UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact name of small business issuer as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(IRS Employer Identification No.) |
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(Address of principal executive offices) |
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(Issuer’s telephone number) |
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading symbol |
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Name of exchange on which registered |
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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.
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).
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 |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
GALAXY GAMING, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 2022
TABLE OF CONTENTS
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PART I
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Item 1: |
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Item 2: |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3: |
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Item 4: |
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PART II
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Item 1: |
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Item 2: |
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Item 6: |
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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, 2022 and December 31, 2021 (unaudited) |
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Notes to Condensed Consolidated Financial Statements (unaudited) |
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3
GALAXY GAMING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS |
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June 30, |
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December 31, |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net of allowance of $ |
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Inventory |
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Income tax receivable |
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Prepaid expenses |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use assets |
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Assets deployed at client locations, net |
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Goodwill |
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Other intangible assets, net |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ DEFICIT |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses |
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Revenue contract liability |
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Current portion of operating lease liabilities |
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Current portion of long-term debt |
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Total current liabilities |
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Long-term operating lease liabilities |
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Long-term debt and liabilities, net |
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Deferred tax liabilities, net |
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Total liabilities |
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Stockholders’ deficit |
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Preferred stock, |
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Common stock, |
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Additional paid-in capital |
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Accumulated deficit |
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Accumulated other comprehensive loss |
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Total stockholders’ deficit |
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Total liabilities and stockholders’ deficit |
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$ |
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$ |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
4
GALAXY GAMING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, 2022 |
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June 30, 2021 |
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June 30, 2022 |
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June 30, 2021 |
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Revenue: |
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Licensing fees |
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$ |
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$ |
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$ |
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$ |
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Total revenue |
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Costs and expenses: |
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Cost of ancillary products and assembled components |
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Selling, general and administrative |
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Research and development |
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Depreciation and amortization |
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Share-based compensation |
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Total costs and expenses |
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Income from operations |
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Other income (expense): |
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Interest income |
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Interest expense |
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( |
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( |
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( |
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( |
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Share redemption consideration |
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— |
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( |
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— |
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( |
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Foreign currency exchange (loss) gain |
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( |
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( |
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Change in fair value of interest rate swap liability |
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— |
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— |
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Total other expense, net |
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( |
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( |
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( |
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( |
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(Loss) income before provision for income taxes |
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( |
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( |
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Provision for income taxes |
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( |
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( |
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( |
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( |
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Net (loss) income |
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( |
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( |
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Foreign currency translation adjustment |
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( |
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( |
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( |
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Comprehensive (loss) income |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Net (loss) income per share: |
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Basic |
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$ |
( |
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$ |
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$ |
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$ |
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Diluted |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Weighted-average shares outstanding: |
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Basic |
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Diluted |
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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)
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Common Stock |
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Additional Paid-in |
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Accumulated |
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Accumulated Other Comprehensive |
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Total Stockholders' |
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Shares |
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Amount |
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Capital |
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Deficit |
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Loss |
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Deficit |
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Beginning balance, December 31, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
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— |
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( |
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Foreign currency translation loss |
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— |
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— |
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— |
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— |
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( | ) |
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( | ) |
Stock options exercised |
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— |
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— |
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Share-based compensation |
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— |
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— |
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Balance, March 31, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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Net loss |
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— |
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— |
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— |
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( |
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— |
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( |
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Foreign currency translation loss |
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— |
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— |
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— |
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— |
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( |
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( |
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Surrender of options |
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( |
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( |
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( |
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— |
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— |
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( |
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Stock options exercised |
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— |
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— |
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Share-based compensation |
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— |
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— |
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Balance, June 30, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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Common Stock |
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Additional Paid-in |
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Accumulated |
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Accumulated Other Comprehensive |
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Total Stockholders' |
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Shares |
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Amount |
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Capital |
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Deficit |
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Loss |
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Deficit |
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Beginning balance, December 31, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
( |
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Net income |
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— |
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— |
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— |
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— |
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Foreign currency translation loss |
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— |
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— |
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— |
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— |
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( | ) |
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( | ) |
Stock options exercised |
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— |
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— |
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Share-based compensation |
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— |
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— |
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Balance, March 31, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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Net income |
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— |
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— |
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— |
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— |
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Foreign currency translation gain |
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— |
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— |
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— |
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— |
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Stock options exercised |
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— |
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— |
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Share-based compensation |
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— |
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— |
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Balance, June 30, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
6
GALAXY GAMING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended |
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June 30, 2022 |
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June 30, 2021 |
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Cash flows from operating activities: |
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Net (loss) income |
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$ |
( |
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$ |
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Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
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Depreciation and amortization |
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Amortization of right-of-use assets |
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Amortization of debt issuance costs and debt discount |
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Bad debt (recovery) expense |
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( |
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Change in fair value of interest rate swap liability |
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— |
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( |
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Deferred income tax |
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- |
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Share-based compensation |
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Foreign currency exchange loss |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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( |
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( |
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Inventory |
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( |
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( |
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Income tax receivable/payable |
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( |
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Prepaid expenses and other current assets |
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Other assets |
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( |
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( |
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Accounts payable |
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( |
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Accrued expenses |
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( |
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Revenue contract liability |
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Operating lease liabilities |
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( |
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( |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Investment in internally developed software |
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( |
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( |
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Acquisition of property and equipment |
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( |
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( |
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Net cash used in investing activities |
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( |
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( |
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Cash flows from financing activities: |
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Proceeds from stock option exercises |
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Principal payments on long-term debt |
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( |
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( |
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Net cash used in financing activities |
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( |
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( |
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Effect of exchange rate changes on cash |
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( |
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( |
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Net increase (decrease) in cash and cash equivalents |
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( |
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Cash and cash equivalents – beginning of period |
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Cash and cash equivalents – end of period |
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$ |
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$ |
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Supplemental cash flow information: |
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Cash paid for interest |
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$ |
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$ |
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Cash paid for income taxes |
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$ |
— |
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$ |
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Supplemental schedule of non-cash activities: |
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Net option settlement and tax withholding through additional paid-in capital |
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$ |
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$ |
— |
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Inventory transferred to assets deployed at client locations |
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$ |
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$ |
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Right-of-use assets obtained in exchange for lease liabilities |
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$ |
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$ |
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Debt modification fee payable |
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$ |
— |
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$ |
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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 gaming industry. Casinos use our proprietary products and services to enhance their gaming operations and improve their profitability and productivity, 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 United Kingdom, Europe and Africa as well as to cruise ship companies. We license our products and services for use solely in legalized gaming markets. We also license our content and distribute content from other companies to iGaming operators throughout the world.
COVID-19. Disruptions due to the COVID-19 crisis continue to impact our results of operations. Most of the Company’s land-based customers have resumed normal operations. However, some of our customers rely on international travelers from countries that are still enforcing COVID-19 lockdowns or are affected by the war in Ukraine.
We rely on third-party suppliers and manufacturers in China. Many of these suppliers were affected by COVID-19 and the worldwide supply chain disruptions that ensued and, in many cases, are continuing. These disruptions of our suppliers and their contract manufacturers may impact our sales and operating results going forward.
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 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 thereto included in our 2021 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.
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.
Cash and cash equivalents. Our cash and cash equivalents consist of bank deposits. These deposits are in insured banking institutions, which are insured up to $
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 5) 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.
Patents |
|
|
Client relationships |
|
|
Trademarks |
|
|
Non-compete agreements |
|
|
Internally-developed software |
|
Other intangible assets (Note 5) 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.
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:
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 6).
Revenue recognition. We account for our revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. See Note 3.
Foreign currency translation. The functional currency for PGP is the Euro. Gains and losses from settlement of transactions involving foreign currency amounts are included in other income or expense in the consolidated statements of operations. Gains and losses resulting from translating assets and liabilities from the functional currency to U.S. dollars are included in accumulated other comprehensive income or loss in the consolidated statements of changes in stockholders’ deficit.
Net income per share. Basic net income per share is calculated by dividing net income by the weighted-average number of common shares issued and outstanding during the year. Diluted net income per share is similar to basic, except that the weighted-average number of shares outstanding is increased by the potentially dilutive effect of outstanding stock options and restricted stock, if applicable, during the year.
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
9
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)
All “shares” above will 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
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 $
Other significant accounting policies. Our significant accounting policies are described in our 2021 10-K. There have been no material changes to those policies.
10
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.
Disaggregation of revenue
The following table disaggregates our revenue by geographic location for the following periods:
|
|
Three Months |
|
|
Six Months |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
North America and Caribbean |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Europe, Middle East and Africa |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Contract liabilities. Amounts billed and cash received in advance of performance obligations fulfilled are recorded as contract liabilities and recognized as 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 $
NOTE 4. INVENTORY
Inventory consisted of the following at:
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Raw materials and component parts |
|
$ |
|
|
$ |
|
||
Finished goods |
|
|
|
|
|
|
||
Inventory |
|
$ |
|
|
$ |
|
||
NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill. A goodwill balance of $
Other intangible assets, net. Other intangible assets, net consisted of the following at:
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Patents |
|
$ |
|
|
$ |
|
||
Customer relationships |
|
|
|
|
|
|
||
Trademarks |
|
|
|
|
|
|
||
Non-compete agreements |
|
|
|
|
|
|
||
Software |
|
|
|
|
|
|
||
Other intangible assets, gross |
|
|
|
|
|
|
||
Less: accumulated amortization |
|
|
( |
) |
|
|
( |
) |
Other intangible assets, net |
|
$ |
|
|
$ |
|
||
For the three and six months ended June 30, 2022 and 2021, amortization expense related to other intangible assets were $
11
NOTE 6. LEASES
Lessee
We have operating leases for our corporate office,
On September 21, 2021, we executed a third amendment to one of our satellite facilities to amend the lease expiration date from
As of June 30, 2022, our leases have remaining lease terms ranging from
Supplemental balance sheet information related to leases is as follows:
|
|
As of June 30, 2022 |
||||
|
|
Amount |
|
|
Classification |
|
Operating leases: |
|
|
|
|
|
|
Operating lease right-of-use lease assets |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Operating lease current liabilities |
|
$ |
|
|
Current portion of operating lease liabilities |
|
|
|
|
|
|
|
|
Operating lease long-term liabilities |
|
|
|
|
Long-term operating lease liabilities |
|
|
|
|
|
|
|
|
Total operating lease liabilities |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term: |
|
|
|
|
|
|
Operating leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate: |
|
|
|
|
|
|
Operating leases |
|
|
% |
|
|
|
The components of lease expense are as follows:
|
|
Three Months Ended June 30, 2022 |
||||
|
|
Amount |
|
|
Classification |
|
Operating lease cost |
|
$ |
|
|
Selling, general and administrative expense |
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2022 |
||||
|
|
Amount |
|
|
Classification |
|
Operating lease cost |
|
$ |
|
|
Selling, general and administrative expense |
|
Supplemental cash flow information related to leases is as follows:
|
|
Six Months Ended June 30, 2022 |
||||
|
|
Amount |
|
|
Classification |
|
Cash paid for amounts included in the |
|
|
|
|
|
|
Operating cash flows from operating leases |
|
$ |
|
|
Net income |
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange |
|
|
|
|
|
|
Operating leases |
|
$ |
|
|
Supplemental cash flow information |
|
12
As of June 30, 2022, future maturities of our operating lease liabilities are as follows:
|
|
Amount |
|
|
For the remaining six months ending December 31, 2022 |
|
$ |
|
|
Years ending December 31, |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
Thereafter |
|
|
— |
|
Total minimum lease payments |
|
|
|
|
Less: imputed interest |
|
|
( |
) |
Total operating lease liability |
|
|
|
|
Less: current portion |
|
|
( |
) |
Long-term portion |
|
$ |
|
|
NOTE 7. LONG-TERM LIABILITIES
Long-term liabilities consisted of the following at:
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Fortress credit agreement |
|
$ |
|
|
$ |
|
||
Insurance notes payable |
|
|
|
|
|
|
||
Long-term liabilities, gross |
|
|
|
|
|
|
||
Less: Unamortized debt issuance costs |
|
|
( |
) |
|
|
( |
) |
Long-term liabilities, net of debt issuance costs |
|
|
|
|
|
|
||
Less: Current portion |
|
|
( |
) |
|
|
( |
) |
Long-term liabilities, net |
|
$ |
|
|
$ |
|
||
For most of 2021, our long-term liabilities consisted of term and revolving notes owed to Nevada State Bank, borrowings under the Main Street Priority Loan Program, and redemption consideration owed to Triangulum Partners LLC. All of those liabilities were paid in full from the proceeds of the Fortress Credit Agreement on November 15, 2021.
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 $
13
In connection with entering into the Fortress Credit Agreement, the Company also issued warrants to purchase a total of up to
As of June 30, 2022, minimum future maturities of our long-term liabilities are as follows (the excess cash flow sweep mechanism in the Fortress Credit Agreement may increase repayments in 2023 through 2026):
|
|
Total |
|
|
For the remaining six months ending December 31, 2022 |
|
$ |
|
|
Years ending December 31, |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Long-term liabilities, gross |
|
$ |
|
|
NOTE 8. 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, 2022 and 2021, respectively, we had the following client concentrations:
|
|
Location |
|
Six Months Ended June 30, 2022 |
|
|
Six Months Ended June 30, 2021 |
|
|
Accounts |
|
|
Accounts |
|
||||
Client A |
|
Europe |
|
|
% |
|
|
% |
|
$ |
|
|
$ |
— |
|
|||
Client B |
|
North America |
|
|
% |
|
|
% |
|
$ |
|
|
$ |
|
||||
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.
Intellectual property agreements. From time to time, the Company purchases and licenses intellectual property from third-parties and the Company, in turn, utilizes that intellectual property in certain games licensed to clients. In these purchase and license 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.
NOTE 9. INCOME TAXES
Our forecasted annual effective tax rate (“AETR”) at June 30, 2022 was
For the six months ended June 30, 2022 and 2021, our effective tax rate (“ETR”) was (
NOTE 10. SUBSEQUENT EVENTS
On and as of July 13, 2022, the Company's Board appointed Ms. Meredith Brill as a member of the Board, to serve as a Class II director with a term expiring (12) months from her appointment or until the Company's next annual meeting of the Company's shareholders.
14
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, 2022 and 2021. 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 2021 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, table game display products and other ancillary equipment. In addition, we license intellectual property to legal internet gaming operators. We refer to the licensure of our products in land-based casinos as “Galaxy Core” and to the licensure of our products in online casinos as “Galaxy Digital”. 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, 2022 and 2021. For the three months ended June 30, 2022, we generated revenues of $5,676,195 compared to $4,749,330 for the comparable prior-year period, representing an increase of $926,865, or 19.5%. This increase was attributable to the continued recovery of our land-based customers from the effects of the COVID-19 crisis, particularly in the United Kingdom. Our online gaming revenues increased due to increased revenue earned by our iGaming clients, reflecting continued growth in their non-US markets and significantly increased revenue in existing or newly-opened US markets. However, revenue in both Galaxy Core and Galaxy Digital were adversely affected by the strengthening of the US Dollar versus the Euro and UK Pound. In local currency, revenues in Galaxy Core increased 15.6% and revenues in Galaxy Digital increased 31.6%.
Selling, general and administrative expenses for the three months ended June 30, 2022 were $3,483,918 compared to $2,532,655 for the comparable prior-year period, representing an increase of $951,263, or 37.6%. This increase was due to higher internal labor and related expenses due to both an increase in the number of employees and an increase in compensation for continuing employees. In addition, we experienced increases in travel expenses and increase in marketing expenses related to our attendance at trade shows that were not held in 2021. Finally, a decrease in legal fees related to the Triangulum lawsuit was more than offset by legal and other fees related to the contested proxy solicitation.
Research and development expenses for the three months ended June 30, 2022 were $152,022, compared to $129,859 for the comparable prior-year period, representing an increase of $22,163, or 17.1%. This increase was primarily due to higher internal labor and related expenses.
Share-based compensation expenses for the three months ended June 30, 2022 were $315,408, as compared to $441,444 for the comparable prior-year period, representing a decrease of $126,036, or 28.6%. The decrease was due primarily to a change in the level and the composition of fees paid to members of our Board in 2022.
As a result of the changes described above, income from operations increased $43,865 or 4.8% to $949,150 for the three months ended June 30, 2022, compared to income from operations of $905,285 for the comparable prior-year period.
Total interest expense increased $1,557,293 to $1,697,435 for the three months ended June 30, 2022, compared to $140,142 for the comparable prior-year period. The increase was attributable to a larger balance of debt outstanding in the current period as compared to the prior year, and higher rates of interest on the current borrowings.
Share redemption consideration was $0 for the three months ended June 30, 2022, compared to $195,482 in the comparable prior-year period. The reduction is due to the payment in full of the Triangulum Redemption Consideration Obligation in November 2021.
Income tax expense was $194,977 for the three months ended June 30, 2022, compared to income tax expense of $47,136 for the comparable prior-year period. The increase in expense is primarily the result of decreased favorable discrete items related to excess tax benefits from stock-based compensation and changes in valuation allowance against deferred tax attributes.
Results of operations for the six months ended June 30, 2022 and 2021. For the six months ended June 30, 2022, we generated revenues of $11,594,794 compared to $9,032,339 for the comparable prior-year period, representing an increase of $2,562,455, or 28.4%. This increase was attributable to the continued recovery of Galaxy Core from the effects of the COVID-19 crisis, particularly in the United
15
Kingdom. Our online gaming revenues increased due to increased revenue earned by our iGaming clients, reflecting continued growth in their non-US markets and significantly increased revenue in existing or newly-opened US markets. However, revenue in both Galaxy Core and Galaxy Digital were adversely affected by the strengthening of the US Dollar versus the Euro and UK Pound. In local currency, revenues in Galaxy Core increased 22.0% and revenues in Galaxy Digital increased 40.5%.
Selling, general and administrative expenses for the six months ended June 30, 2022 were $6,527,277 compared to $5,243,707 for the comparable prior-year period, representing an increase of $1,283,570, or 24.5%. This increase was due to higher internal labor and related expenses due to both an increase in the number of employees and an increase in compensation for continuing employees. In addition, we experienced increases in travel expenses and increase in marketing expenses related to our attendance at trade shows that were not held in 2021. Finally, a decrease in legal fees related to the Triangulum lawsuit was more than offset by legal and other fees related to the contested proxy solicitation.
Research and development expenses for the six months ended June 30, 2022 were $351,092, compared to $248,560 for the comparable prior-year period, representing an increase of $102,532, or 41.3%. This increase was primarily due to higher internal labor and related expenses (base salary, payroll-related taxes, commissions and bonus accrual).
Share-based compensation expenses for the six months ended June 30, 2022 were $625,410, as compared to $758,084 for the comparable prior-year period, representing a decrease of $132,674, or 17.5%. The decrease was due primarily to a change in the level and the composition of fees paid to members of our Board in 2022.
As a result of the changes described above, income from operations increased $1,227,923 or 93.7% to $2,538,266 for the six months ended June 30, 2022, compared to income from operations of $1,310,343 for the comparable prior-year period.
Total interest expense increased $3,063,405 to $3,384,457 for the six months ended June 30, 2022, compared to $321,052 for the comparable prior-year period. The increase was attributable to a larger balance of debt outstanding in the current period as compared to the prior year, and higher rates of interest on the current borrowings.
Share redemption consideration was $0 for the six months ended June 30, 2022, compared to $390,964 in the comparable prior-year period. The reduction is due to the payment in full of the Triangulum Redemption Consideration Obligation in November 2021.
Income tax expense was $53,003 for the six months ended June 30, 2022, compared to income tax expense of $28,186 for the comparable prior-year period. The slight increase in expense is primarily the result of changes in valuation allowance against deferred tax attributes.
Adjusted EBITDA. Adjusted EBITDA includes adjustments to net income to exclude interest, income taxes, depreciation, amortization, share-based compensation, foreign currency exchange loss (gain), change in fair value of interest rate swap liability 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: |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Net (loss) income |
|
$ |
(1,115,641 |
) |
|
$ |
550,455 |
|
|
$ |
(1,129,603 |
) |
|
$ |
639,192 |
|
Interest expense |
|
|
1,697,435 |
|
|
|
140,142 |
|
|
|
3,384,457 |
|
|
|
321,052 |
|
Share redemption consideration |
|
|
— |
|
|
|
195,482 |
|
|
|
— |
|
|
|
390,964 |
|
Interest income |
|
|
(2,259 |
) |
|
|
(388 |
) |
|
|
(4,492 |
) |
|
|
(771 |
) |
Depreciation and amortization |
|
|
725,258 |
|
|
|
720,488 |
|
|
|
1,449,720 |
|
|
|
1,437,742 |
|
Share-based compensation |
|
|
315,408 |
|
|
|
441,444 |
|
|
|
625,410 |
|
|
|
758,084 |
|
Foreign currency exchange loss (gain) |
|
|
174,638 |
|
|
|
(11,355 |
) |
|
|
234,901 |
|
|
|
(2,271 |
) |
Change in fair value of interest |
|
|
— |
|
|
|
(16,187 |
) |
|
|
— |
|
|
|
(66,009 |
) |
Provision for income taxes |
|
|
194,977 |
|
|
|
47,136 |
|
|
|
53,003 |
|
|
|
28,186 |
|
Severance expense |
|
|
6,750 |
|
|
|
— |
|
|
|
28,477 |
|
|
|
3,750 |
|
Special project expense (benefit) - Triangulum |
|
|
— |
|
|
|
79,317 |
|
|
|
(86,959 |
) |
|
|
296,227 |
|
Special project expense - Other |
|
|
361,821 |
|
|
|
893 |
|
|
|
476,904 |
|
|
|
33,419 |
|
Adjusted EBITDA |
|
$ |
2,358,387 |
|
|
$ |
2,147,427 |
|
|
$ |
5,031,818 |
|
|
$ |
3,839,565 |
|
16
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, 2022, we had total current assets of $24,541,004 and total assets of $40,070,869. This compares to $23,890,122 and $40,452,705, respectively, as of December 31, 2021. The increase in total current assets at June 30, 2022 was due primarily to higher revenues in the 2022 period. The decrease in total assets was primarily due to amortization of other intangibles.
Our total current liabilities as of June 30, 2022 increased to $4,622,553 from $4,401,071 as of December 31, 2021, primarily due to an increase in accrued royalties in our online gaming business and an increase in federal income tax payable.
Our business was profitable and cash-flow positive from operations in Q2 2022. Based on our current forecast of operations, we believe we will have sufficient liquidity to fund our operations and to meet the obligations under our financing arrangements as they come due.
We continue to file applications for new or enhanced licenses in several jurisdictions, which may result in significant future legal and regulatory expenses. A significant increase in such expenses may require us to postpone growth initiatives or investments in personnel, inventory and research and development of our products. It is our intention to continue such initiatives and investments. However, to the extent we are not able to achieve our growth objectives or raise additional capital, we will need to evaluate the reduction of operating expenses.
Our operating activities provided cash of $1,982,655 for the six months ended June 30, 2022, compared to $1,009,660 for the comparable prior period. The increase in operating cash flow was primarily due to higher income from operations, partially offset by higher interest expense.
Cash used in investing activities during the six months ended June 30, 2022 was $193,359, compared to cash used of $90,763 for the comparable prior period. This increase was primarily due to an increase in the acquisition of certain software tools in 2022 compared to the prior period.
Cash used in financing activities during the six months ended June 30, 2022 was $328,207. This compares to $1,101,900 cash used by financing activities for the comparable prior period. The decreased was due to lower amortization of principal on our borrowings in the 2022 period.
Critical accounting policies. Our significant accounting policies are described in our 2021 10-K. There have been no material changes to those policies.
Off-balance sheet arrangements. As of June 30, 2022, 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.
17
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, 2022, 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.
18
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have been named in and have brought lawsuits in the normal course of business. See Note 8 to condensed consolidated financial statements included in Item 1 in this Form 10-Q, and Note 11 to our audited financial statements included in Item 8 “Financial Statements and Supplementary Financial Information” in our 2021 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On June 30, 2022, 22,237 restricted shares of our common stock valued at $82,499 were issued to members of our Board in partial consideration for their service in Q2 2022. These shares were fully vested upon issuance. These securities were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, (the “Securities Act”) and rules and regulations promulgated thereunder.
Our reliance upon Section 4(a)(2) of the Securities Act in granting the aforementioned options to purchase shares of our common stock was based in part upon the following factors: (a) each of the issuances of the securities was in connection with an isolated private transaction which did not involve any public offering; (b) there were a limited number of offerees; (c) there were no subsequent or contemporaneous public offerings of the securities by us; and (d) the negotiations for the issuance of the securities took place directly between the offeree and us.
19
ITEM 6. EXHIBITS
Exhibit Number |
|
Description |
|
Form |
|
File No. |
|
Exhibit |
|
Filing Date |
|
Filed Herewith |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.1 |
|
|
8-K |
|
000-30653 |
|
10.1 |
|
March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.2 |
|
|
8-K |
|
000-30653 |
|
10.1 |
|
May 17, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.3 |
|
|
8-K |
|
000-30653 |
|
10.1 |
|
October 8, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.4 |
|
Credit Agreement dated November 15, 2021, with Fortress Credit Corp. |
|
8-K |
|
000-30653 |
|
10.1 |
|
November 17, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.5 |
|
|
8-K |
|
000-30653 |
|
10.1 |
|
March 22, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.6 |
|
|
8-K |
|
000-30653 |
|
10.1 |
|
April 25, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.7 |
|
Amendment #3 to the Employment Agreement between the Company and Todd Cravens |
|
8-K |
|
000-30653 |
|
10.1 |
|
June 21, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.8 |
|
Board of Directors Service Agreement with Meredith Brill, Director |
|
8-K |
|
000-30653 |
|
10.1 |
|
July 15, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.9 |
|
First Amendment to Board of Directors Service Agreement with Meredith Brill, Director |
|
8-K |
|
000-30653 |
|
10.1 |
|
July 26, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.1 |
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2 |
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.1 |
|
|
|
|
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
20
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document |
|
|
|
|
|
|
|
|
|
|
21
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 12, 2022 |
||
|
|
|
|
|
|
|
By: |
|
/s/ TODD P. CRAVENS |
|
|
|
|
Todd P. Cravens |
|
|
|
|
President and Chief Executive Officer (Principal Executive Officer) |
|
|
|
|
|
|
|
Galaxy Gaming, Inc. |
||
|
|
|
||
Date: |
|
August 12, 2022 |
||
|
|
|
|
|
|
|
By: |
|
/s/ HARRY C. HAGERTY |
|
|
|
|
Harry C. Hagerty |
|
|
|
|
Chief Financial Officer (Principal Accounting Officer) |
22