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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Securities registered pursuant to Section 12(b) of the Act:
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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.
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Emerging growth company |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. ☐
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
GALAXY GAMING, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2023
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 March 31, 2023 and December 31, 2022 (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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March 31, |
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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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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 INCOME (LOSS)
(Unaudited)
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Three Months Ended |
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March 31, 2023 |
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March 31, 2022 |
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Revenue: |
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Licensing fees |
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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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Foreign currency exchange loss |
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Total other expense, net |
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Income (loss) before provision for income taxes |
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(Provision) Benefit for income taxes |
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Net income (loss) |
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Foreign currency translation adjustment |
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Comprehensive income (loss) |
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$ |
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$ |
( | ) |
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Net income (loss) per share: |
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Basic |
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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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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, 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 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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Share-based compensation |
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— |
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— |
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Balance, March 31, 2023 |
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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, 2021 |
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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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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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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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Three Months Ended |
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March 31, 2023 |
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March 31, 2022 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
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$ |
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Adjustments to reconcile net income (loss) to net cash used in 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 expense (recovery) |
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Deferred income tax |
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Share-based compensation |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Income tax receivable |
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Prepaid expenses and other current assets |
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Other assets |
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Accounts payable |
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Accrued expenses |
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Revenue contract liability |
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Operating lease liabilities |
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( |
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Net cash (used in) 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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Acquisition of property and equipment |
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Acquisition of assemblies in process assets |
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Net cash used in investing activities |
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Cash flows from financing activities: |
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Payments of debt issuance costs |
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Proceeds from stock option exercises |
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— |
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Principal payments on long-term debt |
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( |
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Net cash used in financing activities |
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( |
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Effect of exchange rate changes on cash |
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Net increase in cash and cash equivalents |
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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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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, productivity and security, as well as to offer popular cutting-edge gaming entertainment content and technology to their players. We market our products and services to online casinos worldwide, to land-based casino gaming companies in North America, the Caribbean, Central America, the United Kingdom, Europe and Africa, and to cruise ship companies. We license our products and services for use solely in legalized gaming markets. We also license our content and distribute content from other companies to iGaming operators in legalized gaming markets throughout the world.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. The accompanying condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules of the SEC. In the opinion of management, the accompanying unaudited interim condensed financial statements contain all necessary adjustments (including all those of a recurring nature and those necessary in order for the financial statements to be not misleading) and all disclosures to present fairly our financial position and the results of our operations and cash flows for the periods presented.
These unaudited interim condensed financial statements should be read in conjunction with the financial statements and the related notes as of and for the year ended December 31, 2022 included in our 2022 Form 10-K ("2022 10-K").
The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
Use of estimates and assumptions. We are required to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our Company and the industry as a whole, and information available from other outside sources. Our estimates affect reported amounts for assets, liabilities, revenues, expenses and related disclosures. Actual results may differ from initial estimates.
Consolidation. The financial statements are presented on a consolidated basis and include the results of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Reclassifications. Certain accounts and financial statement captions in the prior period have been reclassified to conform to the current period financial statement presentations and had no effect on net income (loss).
Cash and cash equivalents. Our cash and cash equivalents consist of bank deposits. 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 4) is assessed for impairment at least annually or at other times during the year if events or circumstances indicate that it is more-likely-than-not that the fair value of a reporting asset is below the carrying amount. If found to be impaired, the carrying amount will be reduced, and an impairment loss will be recognized.
8
Other intangible assets, net.
Patents |
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Customer relationships |
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Trademarks |
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Intellectual property |
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Non-compete agreements |
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Software |
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Other intangible assets (Note 4) are analyzed for potential impairment at least annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable and exceeds the fair value, which is the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the intangible assets.
Software relates primarily to assets where costs are capitalizable during the application development phase. External labor-related costs associated with product development are included in software.
Fair value of financial instruments. We estimate fair value for financial assets and liabilities in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”). ASC 820 defines fair value, provides guidance for measuring fair value, requires certain disclosures and discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). ASC 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
The estimated fair values of cash equivalents, accounts receivable and accounts payable approximate their carrying amounts due to their short-term nature. The estimated fair value of our long-term debt approximates its carrying value based upon our expected borrowing rate for debt with similar remaining maturities and comparable risk. The Company currently has no financial instruments measured at estimated fair value on a recurring basis based on valuation reports provided by counterparties.
Leases. We account for lease components (such as rent payments) separately from non-lease components (such as common-area maintenance costs, real estate and sales taxes and insurance costs). Operating and finance leases with terms greater than 12 months are recorded on the condensed consolidated balance sheets as right-of-use assets with corresponding lease liabilities. Lease expense is recognized on a straight-line basis using the discount rate implicit in each lease or our incremental borrowing rate at lease commencement date (Note 5).
Revenue recognition. We account for our revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. (Note 3).
Foreign currency translation. The functional currency for our subsidiary Progressive Games Partners ("PGP") is the Euro. Gains and losses from settlement of transactions involving foreign currency amounts are included in other income or expense in the consolidated statements of operations. Gains and losses resulting from translating assets and liabilities from the functional currency to U.S. dollars are included in accumulated other comprehensive income or (loss) in the consolidated statements of changes in stockholders’ deficit.
Segment Information. We define operating segments as components of our enterprise for which separate financial information is reviewed regularly by the chief operating decision-makers to evaluate performance and to make operating decisions. We currently have
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)
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EBITDA Budget target (as adopted by the Board for the calendar year) for calendar year 2023, and (z) an additional grant under the following performance goals for each of calendar year 2022 and 2023: a)
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.
Government subsidies. On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), which among other things, provides employer payroll tax credits for qualified wages and options to defer payroll tax payments for a limited period. Based on our evaluation of the CARES Act, in certain circumstances, we qualify for certain employer payroll tax credits as well as the deferral of payroll tax payments in the future. The Company records government subsidies as offsets to the related operating expenses. During 2022, qualified payroll credits reduced general and administrative expenses by $
Other significant accounting policies. Our significant accounting policies are described in our 2022 10-K. There have been no material changes to those policies.
Financial Instruments – Credit Losses. In February 2020, the FASB issued ASU No. 2020-02, Financial Instruments – Credit Losses (Topic 326). ASU 2020-02 provides updated guidance on how an entity should measure credit losses on financial instruments. We do not believe the adoption of this guidance will have a material impact on our condensed consolidated financial statements or related disclosures.
Reference Rate Reform. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. The amendments were effective upon issuance and provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. We have completed our evaluation of significant contracts. Contracts reviewed will be modified to apply a new reference rate, primarily the Secured
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Overnight Financing Rate ("SOFR") where applicable. As a result, the guidance has not had, and is not expected to have, a material impact on our consolidated financial statements.
NOTE 3. REVENUE RECOGNITION
Revenue recognition. We generate revenue primarily from the licensing of our intellectual property. We recognize revenue under recurring fee license contracts monthly as we satisfy our performance obligation, which consists of granting the customer the right to use our intellectual property. Amounts billed are determined based on flat rates or usage rates stipulated in the customer contract.
We also sell gaming systems with a perpetual right to use our intellectual property. Control transfers and we recognize revenue at a point in time when the gaming system is available for use by a customer, which is no earlier than the shipment of the products to the customer or an intermediary for the customer.
Disaggregation of revenue
The following table disaggregates our revenue by geographic location for the following listed periods. All of the royalty expense that is charged to a contra-revenue in our GG Digital operating segment has been allocated to the Europe, Middle East and Africa region in both periods presented. In prior filings, it was allocated to the Americas.
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|
Three Months |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
The Americas |
|
$ |
|
|
$ |
|
||
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 revenue when performance obligations are fulfilled.
Contract Assets. The Company’s contract assets consist solely of unbilled receivables which are recorded when the Company recognizes revenue in advance of billings. Unbilled receivables totaled $
NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill. A goodwill balance of $
Other intangible assets, net.
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|
March 31, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
Patents |
|
$ |
|
|
$ |
|
||
Customer relationships |
|
|
|
|
|
|
||
Trademarks |
|
|
|
|
|
|
||
Intellectual property |
|
|
|
|
|
|
||
Non-compete agreements |
|
|
|
|
|
|
||
Software |
|
|
|
|
|
|
||
Other intangible assets, gross |
|
|
|
|
|
|
||
Less: accumulated amortization |
|
|
( |
) |
|
|
( |
) |
Other intangible assets, net |
|
$ |
|
|
$ |
|
For the three months ended March 31, 2023 and 2022, amortization expense related to other intangible assets was $
NOTE 5. LEASES
Lessee
11
We have operating leases for our corporate office,
As of March 31, 2023, no renewal option periods were included in any estimated minimum lease term as the options were not deemed reasonably certain to be exercised. Our leases have remaining lease terms ranging from
Supplemental balance sheet information related to leases is as follows:
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|
As of March 31, 2023 |
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|
|
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 March 31, 2023 |
||||
|
|
Amount |
|
|
Classification |
|
Operating lease cost |
|
$ |
|
|
Selling, general and administrative expense |
Supplemental cash flow information related to leases is as follows:
|
|
Three Months Ended March 31, 2023 |
||||
|
|
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 March 31, 2023, future maturities of our operating lease liabilities are as follows:
|
|
Amount |
|
|
For the remaining nine months ending December 31, 2023 |
|
$ |
|
|
Years ending December 31, |
|
|
|
|
2024 |
|
$ |
|
|
2025 |
|
|
|
|
2026 |