
|
|
December 31, 2019 |
|
||
Current assets: |
|
(Unaudited) |
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,668,906 |
|
|
$ |
9,686,698 |
|
Accounts receivable, net of allowance of $129,587 and $77,433, respectively |
|
|
2,183,744 |
|
|
|
3,099,586 |
|
Inventory, net |
|
|
761,345 |
|
|
|
665,654 |
|
Income tax receivable |
|
|
350,244 |
|
|
|
260,347 |
|
Prepaid expense and other current assets |
|
|
704,557 |
|
|
|
761,650 |
|
Total current assets |
|
|
6,668,796 |
|
|
|
14,473,935 |
|
Property and equipment, net |
|
|
116,152 |
|
|
|
144,909 |
|
Operating lease right-of-use assets |
|
|
1,482,534 |
|
|
|
306,859 |
|
Assets deployed at client locations, net |
|
|
258,856 |
|
|
|
405,522 |
|
Goodwill |
|
|
1,091,000 |
|
|
|
1,091,000 |
|
Other intangible assets, net |
|
|
16,610,045 |
|
|
|
7,430,643 |
|
Deferred tax assets, net |
|
|
892,090 |
|
|
|
399,283 |
|
Other assets, net |
|
|
27,305 |
|
|
|
— |
|
Total assets |
|
$ |
27,146,778 |
|
|
$ |
24,252,151 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
2,099,180 |
|
|
$ |
766,305 |
|
Accrued expenses |
|
|
844,146 |
|
|
|
1,450,879 |
|
Revenue contract liability |
|
|
587,094 |
|
|
|
1,294,265 |
|
Current portion of long-term debt |
|
|
2,530,149 |
|
|
|
1,634,527 |
|
Current portion of operating lease liabilities |
|
|
197,067 |
|
|
|
276,963 |
|
Total current liabilities |
|
|
6,257,636 |
|
|
|
5,422,939 |
|
Long-term operating lease liabilities |
|
|
1,266,215 |
|
|
|
30,325 |
|
Long-term liabilities, net |
|
|
45,991,154 |
|
|
|
46,291,014 |
|
Interest rate swap liability |
|
|
118,846 |
|
|
|
140,495 |
|
Total liabilities |
|
|
53,633,851 |
|
|
|
51,884,773 |
|
Commitments and Contingencies (See Note 11) |
|
|
|
|
|
|
|
|
Stockholders’ equity (deficit) |
|
|
|
|
|
|
|
|
Preferred stock, 10,000,000 shares authorized, $0.001 par value; 0 shares issued and outstanding, respectively |
|
|
— |
|
|
|
— |
|
Common stock, 65,000,000 shares authorized; $0.001 par value; 21,582,638 and 18,017,944 shares issued and outstanding, respectively |
|
|
21,582 |
|
|
|
18,018 |
|
Additional paid-in capital |
|
|
10,344,181 |
|
|
|
5,795,636 |
|
Accumulated deficit |
|
|
(36,833,752 |
) |
|
|
(33,446,276 |
) |
Accumulated other comprehensive loss |
|
|
(19,084 |
) |
|
|
— |
|
Total stockholders’ deficit |
|
|
(26,487,073 |
) |
|
|
(27,632,622 |
) |
Total liabilities and stockholders’ deficit |
|
$ |
27,146,778 |
|
|
$ |
24,252,151 |
|
The accompanying notes are an integral part of the financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, 2020 |
|
|
September 30, 2019 |
|
|
September 30, 2020 |
|
|
September 30, 2019 |
|
||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product leases, royalties and other |
|
$ |
1,797,833 |
|
|
$ |
5,371,646 |
|
|
$ |
6,956,122 |
|
|
$ |
16,117,583 |
|
Total revenue |
|
$ |
1,797,833 |
|
|
$ |
5,371,646 |
|
|
|
6,956,122 |
|
|
$ |
16,117,583 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of ancillary products and assembled components |
|
|
11,142 |
|
|
|
37,674 |
|
|
|
40,855 |
|
|
|
167,009 |
|
Selling, general and administrative |
|
|
1,833,723 |
|
|
|
3,645,319 |
|
|
|
7,264,410 |
|
|
|
10,126,029 |
|
Research and development |
|
|
97,081 |
|
|
|
208,253 |
|
|
|
391,333 |
|
|
|
685,693 |
|
Depreciation and amortization |
|
|
575,637 |
|
|
|
476,112 |
|
|
|
1,499,927 |
|
|
|
1,439,220 |
|
Share-based compensation |
|
|
178,553 |
|
|
|
242,016 |
|
|
|
512,818 |
|
|
|
678,199 |
|
Total costs and expenses |
|
|
2,696,136 |
|
|
|
4,609,374 |
|
|
|
9,709,343 |
|
|
|
13,096,150 |
|
(Loss) income from operations |
|
|
(898,303 |
) |
|
|
762,272 |
|
|
|
(2,753,221 |
) |
|
|
3,021,433 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,412 |
|
|
|
25,326 |
|
|
|
25,313 |
|
|
|
45,891 |
|
Interest expense |
|
|
(162,082 |
) |
|
|
(165,706 |
) |
|
|
(506,922 |
) |
|
|
(503,262 |
) |
Share redemption consideration |
|
|
(195,482 |
) |
|
|
(195,482 |
) |
|
|
(586,446 |
) |
|
|
(315,293 |
) |
Foreign currency exchange gain (loss) |
|
|
20,014 |
|
|
|
(69,470 |
) |
|
|
(95,976 |
) |
|
|
(57,299 |
) |
Change in estimated fair value of interest rate swap liability |
|
|
55,330 |
|
|
|
13,162 |
|
|
|
21,650 |
|
|
|
(78,440 |
) |
Other non-recurring income |
|
|
15,320 |
|
|
|
— |
|
|
|
15,320 |
|
|
|
— |
|
Total other expense |
|
|
(265,488 |
) |
|
|
(392,170 |
) |
|
|
(1,127,061 |
) |
|
|
(908,403 |
) |
(Loss) income before benefit (provision) for income taxes |
|
|
(1,163,791 |
) |
|
|
370,102 |
|
|
|
(3,880,282 |
) |
|
|
2,113,030 |
|
Benefit (provision) for income taxes |
|
|
(133,708 |
) |
|
|
210,132 |
|
|
|
492,807 |
|
|
|
(17,189 |
) |
Net (loss) income |
|
$ |
(1,297,499 |
) |
|
$ |
580,234 |
|
|
$ |
(3,387,475 |
) |
|
$ |
2,095,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.07 |
) |
|
$ |
0.03 |
|
|
$ |
(0.18 |
) |
|
$ |
0.07 |
|
Diluted |
|
$ |
(0.06 |
) |
|
$ |
0.03 |
|
|
$ |
(0.17 |
) |
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
19,745,525 |
|
|
|
17,774,022 |
|
|
|
18,675,769 |
|
|
|
28,083,665 |
|
Diluted |
|
|
20,475,085 |
|
|
|
19,102,709 |
|
|
|
19,483,464 |
|
|
|
29,672,645 |
|
The accompanying notes are an integral part of the financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
|
|
Common Stock |
|
|
Additional Paid in |
|
|
Accumulated Earnings |
|
|
Accumulated Other |
|
|
Total Shareholders' |
|
|||||||||
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
(Deficit) |
|
|
Comprehensive Income |
|
|
Deficit |
|
||||||
Beginning balance, December 31, 2019 |
|
|
18,017,944 |
|
|
$ |
18,018 |
|
|
$ |
5,795,636 |
|
|
$ |
(33,446,276 |
) |
|
$ |
— |
|
|
$ |
(27,632,622 |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
116,605 |
|
|
|
— |
|
|
|
116,605 |
|
Stock options exercised |
|
|
25,000 |
|
|
|
25 |
|
|
|
7,475 |
|
|
|
— |
|
|
|
— |
|
|
|
7,500 |
|
Share-based compensation |
|
|
63,333 |
|
|
|
63 |
|
|
|
157,533 |
|
|
|
— |
|
|
|
— |
|
|
|
157,596 |
|
Balance, March 31, 2020 |
|
|
18,106,277 |
|
|
$ |
18,106 |
|
|
$ |
5,960,644 |
|
|
$ |
(33,329,671 |
) |
|
$ |
— |
|
|
$ |
(27,350,921 |
) |
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,206,582 |
) |
|
|
— |
|
|
|
(2,206,582 |
) |
Stock options exercised |
|
|
150,000 |
|
|
|
150 |
|
|
|
30,113 |
|
|
|
— |
|
|
|
— |
|
|
|
30,263 |
|
Share-based compensation |
|
|
80,000 |
|
|
|
80 |
|
|
|
176,589 |
|
|
|
— |
|
|
|
— |
|
|
|
176,669 |
|
Balance, June 30, 2020 |
|
|
18,336,277 |
|
|
$ |
18,336 |
|
|
$ |
6,167,346 |
|
|
$ |
(35,536,253 |
) |
|
$ |
— |
|
|
$ |
(29,350,571 |
) |
Shares issued in connection with PGP asset acquisition |
|
|
3,141,361 |
|
|
|
3,141 |
|
|
$ |
3,986,387 |
|
|
|
— |
|
|
|
— |
|
|
|
3,989,528 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,297,499 |
) |
|
|
— |
|
|
|
(1,297,499 |
) |
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(19,084 |
) |
|
|
(19,084 |
) |
Stock options exercised |
|
|
50,000 |
|
|
|
50 |
|
|
|
11,950 |
|
|
|
— |
|
|
|
— |
|
|
|
12,000 |
|
Share-based compensation |
|
|
55,000 |
|
|
|
55 |
|
|
|
178,498 |
|
|
|
— |
|
|
|
— |
|
|
|
178,553 |
|
Balance, September 30, 2020 |
|
|
21,582,638 |
|
|
$ |
21,582 |
|
|
$ |
10,344,181 |
|
|
$ |
(36,833,752 |
) |
|
$ |
(19,084 |
) |
|
$ |
(26,487,073 |
) |
|
|
Common Stock |
|
|
Additional Paid in |
|
|
Accumulated Earnings |
|
|
Accumulated Other |
|
|
Total Shareholders' |
|
|||||||||
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
(Deficit) |
|
|
Comprehensive Income |
|
|
Equity (Deficit) |
|
||||||
Beginning balance, December 31, 2018 |
|
|
39,921,591 |
|
|
$ |
39,922 |
|
|
$ |
4,733,701 |
|
|
$ |
2,683,478 |
|
|
$ |
— |
|
|
$ |
7,457,101 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
460,664 |
|
|
|
— |
|
|
|
460,664 |
|
Stock options exercised |
|
|
98,332 |
|
|
|
98 |
|
|
|
36,134 |
|
|
|
— |
|
|
|
— |
|
|
|
36,232 |
|
Share-based compensation |
|
|
470,200 |
|
|
|
470 |
|
|
|
223,134 |
|
|
|
— |
|
|
|
— |
|
|
|
223,604 |
|
Balance, March 31, 2019 |
|
|
40,490,123 |
|
|
$ |
40,490 |
|
|
$ |
4,992,969 |
|
|
$ |
3,144,142 |
|
|
$ |
— |
|
|
$ |
8,177,601 |
|
Common stock redemption |
|
|
(23,271,667 |
) |
|
|
(23,271 |
) |
|
|
— |
|
|
|
(39,073,130 |
) |
|
|
— |
|
|
|
(39,096,401 |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,054,943 |
|
|
|
— |
|
|
|
1,054,943 |
|
Stock options exercised |
|
|
457,888 |
|
|
|
458 |
|
|
|
59,917 |
|
|
|
— |
|
|
|
— |
|
|
|
60,375 |
|
Share-based compensation |
|
|
76,400 |
|
|
|
76 |
|
|
|
212,502 |
|
|
|
— |
|
|
|
— |
|
|
|
212,578 |
|
Balance, June 30, 2019 |
|
|
17,752,744 |
|
|
$ |
17,753 |
|
|
$ |
5,265,388 |
|
|
$ |
(34,874,045 |
) |
|
$ |
— |
|
|
$ |
(29,590,904 |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
580,234 |
|
|
|
— |
|
|
|
580,234 |
|
Stock options exercised |
|
|
75,000 |
|
|
|
75 |
|
|
|
29,175 |
|
|
|
— |
|
|
|
— |
|
|
|
29,250 |
|
Share-based compensation |
|
|
82,600 |
|
|
|
82 |
|
|
|
241,934 |
|
|
|
— |
|
|
|
— |
|
|
|
242,016 |
|
Balance, September 30, 2019 |
|
|
17,910,344 |
|
|
$ |
17,910 |
|
|
$ |
5,536,497 |
|
|
$ |
(34,293,811 |
) |
|
$ |
— |
|
|
$ |
(28,739,404 |
) |
The accompanying notes are an integral part of the financial statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months Ended |
|
|||||
|
|
September 30, 2020 |
|
|
September 30, 2019 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(3,387,475 |
) |
|
$ |
2,095,841 |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization of intangible assets |
|
|
1,499,927 |
|
|
|
1,424,934 |
|
Non-cash lease expense |
|
|
207,378 |
|
|
|
203,205 |
|
Amortization of debt issuance costs and debt discount |
|
|
26,935 |
|
|
|
25,584 |
|
Bad debt expense |
|
|
166,002 |
|
|
|
101,938 |
|
Change in estimated fair value of interest rate swap liability |
|
|
(21,650 |
) |
|
|
78,440 |
|
Deferred income tax benefit |
|
|
(492,807 |
) |
|
|
(4,194 |
) |
Share-based compensation |
|
|
512,818 |
|
|
|
678,199 |
|
Unrealized foreign exchange loss |
|
|
84,757 |
|
|
|
33,291 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
1,333,515 |
|
|
|
(477,319 |
) |
Inventory |
|
|
(123,359 |
) |
|
|
(315,155 |
) |
Income tax receivable/payable |
|
|
(14,379 |
) |
|
|
(414,817 |
) |
Prepaid expenses and other current assets |
|
|
54,953 |
|
|
|
(40,086 |
) |
Accounts payable |
|
|
552,166 |
|
|
|
332,566 |
|
Accrued expenses |
|
|
(698,380 |
) |
|
|
(14,826 |
) |
Revenue contract liability |
|
|
(707,171 |
) |
|
|
(143,812 |
) |
Operating lease liabilities |
|
|
(254,363 |
) |
|
|
(197,875 |
) |
Other current liabilities |
|
|
— |
|
|
|
(71,581 |
) |
Net cash (used in) provided by operating activities |
|
|
(1,261,133 |
) |
|
|
3,294,333 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Investment in intangible assets |
|
|
— |
|
|
|
(27,400 |
) |
Acquisition of PGP assets, net of cash acquired |
|
|
(6,266,335 |
) |
|
|
— |
|
Acquisition of property and equipment |
|
|
(38,712 |
) |
|
|
(32,495 |
) |
Net cash used in investing activities |
|
|
(6,305,047 |
) |
|
|
(59,895 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from draw on revolving loan |
|
|
1,000,000 |
|
|
|
— |
|
Proceeds from Paycheck Protection Program |
|
|
835,300 |
|
|
|
— |
|
Proceeds from stock option exercises |
|
|
49,750 |
|
|
|
189,981 |
|
Payments of debt issuance costs |
|
|
— |
|
|
|
(5,736 |
) |
Principal payments on finance lease obligations |
|
|
— |
|
|
|
(14,198 |
) |
Principal payments on long-term debt |
|
|
(1,264,322 |
) |
|
|
(1,105,461 |
) |
Net cash provided by (used in) financing activities |
|
|
620,728 |
|
|
|
(935,414 |
) |
Effect of exchange rate changes on cash |
|
|
(72,340 |
) |
|
|
(33,291 |
) |
Net (decrease) increase in cash and cash equivalents |
|
|
(7,017,792 |
) |
|
|
2,265,733 |
|
Cash and cash equivalents – beginning of period |
|
|
9,686,698 |
|
|
|
6,311,563 |
|
Cash and cash equivalents – end of period |
|
$ |
2,668,906 |
|
|
$ |
8,577,296 |
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
462,959 |
|
|
$ |
502,764 |
|
Cash paid for income taxes |
|
$ |
77,465 |
|
|
$ |
436,200 |
|
Supplemental schedule of non-cash activities: |
|
|
|
|
|
|
|
|
Common stock redemption in exchange for share redemption consideration obligation |
|
$ |
— |
|
|
$ |
39,096,401 |
|
Shares issued in connection with PGP asset acquisition |
|
$ |
3,989,528 |
|
|
$ |
— |
|
Right-of-use assets obtained in exchange for lease liabilities |
|
$ |
1,383,052 |
|
|
$ |
305,163 |
|
Inventory transferred to assets deployed at client locations |
|
$ |
27,668 |
|
|
$ |
157,202 |
|
The accompanying notes are an integral part of the financial statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS AND RECENT DEVELOPMENTS
Unless the context indicates otherwise, references to “Galaxy Gaming, Inc.,” “we,” “us,” “our,” or the “Company,” refer to Galaxy Gaming, Inc., a Nevada corporation (“Galaxy Gaming”).
We are an established global gaming company specializing in the design, development, assembly, marketing and acquisition of proprietary casino table games and associated technology, platforms and systems for the casino gaming industry. Casinos use our proprietary products and services to enhance their gaming floor operations and improve their profitability, productivity and security, as well as to offer popular cutting-edge gaming entertainment content and technology to their players. We market our products and services to online casinos worldwide and to land-based casino gaming companies in North America, the Caribbean, Central America, the British Isles, Europe and Africa and to cruise ship companies. We license our products and services for use solely in legalized gaming markets.
Share Redemption. On May 6, 2019, we redeemed all 23,271,667 shares of our common stock held by Triangulum Partners, LLC (“Triangulum”), an entity controlled by Robert B. Saucier, Galaxy Gaming's founder, and, prior to the redemption, the holder of a majority of our outstanding common stock. Our Articles of Incorporation (the “Articles”) provide that if certain events occur in relation to a stockholder that is required to undergo a gaming suitability review or similar investigative process, we have the option to purchase all or any part of such stockholder’s shares at a price per share that is equal to the average closing share price over the thirty calendar days preceding the purchase. The average closing share price over the thirty calendar days preceding the redemption was $1.68 per share.
The consideration owed to Triangulum for the redemption is $39,096,401 (the “Redemption Consideration”). See Note 10.
There is ongoing litigation between the Company and Triangulum related to the redemption and other matters. See Note 11.
Membership Interest Purchase Agreement. On February 25, 2020, Galaxy Gaming entered into a Membership Interest Purchase Agreement, dated February 25, 2020 (the “Purchase Agreement”), between the Company and the membership interest holders of Progressive Games Partners LLC (“PGP”).
On August 21, 2020, the Company entered into a First Amendment to the Purchase Agreement between the Company and the membership interest holders of PGP. The First Amendment, among other things, fixed the cash portion of the purchase price at $6.425 million and established that the stock portion would be satisfied through the issuance of 3,141,361 shares of the Company’s common stock with a value of $1.27 per share on the date of the acquisition. The entirety of the purchase price ($10,414,528) has been allocated to customer relationships and is included in Other intangible assets, net, on the Company’s balance sheet. See Note 7. The Company also acquired net working capital of $581,885 (including cash of $158,665), all of which is payable to the sellers of PGP.
Management has determined that the PGP transaction does not meet the definition of a business combination and therefore has been accounted for as an asset acquisition.
COVID-19. On March 11, 2020, the World Health Organization declared a pandemic related to the COVID-19 outbreak, which led to a global health emergency. The public-health impact of the outbreak continues to remain largely unknown and still evolving. The related health crisis could continue to adversely affect the global economy, resulting in continued economic downturn that could impact demand for our products.
On March 17, 2020, the Company announced that it suspended billing to customers who had closed their doors due to the COVID-19 outbreak. As a result, we did not earn revenue for the use of our games by our physical casino customers during the time that they were closed. In general, the online gaming customers who license our games through our distributor remained and continue to remain in operation in spite of the COVID-19 crisis. We earned revenue from them during the crisis and expect to continue to do so, but potentially at levels that may be lower than we previously received.
As of the date of this filing, many land-based casinos have begun to re-open with significantly reduced occupancy and other limitations. As they reopen, it will take additional time for their operations to return to pre-crisis levels. Given the uncertainties around casino re-openings, we instituted a phased billing approach for our clients through fiscal year 2020, which will result in us realizing substantially less revenue than we might otherwise expect. In addition, because of COVID-19-related financial pressures on our physical casino customers, there can be no assurance that our accounts receivable we will be paid timely (or at all) for revenues earned prior to the shutdowns. Finally, some of our casino clients have notified vendors (including us) that they will lengthen payment terms for a period of time after reopening as they attempt to preserve their own liquidity.
8
We also rely on third-party suppliers and manufacturers in China, many of whom were shut down or severely cut back production during the shutdown. Although this has not had a material effect on our supply chain, any future disruption of our suppliers and their contract manufacturers may impact our sales and operating results going forward.
Because of the uncertainties of COVID-19, the Company drew on its Revolving Loan in the amount of $1,000,000 on March 12, 2020. Also, on April 17, 2020, the Company obtained an unsecured loan of $835,300 through Zions Bancorporation, N.A. dba Nevada State Bank under the Paycheck Protection Program (the “PPP Loan”) pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the Paycheck Protection Program Flexibility Act (the “Flexibility Act”). Pursuant to the CARES Act, the Federal Reserve created the Main Street Lending Program to provide financing for small and medium-sized businesses. On October 26, 2020, the Company borrowed $4 million from Zions Bancorporation N.A., dba Nevada State Bank under the Main Street Lending Program (the “Main Street Loan”). The Main Street Loan bears interest at a rate of three-month US dollar LIBOR plus 300 basis points (initially 3.215%), and interest payments during the first year are deferred and added to the loan balance. The Main Street Loan may be prepaid at any time and matures on the fifth anniversary of the date it was funded, with 15% of principal amortizing in each of the third and fourth years the loan is outstanding. See Note 10.
As of the date of this filing, the Company believes that it has adequate liquidity to meet its short-term obligations. If the effects of the COVID-19 crisis endure or there is a second period of casino closures (Note 16), we may be required to reassess our obligations, including our ability to pay employee compensation and benefits.
The COVID-19 crisis may change the behavior of gaming patrons. Most of our clients operate places of public accommodation, and their patrons may reduce visitation and play as a precaution. Further, governmental authorities may continue to impose reduced hours of operation or limit the capacity of such places of public accommodation. A long-term reduction in play could have a material adverse impact on our results of operations. Depending on the length and severity of any such adverse impact, we may fail to comply with our obligations, including covenants in our credit agreement, and we may need to reassess the carrying value of our assets.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. The accompanying condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited interim condensed financial statements contain all necessary adjustments (including all those of a recurring nature and those necessary in order for the financial statements to be not misleading) and all disclosures to present fairly our financial position and the results of our operations and cash flows for the periods presented. As permitted by the rules and regulations of the SEC, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations.
These unaudited interim condensed financial statements should be read in conjunction with the financial statements and the related notes thereto included in our Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on March 30, 2020 (the “2019 10-K”).
The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
Basis of accounting. The financial statements have been prepared on the accrual basis of accounting in conformity with U.S. GAAP. Revenues are recognized as income when earned and expenses are recognized when they are incurred. We do not have significant categories of cost of revenues. Expenses such as wages, consulting expenses, legal, regulatory and professional fees and rent are recorded when the expense is incurred.
Use of estimates and assumptions. We are required to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our Company and the industry as a whole, and information available from other outside sources. Our estimates affect reported amounts for assets, liabilities, revenues, expenses and related disclosures. Actual results may differ from initial estimates.
Consolidation. The financial statements are presented on a consolidated basis, including the results of the Company and its wholly owned subsidiary, PGP. All intercompany transactions and balances have been eliminated in consolidation.
Impairment considerations. We considered whether the impact of the current COVID-19 pandemic on operations and financial results is an indicator that impairment may exist related to the Company’s inventory (Note 4), property and equipment (Note 5), assets deployed at client locations (Note 6) and intangible assets (Note 7). As a result of its impairment assessments, management has determined that its assets are not currently impaired. We considered the following:
Inventory. We considered whether additional write-offs or reserves were necessary to our inventory balance as a result of the impact of COVID-19. The vast majority of our Inventory is not sold to customers but, rather, is used to support new installations and repairs of our electronic table game systems which we account for as Assets Deployed at Client Locations. Based on our assessment, we
9
determined additional write-offs and reserves were not required. We are in the process of developing a new generation of electronic table game systems and, once that new generation of system is available for customer installation, we will review inventory to determine how much of existing Inventory can be used in the next generation of systems. To the extent that there is Inventory that 1) cannot be used in the new generation of systems and 2) is in excess of what we might expect to need for repair of older generation systems that we expect to remain in the field, we may incur an impairment charge with respect to Inventory that is obsolete.
Long-lived assets. Our long-lived assets include property and equipment, assets deployed at client locations, and intangible assets. We assessed whether there was an indication of impairment of each asset group due to COVID-19 noting that based on the current contracts, including the lengthened payment terms noted above, the carrying value of our long-lived asset groups were recoverable.
Goodwill. We performed a qualitative assessment and determined that it was not more likely than not that the carrying value of the reporting unit was impaired. As part of our qualitative assessment, we considered our previous forecasts and assumptions based on our current projections, which are subject to various risks and uncertainties, including projected revenue, projected operating income, terminal growth rates, and the cost of capital.
Reclassifications. Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period financial statement presentations.
Other significant accounting policies. 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 Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 addresses the required disclosures around fair value measurement, removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. We have adopted the new standard effective January 1, 2020, which did not have a material effect on our financial statements or related disclosures.
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 smaller reporting companies until fiscal years beginning after December 15, 2022. Early adoption is permitted. We do not believe the adoption of this guidance will have a material impact on our financial statements or related disclosures.
NOTE 3. REVENUE RECOGNITION
Revenue recognition. We generate revenue primarily from the licensing of our intellectual property. We also, occasionally, receive a one-time sale of certain products and/or reimbursement of our equipment.
License fees. We derive product lease and royalty 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. In addition, revenue associated with performance-based agreements is recognized during the month that the usage of the product or intellectual property occurs.
Product sales. Occasionally, we sell certain incidental products or receive reimbursement of our equipment after the commencement of the new license agreement. Revenue from such sales is recognized as a separate performance obligation when we ship the items.
10
The following table disaggregates our revenue by geographic location for the following periods:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
North America and Caribbean |
|
$ |
971,147 |
|
|
$ |
3,891,875 |
|
|
$ |
4,262,408 |
|
|
$ |
11,644,353 |
|
Europe, Middle East and Africa |
|
|
826,686 |
|
|
|
1,479,771 |
|
|
|
2,693,714 |
|
|
|
4,473,230 |
|
Total revenue |
|
$ |
1,797,833 |
|
|
$ |
5,371,646 |
|
|
$ |
6,956,122 |
|
|
$ |
16,117,583 |
|
Revenue contract liability
For a portion of our business, we invoice our clients monthly in advance for unlimited use of our intellectual property licenses and recognize a revenue contract liability that represents such advanced billing to our clients for unsatisfied performance. We reduce the revenue contract liability and recognize revenue when we transfer those goods or services and, therefore, satisfy our performance obligation.
The table below summarizes changes in the revenue contract liability during the nine months ended September 30, 2020:
Beginning balance – January 1, 2020 |
|
$ |
1,294,265 |
|
Increase (advanced billings) |
|
|
7,199,100 |
|
Decrease (revenue recognition) |
|
|
(7,906,271 |
) |
Ending balance – September 30, 2020 |
|
$ |
587,094 |
|
Revenue recognized during the three and nine months ended September 30, 2020 that was included in the beginning balance of revenue contract liability was $6,250 and $1,292,182, respectively.
NOTE 4. INVENTORY
Inventory, net consisted of the following at:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2020 |
|
|
2019 |
|
||
Raw materials and component parts |
|
$ |
379,711 |
|
|
$ |
359,349 |
|
Finished goods |
|
|
428,103 |
|
|
|
343,305 |
|
Inventory, gross |
|
|
807,814 |
|
|
|
702,654 |
|
Less: inventory reserve |
|
|
(46,469 |
) |
|
|
(37,000 |
) |
Inventory, net |
|
$ |
761,345 |
|
|
$ |
665,654 |
|
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following at:
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2020 |
|
|
2019 |
|
||
Furniture and fixtures |
|
$ |
312,640 |
|
|
$ |
312,639 |
|
Automotive vehicles |
|
|
215,127 |
|
|
|
215,127 |
|
Office and computer equipment |
|
|
329,296 |
|
|
|
302,296 |
|
Leasehold improvements |
|
|
18,554 |
|
|
|
6,843 |
|
Property and equipment, gross |
|
|