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9

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, 2022

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

 

img154406026_0.jpg 

Galaxy Gaming, Inc.

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

 

 

Nevada

 

20-8143439

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

 

 

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

(Address of principal executive offices)

 

(702) 939-3254

(Issuer’s telephone number)

 

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

 

Title of each class

 

Trading symbol

 

Name of exchange on which registered

Common stock

 

GLXZ

 

OTCQB marketplace

 

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

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

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

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: 24,253,124 common shares as of November 4, 2022.

 

 


 

GALAXY GAMING, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED September 30, 2022

TABLE OF CONTENTS

 

 

PART I

 

 

Item 1:

Financial Statements (unaudited)

3

Item 2:

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

17

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

21

Item 4:

Controls and Procedures

21

 

 

PART II

 

 

Item 1:

Legal Proceedings

22

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

22

Item 6:

Exhibits

23

 

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 September 30, 2022 and December 31, 2021 (unaudited)

4

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the three and nine months ended September 30, 2022 and 2021 (unaudited)

5

Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the three and nine months ended September 30, 2022 and 2021 (unaudited)

6

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (unaudited)

8

Notes to Condensed Consolidated Financial Statements (unaudited)

9

 

3


 

GALAXY GAMING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

ASSETS

 

September 30,
2022

 

 

December 31,
2021

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

19,275,180

 

 

$

16,058,714

 

Accounts receivable, net of allowance of $250,821 and $348,695, respectively

 

 

3,558,352

 

 

 

4,377,165

 

Inventory

 

 

924,021

 

 

 

770,248

 

Income tax receivable

 

 

766,225

 

 

 

1,536,682

 

Prepaid expenses

 

 

893,024

 

 

 

1,125,777

 

Other current assets

 

 

8,640

 

 

 

21,536

 

Total current assets

 

 

25,425,442

 

 

 

23,890,122

 

Property and equipment, net

 

 

67,452

 

 

 

98,594

 

Operating lease right-of-use assets

 

 

1,061,140

 

 

 

1,167,903

 

Assets deployed at client locations, net

 

 

481,362

 

 

 

360,735

 

Goodwill

 

 

1,091,000

 

 

 

1,091,000

 

Other intangible assets, net

 

 

14,110,589

 

 

 

13,677,264

 

Other assets

 

 

245,217

 

 

 

167,087

 

Total assets

 

$

42,482,202

 

 

$

40,452,705

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

3,399,386

 

 

$

374,323

 

Accrued expenses

 

 

2,982,457

 

 

 

2,666,073

 

Revenue contract liability

 

 

44,095

 

 

 

37,500

 

Current portion of operating lease liabilities

 

 

243,038

 

 

 

222,806

 

Current portion of long-term debt

 

 

600,000

 

 

 

1,100,369

 

Total current liabilities

 

 

7,268,976

 

 

 

4,401,071

 

Long-term operating lease liabilities

 

 

895,318

 

 

 

1,019,029

 

Long-term debt and liabilities, net

 

 

52,794,860

 

 

 

52,143,810

 

Deferred tax liabilities, net

 

 

29,000

 

 

 

175,218

 

Total liabilities

 

 

60,988,154

 

 

 

57,739,128

 

Commitments and Contingencies (See Note 8)

 

 

 

 

 

 

Stockholders’ deficit

 

 

 

 

 

 

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

 

 

 

 

 

 

Common stock, 65,000,000 shares authorized; $0.001 par value; 24,327,426 and 23,523,969 shares issued and outstanding, respectively

 

 

24,327

 

 

 

23,524

 

Additional paid-in capital

 

 

17,221,963

 

 

 

16,380,597

 

Accumulated deficit

 

 

(35,371,644

)

 

 

(33,543,351

)

Accumulated other comprehensive loss

 

 

(380,598

)

 

 

(147,193

)

Total stockholders’ deficit

 

 

(18,505,952

)

 

 

(17,286,423

)

Total liabilities and stockholders’ deficit

 

$

42,482,202

 

 

$

40,452,705

 

 

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)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2022

 

 

September 30, 2021

 

 

September 30, 2022

 

 

September 30, 2021

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Licensing fees

 

$

5,906,989

 

 

$

5,281,788

 

 

$

17,501,783

 

 

$

14,314,127

 

Total revenue

 

 

5,906,989

 

 

 

5,281,788

 

 

 

17,501,783

 

 

 

14,314,127

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of ancillary products and assembled components

 

 

71,363

 

 

 

26,310

 

 

 

174,392

 

 

 

60,212

 

Selling, general and administrative

 

 

3,340,691

 

 

 

2,740,328

 

 

 

9,867,968

 

 

 

7,984,035

 

Research and development

 

 

127,774

 

 

 

156,768

 

 

 

478,866

 

 

 

405,327

 

Depreciation and amortization

 

 

740,069

 

 

 

722,475

 

 

 

2,189,789

 

 

 

2,160,217

 

Share-based compensation

 

 

329,140

 

 

 

449,564

 

 

 

954,550

 

 

 

1,207,649

 

Total costs and expenses

 

 

4,609,037

 

 

 

4,095,445

 

 

 

13,665,565

 

 

 

11,817,440

 

Income from operations

 

 

1,297,952

 

 

 

1,186,343

 

 

 

3,836,218

 

 

 

2,496,687

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

18,674

 

 

 

392

 

 

 

23,166

 

 

 

1,163

 

Interest expense

 

 

(1,896,865

)

 

 

(129,422

)

 

 

(5,281,322

)

 

 

(450,474

)

Share redemption consideration

 

 

 

 

 

(195,482

)

 

 

 

 

 

(586,446

)

Foreign currency exchange loss

 

 

(255,140

)

 

 

(33,781

)

 

 

(490,041

)

 

 

(31,511

)

Change in fair value of interest rate swap liability

 

 

 

 

 

 

 

 

 

 

 

66,009

 

Other non-recurring (loss) income

 

 

(18,255

)

 

 

25,000

 

 

 

(18,255

)

 

 

25,000

 

Total other expense, net

 

 

(2,151,586

)

 

 

(333,293

)

 

 

(5,766,452

)

 

 

(976,259

)

(Loss) income before benefit (provision) from income taxes

 

 

(853,634

)

 

 

853,050

 

 

 

(1,930,234

)

 

 

1,520,428

 

Benefit (provision) from income taxes

 

 

154,944

 

 

 

21,186

 

 

 

101,941

 

 

 

(7,000

)

Net (loss) income

 

 

(698,690

)

 

 

874,236

 

 

 

(1,828,293

)

 

 

1,513,428

 

Foreign currency translation adjustment

 

 

(77,871

)

 

 

(81,716

)

 

 

(233,405

)

 

 

(139,716

)

Comprehensive (loss) income

 

$

(776,561

)

 

$

792,520

 

 

$

(2,061,698

)

 

$

1,373,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.03

)

 

$

0.04

 

 

$

(0.07

)

 

$

0.07

 

Diluted

 

$

(0.03

)

 

$

0.04

 

 

$

(0.07

)

 

$

0.07

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

24,945,839

 

 

 

20,410,950

 

 

 

24,654,517

 

 

 

20,315,730

 

Diluted

 

 

24,945,839

 

 

 

22,364,694

 

 

 

24,654,517

 

 

 

22,080,338

 

 

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

5


 

GALAXY GAMING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional Paid-in

 

 

Accumulated

 

 

Accumulated Other Comprehensive

 

 

Total Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Deficit

 

Beginning balance, December 31, 2021

 

 

23,523,969

 

 

$

23,524

 

 

$

16,380,597

 

 

$

(33,543,351

)

 

$

(147,193

)

 

$

(17,286,423

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(13,962

)

 

 

 

 

 

(13,962

)

Foreign currency translation loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(41,949

)

 

 

(41,949

)

Stock options exercised

 

 

219,999

 

 

 

220

 

 

 

195,236

 

 

 

 

 

 

 

 

 

195,456

 

Share-based compensation

 

 

18,965

 

 

 

19

 

 

 

309,983

 

 

 

 

 

 

 

 

 

310,002

 

Balance, March 31, 2022

 

 

23,762,933

 

 

$

23,763

 

 

$

16,885,816

 

 

$

(33,557,313

)

 

$

(189,142

)

 

$

(16,836,876

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(1,115,641

)

 

 

 

 

 

(1,115,641

)

Foreign currency translation loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(113,585

)

 

 

(113,585

)

Surrender of options

 

 

(365,751

)

 

 

(366

)

 

 

(1,279,767

)

 

 

 

 

 

 

 

 

(1,280,133

)

Stock options exercised

 

 

671,665

 

 

 

672

 

 

 

733,641

 

 

 

 

 

 

 

 

 

734,313

 

Share-based compensation

 

 

47,236

 

 

 

47

 

 

 

315,361

 

 

 

 

 

 

 

 

 

315,408

 

Balance, June 30, 2022

 

 

24,116,083

 

 

$

24,116

 

 

$

16,655,051

 

 

$

(34,672,954

)

 

$

(302,727

)

 

$

(18,296,514

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(698,690

)

 

 

 

 

 

(698,690

)

Foreign currency translation loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(77,871

)

 

 

(77,871

)

Stock options exercised

 

 

182,168

 

 

 

182

 

 

 

237,801

 

 

 

 

 

 

 

 

 

237,983

 

Share-based compensation

 

 

29,175

 

 

 

29

 

 

 

329,111

 

 

 

 

 

 

 

 

 

329,140

 

Balance, September 30, 2022

 

 

24,327,426

 

 

$

24,327

 

 

$

17,221,963

 

 

$

(35,371,644

)

 

$

(380,598

)

 

$

(18,505,952

)

 

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

6


 

GALAXY GAMING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(Unaudited)

 

 

 

Common Stock

 

 

Additional Paid-in

 

 

Accumulated

 

 

Accumulated Other Comprehensive

 

 

Total Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Deficit

 

Beginning balance, December 31, 2020

 

 

21,970,638

 

 

$

21,971

 

 

$

10,798,536

 

 

$

(35,655,163

)

 

$

37,691

 

 

$

(24,796,965

)

Net income

 

 

 

 

 

 

 

 

 

 

 

88,737

 

 

 

 

 

 

88,737

 

Foreign currency translation loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(79,207

)

 

 

(79,207

)

Stock options exercised

 

 

50,000

 

 

 

50

 

 

 

10,949

 

 

 

 

 

 

 

 

 

10,999

 

Share-based compensation

 

 

55,000

 

 

 

55

 

 

 

316,585

 

 

 

 

 

 

 

 

 

316,640

 

Balance, March 31, 2021

 

 

22,075,638

 

 

$

22,076

 

 

$

11,126,070

 

 

$

(35,566,426

)

 

$

(41,516

)

 

$

(24,459,796

)

Net income

 

 

 

 

 

 

 

 

 

 

 

550,455

 

 

 

 

 

 

550,455

 

Foreign currency translation gain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,207

 

 

 

21,207

 

Stock options exercised

 

 

50,000

 

 

 

50

 

 

 

15,451

 

 

 

 

 

 

 

 

 

15,501

 

Share-based compensation

 

 

55,000

 

 

 

55

 

 

 

441,389

 

 

 

 

 

 

 

 

 

441,444

 

Balance, June 30, 2021

 

 

22,180,638

 

 

$

22,181

 

 

$

11,582,910

 

 

$

(35,015,971

)

 

$

(20,309

)

 

$

(23,431,189

)

Net income

 

 

 

 

 

 

 

 

 

 

 

874,236

 

 

 

 

 

 

874,236

 

Foreign currency translation loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(81,716

)

 

 

(81,716

)

Stock options exercised

 

 

119,166

 

 

 

119

 

 

 

62,697

 

 

 

 

 

 

 

 

 

62,816

 

Share-based compensation

 

 

 

 

 

 

 

 

345,305

 

 

 

 

 

 

 

 

 

345,305

 

Balance, September 30, 2021

 

 

22,299,804

 

 

$

22,300

 

 

$

11,990,912

 

 

$

(34,141,735

)

 

$

(102,025

)

 

$

(22,230,548

)

 

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

7


 

GALAXY GAMING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30, 2022

 

 

September 30, 2021

 

Cash flows from operating activities:

 

 

 

 

 

 

Net (loss) income

 

$

(1,828,293

)

 

$

1,513,428

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

2,189,789

 

 

 

2,160,217

 

Amortization of right-of-use assets

 

 

173,799

 

 

 

170,733

 

Amortization of debt issuance costs and debt discount

 

 

1,114,488

 

 

 

47,939

 

Bad debt (recovery) expense

 

 

(40,231

)

 

 

233,160

 

Loss on inventory write-down

 

 

95,307

 

 

 

40,109

 

Loss (gain) on sale of property and equipment

 

 

18,255

 

 

 

(25,000

)

Change in fair value of interest rate swap liability

 

 

 

 

 

(66,009

)

Deferred income tax

 

 

(146,218

)

 

 

 

Share-based compensation

 

 

954,550

 

 

 

1,207,649

 

Foreign currency exchange loss

 

 

33,175

 

 

 

33,166

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

1,020,719

 

 

 

(2,615,929

)

Inventory

 

 

(545,358

)

 

 

(333,469

)

Income tax receivable

 

 

766,599

 

 

 

(311,155

)

Prepaid expenses and other current assets

 

 

245,649

 

 

 

394,457

 

Other assets

 

 

(78,130

)

 

 

(112,629

)

Accounts payable

 

 

1,025,766

 

 

 

(59,173

)

Accrued expenses

 

 

(333,469

)

 

 

1,069,409

 

Revenue contract liability

 

 

6,595

 

 

 

14,583

 

Operating lease liabilities

 

 

(170,515

)

 

 

(141,167

)

Net cash provided by operating activities

 

 

4,502,477

 

 

 

3,220,319

 

Cash flows from investing activities:

 

 

 

 

 

 

Investment in internally developed software

 

 

(409,626

)

 

 

(49,900

)

Proceeds from sale of property and equipment

 

 

 

 

 

25,000

 

Acquisition of property and equipment

 

 

(24,950

)

 

 

(60,069

)

Net cash used in investing activities

 

 

(434,576

)

 

 

(84,969

)

Cash flows from financing activities:

 

 

 

 

 

 

Payments of debt issuance costs

 

 

(13,438

)

 

 

(46,117

)

Proceeds from stock option exercises

 

 

542,500

 

 

 

89,315

 

Principal payments on long-term debt

 

 

(950,369

)

 

 

(1,697,380

)

Net cash used in financing activities

 

 

(421,307

)

 

 

(1,654,182

)

Effect of exchange rate changes on cash

 

 

(430,128

)

 

 

(72,686

)

Net increase in cash and cash equivalents

 

 

3,216,466

 

 

 

1,408,482

 

Cash and cash equivalents – beginning of period

 

 

16,058,714

 

 

 

5,993,388

 

Cash and cash equivalents – end of period

 

$

19,275,180

 

 

$

7,401,870

 

Supplemental cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

4,254,362

 

 

$

300,026

 

Cash paid for income taxes

 

$

 

 

$

338,447

 

Supplemental schedule of non-cash activities:

 

 

 

 

 

 

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

 

$

1,280,133

 

 

$

 

Inventory transferred to assets deployed at client locations

 

$

296,278

 

 

$

213,648

 

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

 

$

71,901

 

 

$

28,604

 

Acquisition of intellectual property

 

$

2,000,000

 

 

$

 

 

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

8


 

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, and its wholly owned and consolidated subsidiaries (“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.

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.

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. To date, we have not experienced uninsured losses, and we believe the risk of future loss is negligible.

Accounts receivable and allowance for doubtful accounts. Accounts receivable are stated at face value less an allowance for doubtful accounts. Accounts receivable are non-interest bearing. The Company reviews the accounts receivable on a 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 carrying amount of a reporting unit exceeds its fair value. Goodwill impairment loss is measured as the amount by which a reporting unit’s carrying amount exceeds its fair value.

9


 

Other intangible assets, net. The following intangible assets have finite lives and are being amortized using the straight-line method over their estimated economic lives as follows:

 

Patents

 

4 - 20 years

Client relationships

 

9 - 22 years

Trademarks

 

20 - 30 years

Intellectual property

 

12 years

Non-compete agreements

 

9 years

Software

 

3 years

 

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. No impairment was recorded for the three and nine months ended September 30, 2022.

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

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

The estimated fair values of cash equivalents, accounts receivable and accounts payable approximate their carrying amounts due to their short-term nature. The estimated fair value of our long-term debt approximates its carrying amount 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.

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 Progressive Games Partners LLC ("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 (loss) per share. Basic net income (loss) 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 (loss) 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 period.

Segment information. We define operating segments as components of our enterprise for which separate financial information is reviewed regularly by the chief operating decision-makers to evaluate performance and to make operating decisions. We currently have two operating segments (land-based gaming and online gaming) which are aggregated into one reportable segment.

10


 

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 ("CEO"). The Amendment (i) extends the term of the agreement from July 27, 2022, to July 26, 2024; (ii) provides for a potential equity incentive grant of stock for calendar year 2022 and calendar year 2023, with (x) a grant of 20,000 shares if the Company achieves 80% of its earnings before interest, taxes, depreciation and amortization ("EBITDA") Budget target (as defined by management and as adopted by the Board for the calendar year) for calendar year 2022, (y) a grant of 20,000 shares if the Company achieves 80% of its EBITDA Budget target (as adopted by the Board for the calendar year) for calendar year 2023, and (z) an additional grant under the following performance goals for each of calendar years 2022 and 2023: a) 100% of EBITDA Target – 20,000 shares, b) 110% of EBITDA Target – 30,000 shares, and c) 115% of EBITDA Target – 40,000 shares; and (iii) increases Mr. Cravens' annual compensation to $300,000 effective as of August 01, 2022.

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 20,000 shares from each of the 2022 and 2023 CEO executive Incentive from the 80% EBITDA Target, will be granted immediately. The Board retains discretion to be exercised reasonably and in good faith to accelerate the grant of remaining shares under the 2022 and 2023 equity incentives set forth in the Amendment.

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

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

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

Other significant accounting policies. Our significant accounting policies are described in our 2021 10-K. There have been no material changes to those policies.

New accounting standards not yet adopted. Financial Instruments – Credit Losses. In February 2020, FASB issued Accounting Standards Update ("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 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 condensed consolidated financial statements or related disclosures.

Reference Rate Reform. In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides elective amendments for entities that have contracts, hedging relationships and other transactions that reference London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. In January 2021, FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), to expand and clarify the scope of Topic 848 to include derivative instruments on discounting transactions. The amendments in ASU 2021-01 are effective in the same timeframe as ASU 2020-04. Currently, we do not anticipate the need to modify any existing debt agreements as a result of reference rate reform in the current year. We are currently evaluating the impact, but do not believe the adoption of this guidance will have a material impact on our condensed consolidated financial statements or related disclosures.

11


 

 

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
Ended September 30,

 

 

Nine Months
Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

North America and Caribbean

 

$

2,602,001

 

 

$

2,476,619

 

 

$

7,577,670

 

 

$

7,394,096

 

Europe, Middle East and Africa

 

 

3,304,988

 

 

 

2,805,169

 

 

 

9,924,113

 

 

 

6,920,031

 

Total revenue

 

$

5,906,989

 

 

$

5,281,788

 

 

$

17,501,783

 

 

$

14,314,127

 

 

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 $432,718 and $771,294 as of September 30, 2022 and December 31, 2021, respectively, and are included in the accounts receivable balance in the accompanying condensed consolidated balance sheets.

NOTE 4. INVENTORY

Inventory consisted of the following at:

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Raw materials and component parts

 

$

541,611

 

 

$

413,320

 

Finished goods

 

 

382,410

 

 

 

356,928

 

Inventory

 

$

924,021

 

 

$

770,248

 

 

NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS

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

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Patents

 

$

13,507,997

 

 

$

13,507,997

 

Customer relationships

 

 

14,040,856

 

 

 

14,040,856

 

Trademarks

 

 

2,880,967

 

 

 

2,880,967

 

Intellectual property

 

 

2,000,000

 

 

 

 

Non-compete agreements

 

 

660,000

 

 

 

660,000

 

Software

 

 

692,966

 

 

 

283,340

 

Other intangible assets, gross

 

 

33,782,786

 

 

 

31,373,160

 

Less: accumulated amortization

 

 

(19,672,197

)

 

 

(17,695,896

)

Other intangible assets, net

 

$

14,110,589

 

 

$

13,677,264

 

 

For the three and nine months ended September 30, 2022 and 2021, amortization expense related to other intangible assets was $667,913 and $653,330, and $1,976,301 and $1,955,832, respectively.

 

12


 

In November 2011, the Company acquired certain intellectual property in exchange for contingent consideration to be paid in the future based on licensing by Galaxy of games utilizing the intellectual property. For the three months ended September 30, 2022, the contingent consideration (accounted for as royalty expense) was $78,631. Effective September 30, 2022, the Company paid the seller of the contract assets $2,000,000 and terminated any obligation to pay contingent consideration after September 30, 2022. As a result of entering into the agreement, accounts payable at September 30, 2022 increased by $2,000,000. The actual payment of $2,000,000 was made on October 4, 2022.

NOTE 6. LEASES

Lessee

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

As of September 30, 2022, no renewal option periods were included in any estimated minimum lease term as the options were not deemed reasonably certain to be exercised. Our leases have remaining lease terms ranging from 15 months to 54 months.

Supplemental balance sheet information related to leases is as follows:

 

 

 

As of September 30, 2022

 

 

Amount

 

 

Classification

Operating leases:

 

 

 

 

 

Operating lease right-of-use lease assets

 

$

1,061,140

 

 

 

 

 

 

 

 

 

Operating lease current liabilities

 

$

243,038

 

 

 Current portion of operating lease liabilities

 

 

 

 

 

 

Operating lease long-term liabilities

 

 

895,318

 

 

 Long-term operating lease liabilities

 

 

 

 

 

 

Total operating lease liabilities

 

$

1,138,356

 

 

 

 

 

 

 

 

 

Weighted-average remaining lease term:

 

 

 

 

 

Operating leases

 

 

4.19

 

 

 

 

 

 

 

 

 

Weighted-average discount rate:

 

 

 

 

 

Operating leases

 

 

4.4

%

 

 

 

The components of lease expense are as follows:

 

 

 

Three Months Ended September 30, 2022

 

 

Amount

 

 

Classification

Operating lease cost

 

$

72,071

 

 

Selling, general and administrative expense

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2022

 

 

Amount

 

 

Classification

Operating lease cost

 

$

214,225

 

 

Selling, general and administrative expense

 

13


 

Supplemental cash flow information related to leases is as follows:

 

 

 

Nine Months Ended September 30, 2022

 

 

Amount

 

 

Classification

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

 

 

 

 

 

Operating cash flows from operating leases

 

$

209,222

 

 

 Net income

 

 

 

 

 

 

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

 

 

 

 

 

Operating leases

 

$

71,901

 

 

 Supplemental cash flow information

 

As of September 30, 2022, future maturities of our operating lease liabilities are as follows:

 

 

 

Amount

 

For the remaining three months ending December 31, 2022

 

$

72,080

 

Years ending December 31,

 

 

 

2023

 

 

290,877

 

2024

 

 

288,892

 

2025

 

 

294,507

 

2026

 

 

302,011

 

2027

 

 

2,985

 

Total minimum lease payments

 

 

1,251,352

 

Less: imputed interest

 

 

(112,996

)

Total operating lease liability

 

 

1,138,356

 

Less: current portion

 

 

(243,038

)

Long-term portion

 

$

895,318

 

 

NOTE 7. LONG-TERM DEBT AND LIABILITIES

Long-term liabilities consisted of the following at:

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Fortress credit agreement

 

$

59,550,000

 

 

$

60,000,000

 

Insurance notes payable

 

 

 

 

 

500,369

 

Long-term debt and liabilities, gross

 

 

59,550,000

 

 

 

60,500,369

 

Less: Unamortized debt issuance costs

 

 

(6,155,140

)

 

 

(7,256,190

)

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

 

 

53,394,860

 

 

 

53,244,179

 

Less: Current portion of long-term debt

 

 

(600,000

)

 

 

(1,100,369

)

Long-term debt and liabilities, net

 

$

52,794,860

 

 

$

52,143,810

 

 

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” and such agreement, “Fortress Credit Agreement”) in the amount of $60 million.

The Fortress Credit Agreement bears interest at a rate equal to, at the Company’s option, either (a) LIBOR (or a successor rate, determined in accordance with the Fortress Credit Agreement) plus 7.75%, subject to a reduction to 7.50% upon the achievement of a net leverage target or (b) a base rate determined by reference to the greatest of (i) the federal funds rate plus 0.50%, (ii) the prime rate as determined by reference to The Wall Street Journal’s “Prime Rate” and (iii) the one-month adjusted LIBOR rate plus 1.00%, plus 6.75%, subject to a reduction to 6.50% upon the achievement of a net leverage target. The Fortress Credit Agreement has a final maturity of November 13, 2026. The obligations under the Fortress Credit Agreement are guaranteed by the Company’s subsidiaries and are secured by substantially all of the assets of the Company and its subsidiaries. The Fortress Credit agreement requires, among other things, principal payments of $150,000 per quarter and includes an annual sweep of 50% of excess cash flow beginning in 2023. The

14


 

Fortress Credit Agreement contains affirmative and negative financial covenants (as defined in the Fortress Credit Agreement) and other restrictions customary for borrowings of this nature. The Company was required to maintain a Total Net Leverage Ratio of 8.00x for the quarter ending September 30, 2022, and the Company was in compliance with that covenant. The Fortress Credit Agreement requires that bank account balances in excess of $1 million at month end be covered by an account control agreement. From November 30, 2021 through February 28, 2022, the bank accounts held by PGP in the Isle of Man exceeded $1 million and did not have control agreements. The Company informed Fortress of the covenant breach, and a Consent and Waiver Agreement was executed among the Company, Fortress as Agent, and the Lenders party to the Fortress Credit Agreement on March 16, 2022. As of March 31, 2022, and through September 30, 2022, the Company was in compliance with the covenants under the Fortress Credit Agreement, and maintained bank account balances within the $1 million threshold.

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

As of September 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 three months ending December 31, 2022

 

$

150,000

 

Years ending December 31,

 

 

 

2023

 

 

600,000

 

2024

 

 

600,000

 

2025

 

 

600,000

 

2026

 

 

57,600,000

 

Long-term liabilities, gross

 

$

59,550,000

 

 

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 nine months ended September 30, 2022 and 2021, respectively, we had the following client concentrations:

 

 

 

Location

 

Nine Months Ended September 30, 2022
Revenue

 

 

Nine Months Ended September 30, 2021
Revenue

 

 

Accounts
Receivable
September 30, 2022

 

 

Accounts
Receivable
December 31, 2021

 

Client A

 

Europe

 

 

27.5

%

 

 

27.1

%

 

$

529,182

 

 

$

 

Client B

 

North America

 

 

8.5

%

 

 

10.3

%

 

$

843,946

 

 

$

138,338

 

 

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 September 30, 2022 was 4.3%, as compared to 10.4% at September 30, 2021. This decrease was primarily due to excess tax benefits reduced foreign rate differential, reduced Subpart F inclusion and a change in valuation allowance because of changes in estimates of current-year ordinary income considered in determining the forecasted AETR.

For the nine months ended September 30, 2022 and 2021, our effective tax rate (“ETR”) was 5.2% and 0.5%, respectively. The increase in the ETR for the nine months ended September 30, 2022 is a result of increased favorable discrete items related to excess tax benefits from stock-based compensation that were greater than the previous comparable period, in addition to changes in valuation allowance as the result of changes in estimates of current-year ordinary income.

15


 

NOTE 10. SUBSEQUENT EVENTS

On November 11, 2022, the Board of Directors reauthorized repurchases of the Company's common stock of up to $750,000, subject to the Company remaining in compliance with the provisions of the Fortress Credit Agreement and, in particular, the $750,000 restricted payments basket.

16


 

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 nine months ended September 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 September 30, 2022 and 2021. For the three months ended September 30, 2022, we generated revenues of $5,906,989 compared to $5,281,788 for the comparable prior-year period, representing an increase of $625,201, or 11.8%. 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-U.S. markets and significantly increased revenue in existing or newly-opened U.S. markets. However, revenue in both Galaxy Core and Galaxy Digital were adversely affected by the strengthening of the U.S. Dollar versus the Euro and UK Pound. In local currency, revenues in Galaxy Core increased 10.3% and revenues in Galaxy Digital increased 31.3%.

Selling, general and administrative expenses for the three months ended September 30, 2022 were $3,340,691 compared to $2,740,328 for the comparable prior-year period, representing an increase of $600,363, or 21.9%. 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, we incurred significant outside consulting expenses in the current quarter related to enhancing our financial reporting systems.

Research and development expenses for the three months ended September 30, 2022 were $127,774, compared to $156,768 for the comparable prior-year period, representing an decrease of $28,994, or 18.5%. This decrease was primarily due to higher internal labor and related expenses.

Share-based compensation expenses for the three months ended September 30, 2022 were $329,140, as compared to $449,564 for the comparable prior-year period, representing a decrease of $120,424, or 26.8%. 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 $111,609 or 9.4% to $1,297,952 for the three months ended September 30, 2022, compared to income from operations of $1,186,343 for the comparable prior-year period.

Total interest expense increased $1,767,443 to $1,896,865 for the three months ended September 30, 2022, compared to $129,422 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.

No share redemption consideration for the three months ended September 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 benefit was $154,944 for the three months ended September 30, 2022, compared to income tax benefit of $21,186 for the comparable prior-year period. The increase in benefit is primarily the result of increased favorable discrete items related to excess tax benefits from stock-based compensation and changes in valuation allowance against deferred tax attributes because of changes in estimates of current-year ordinary income.

Results of operations for the nine months ended September 30, 2022 and 2021. For the nine months ended September 30, 2022, we

17


 

generated revenues of $17,501,783 compared to $14,314,127 for the comparable prior-year period, representing an increase of $3,187,656, or 22.3%. This increase was attributable to the continued recovery of Galaxy Core 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-U.S. markets and significantly increased revenue in existing or newly-opened U.S. markets. However, revenue in both Galaxy Core and Galaxy Digital were adversely affected by the strengthening of the U.S. Dollar versus the Euro and UK Pound. In local currency, revenues in Galaxy Core increased 17.7% and revenues in Galaxy Digital increased 37.2%.

Selling, general and administrative expenses for the nine months ended September 30, 2022 were $9,867,968 compared to $7,984,035 for the comparable prior-year period, representing an increase of $1,883,933, or 23.6%. 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. A decrease in legal fees related to the Triangulum litigation and settlement was almost entirely offset by legal and other expenses related to the contested proxy solicitation.

Research and development expenses for the nine months ended September 30, 2022 were $478,866, compared to $405,327 for the comparable prior-year period, representing an increase of $73,539, or 18.1%. 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 nine months ended September 30, 2022 were $954,550, as compared to $1,207,649 for the comparable prior-year period, representing a decrease of $253,099, or 21.0%. 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 $1,339,531 or 53.7% to $3,836,218 for the nine months ended September 30, 2022, compared to income from operations of $2,496,687 for the comparable prior-year period.

Total interest expense increased $4,830,848 to $5,281,322 for the nine months ended September 30, 2022, compared to $450,474 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.

There was no share redemption consideration for the nine months ended September 30, 2022, compared to $586,446 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 benefit was $101,941 for the nine months ended September 30, 2022, compared to income tax expense of $7,000 for the comparable prior-year period. The increase in benefit is primarily the result of increased favorable discrete items related to excess tax benefits from stock-based compensation and changes in valuation allowance against deferred tax attributes because of changes in estimates of current-year ordinary income.

18


 

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 September 30,

 

 

Nine Months Ended September 30,

 

Adjusted EBITDA Reconciliation:

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net (loss) income

 

$

(698,690

)

 

$

874,236

 

 

$

(1,828,293

)

 

$

1,513,428

 

Interest expense

 

 

1,896,865

 

 

 

129,422

 

 

 

5,281,322

 

 

 

450,474

 

Share redemption consideration

 

 

 

 

 

195,482

 

 

 

 

 

 

586,446

 

Interest income

 

 

(18,674

)

 

 

(392

)

 

 

(23,166

)

 

 

(1,163

)

Depreciation and amortization

 

 

740,069

 

 

 

722,475

 

 

 

2,189,789

 

 

 

2,160,217

 

Share-based compensation

 

 

329,140

 

 

 

449,564

 

 

 

954,550

 

 

 

1,207,649

 

Foreign currency exchange loss (gain)

 

 

255,140

 

 

 

33,781

 

 

 

490,041

 

 

 

31,511

 

Change in fair value of interest
   rate swap liability

 

 

 

 

 

 

 

 

 

 

 

(66,009

)

Provision (benefit) for income taxes

 

 

(154,944

)

 

 

(21,186

)

 

 

(101,941

)

 

 

7,000

 

Other non-recurring income

 

 

18,255

 

 

 

(25,000

)

 

 

18,255

 

 

 

(25,000

)

Severance expense

 

 

 

 

 

8,846

 

 

 

28,477

 

 

 

12,596

 

Special project expense (benefit) - Triangulum

 

 

 

 

 

116,798

 

 

 

(86,959

)

 

 

413,024

 

Special project expense - Other

 

 

(17,000

)

 

 

(20,904

)

 

 

459,904

 

 

 

12,516

 

Adjusted EBITDA

 

$

2,350,161

 

 

$

2,463,122

 

 

$

7,381,979

 

 

$

6,302,689

 

 

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 September 30, 2022, we had total current assets of $25,425,442 and total assets of $42,482,202. This compares to $23,890,122 and $40,452,705, respectively, as of December 31, 2021. The increase in total current assets at September 30, 2022 was due primarily to higher revenues in the 2022 period. The increase in total assets was primarily due to the addition of $2,000,000 in intangibles through the exercise of an option in a contract pursuant to which we terminated the obligation to pay any consideration to a party from whom we acquired game assets in 2011.

Our total current liabilities as of September 30, 2022 increased to $7,268,976 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 cash-flow positive from operations as of September 30, 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 $4,502,477 for the nine months ended September 30, 2022, compared to cash provided of $3,220,319 in the 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 nine months ended September 30, 2022 was $434,576, compared to cash used of $84,969 in the prior period. This was primarily due to an increase in the acquisition of certain software tools in 2022.

19


 

Cash used in financing activities during the nine months ended September 30, 2022 was $421,307, compared to cash used of $1,654,182 in the prior period. This was due to principal payments on our borrowings in 2022, offset by the proceeds from stock option exercised.


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 September 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.

20


 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A smaller reporting company is not required to provide the information required by this Item.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure controls and procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed submitted under the Exchange Act is accumulated and communicated to management including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 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 errors or mistakes. 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.

21


 

PART II – OTHER INFORMATION

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 September 30, 2022, 29,175 restricted shares of our common stock valued at $80,523 were issued to members of our Board in partial consideration for their service in Q3 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.

 

22


 

ITEM 6. EXHIBITS

 

Exhibit

Number

 

Description

 

Form

 

File No.

 

Exhibit

 

Filing Date

 

Filed

Herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

10.1

 

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

 

8-K

 

000-30653

 

10.1

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.2

 

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

 

8-K

 

000-30653

 

10.1

 

May 17, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.3

 

Settlement Agreement with former Chairman and Chief Executive Officer, Robert Saucier and Triangulum Partners LLC dated October 6, 2021

 

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

 

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

 

8-K

 

000-30653

 

10.1

 

March 22, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.6

 

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

 

8-K

 

000-30653

 

10.1

 

June 21, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.7

 

Board of Directors Service Agreement with Meredith Brill, Director

 

8-K

 

000-30653

 

10.1

 

July 15, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.8

 

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

 

8-K

 

000-30653

 

10.1

 

July 26, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31.1

 

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

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

31.2

 

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

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

32.1

 

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

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.INS

 

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

 

 

 

 

 

 

 

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

 

 

 

 

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

 

 

 

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

 

 

 

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

 

 

 

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

 

 

 

 

 

104

 

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

 

 

 

 

 

 

 

 

 

 

 

23


 

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:

 

November 14, 2022

 

 

 

 

 

 

 

By:

 

/s/ TODD P. CRAVENS

 

 

 

 

Todd P. Cravens

 

 

 

 

President and Chief Executive Officer

(Principal Executive Officer)

 

 

 

 

 

 

 

Galaxy Gaming, Inc.

 

 

 

Date:

 

November 14, 2022

 

 

 

 

 

 

 

By:

 

/s/ HARRY C. HAGERTY

 

 

 

 

Harry C. Hagerty

 

 

 

 

Chief Financial Officer

(Principal Accounting Officer)

 

24