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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2023

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

 

img155323782_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

 

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: 24,438,490 common shares as of May 3, 2023.

 

 


 

GALAXY GAMING, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2023

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

15

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

18

Item 4:

Controls and Procedures

18

 

PART II

 

Item 1:

Legal Proceedings

19

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

19

Item 6:

Exhibits

20

 

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)

4

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2023 and 2022 (unaudited)

5

Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the three months ended March 31, 2023 and 2022 (unaudited)

6

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 (unaudited)

7

Notes to Condensed Consolidated Financial Statements (unaudited)

8

 

3


 

GALAXY GAMING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

ASSETS

 

March 31,
2023

 

 

December 31,
2022

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

16,386,461

 

 

$

18,237,513

 

Accounts receivable, net of allowance of $226,588 and $183,242, respectively

 

 

5,667,898

 

 

 

3,449,753

 

Income tax receivable

 

 

515,259

 

 

 

515,259

 

Prepaid expenses

 

 

1,125,816

 

 

 

1,402,824

 

Other current assets

 

 

574,979

 

 

 

588,838

 

Total current assets

 

 

24,270,413

 

 

 

24,194,187

 

Property and equipment, net

 

 

134,274

 

 

 

143,438

 

Operating lease right-of-use assets

 

 

943,691

 

 

 

1,002,749

 

Assets deployed at client locations, net

 

 

1,331,706

 

 

 

1,399,708

 

Goodwill

 

 

1,091,000

 

 

 

1,091,000

 

Other intangible assets, net

 

 

13,710,632

 

 

 

13,906,111

 

Other assets

 

 

359,348

 

 

 

273,323

 

Total assets

 

$

41,841,064

 

 

$

42,010,516

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

2,544,127

 

 

$

1,129,869

 

Accrued expenses

 

 

2,362,647

 

 

 

3,697,504

 

Revenue contract liability

 

 

346

 

 

 

16,667

 

Current portion of operating lease liabilities

 

 

250,569

 

 

 

248,317

 

Current portion of long-term debt

 

 

813,744

 

 

 

940,084

 

Total current liabilities

 

 

5,971,433

 

 

 

6,032,441

 

Long-term operating lease liabilities

 

 

767,619

 

 

 

830,289

 

Long-term debt and liabilities, net

 

 

52,558,038

 

 

 

52,960,772

 

Deferred tax liabilities, net

 

 

57,107

 

 

 

72,401

 

Total liabilities

 

 

59,354,197

 

 

 

59,895,903

 

Commitments and Contingencies (See Note 7)

 

 

 

 

 

 

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; 24,438,490 and 24,411,098 shares issued and outstanding, respectively

 

 

24,439

 

 

 

24,411

 

Additional paid-in capital

 

 

17,820,291

 

 

 

17,575,396

 

Accumulated deficit

 

 

(35,205,846

)

 

 

(35,316,540

)

Accumulated other comprehensive loss

 

 

(152,017

)

 

 

(168,654

)

Total stockholders’ deficit

 

 

(17,513,133

)

 

 

(17,885,387

)

Total liabilities and stockholders’ deficit

 

$

41,841,064

 

 

$

42,010,516

 

 

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)

 

 

 

Three Months Ended

 

 

 

March 31, 2023

 

 

March 31, 2022

 

Revenue:

 

 

 

 

 

 

Licensing fees

 

$

7,422,534

 

 

$

5,918,599

 

Total revenue

 

 

7,422,534

 

 

 

5,918,599

 

Costs and expenses:

 

 

 

 

 

 

Cost of ancillary products and assembled components

 

 

352,010

 

 

 

52,590

 

Selling, general and administrative

 

 

3,784,657

 

 

 

3,043,359

 

Research and development

 

 

206,760

 

 

 

199,070

 

Depreciation and amortization

 

 

576,342

 

 

 

724,462

 

Share-based compensation

 

 

244,923

 

 

 

310,002

 

Total costs and expenses

 

 

5,164,692

 

 

 

4,329,483

 

Income from operations

 

 

2,257,842

 

 

 

1,589,116

 

Other income (expense):

 

 

 

 

 

 

Interest income

 

 

84,750

 

 

 

2,233

 

Interest expense

 

 

(2,203,635

)

 

 

(1,687,022

)

Foreign currency exchange loss

 

 

(22,688

)

 

 

(60,263

)

Total other expense, net

 

 

(2,141,573

)

 

 

(1,745,052

)

Income (loss) before provision for income taxes

 

 

116,269

 

 

 

(155,936

)

(Provision) Benefit for income taxes

 

 

(5,575

)

 

 

141,974

 

Net income (loss)

 

 

110,694

 

 

 

(13,962

)

Foreign currency translation adjustment

 

 

16,637

 

 

 

(41,949

)

Comprehensive income (loss)

 

$

127,331

 

 

$

(55,911

)

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

Basic

 

$

0.00

 

 

$

0.00

 

Diluted

 

$

0.00

 

 

$

0.00

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

Basic

 

 

25,189,722

 

 

 

24,405,278

 

Diluted

 

 

25,437,374

 

 

 

24,405,278

 

 

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, 2022

 

 

24,411,098

 

 

$

24,411

 

 

$

17,575,396

 

 

$

(35,316,540

)

 

$

(168,654

)

 

$

(17,885,387

)

Net income

 

 

 

 

 

 

 

 

 

 

 

110,694

 

 

 

 

 

 

110,694

 

Foreign currency translation gain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,637

 

 

 

16,637

 

Share-based compensation

 

 

27,392

 

 

 

28

 

 

 

244,895

 

 

 

 

 

 

 

 

 

244,923

 

Balance, March 31, 2023

 

 

24,438,490

 

 

$

24,439

 

 

$

17,820,291

 

 

$

(35,205,846

)

 

$

(152,017

)

 

$

(17,513,133

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

)

 

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

6


 

GALAXY GAMING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Three Months Ended

 

 

 

March 31, 2023

 

 

March 31, 2022

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

110,694

 

 

$

(13,962

)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

576,342

 

 

 

724,462

 

Amortization of right-of-use assets

 

 

59,058

 

 

 

57,182

 

Amortization of debt issuance costs and debt discount

 

 

377,261

 

 

 

369,741

 

Bad debt expense (recovery)

 

 

37,855

 

 

 

(15,831

)

Deferred income tax

 

 

(15,294

)

 

 

(168,681

)

Share-based compensation

 

 

244,923

 

 

 

310,002

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(2,263,475

)

 

 

14,836

 

Income tax receivable

 

 

(20,869

)

 

 

793,522

 

Prepaid expenses and other current assets

 

 

290,566

 

 

 

34,989

 

Other assets

 

 

(86,025

)

 

 

27,870

 

Accounts payable

 

 

1,716,315

 

 

 

114,236

 

Accrued expenses

 

 

(1,603,191

)

 

 

(784,082

)

Revenue contract liability

 

 

(15,960

)

 

 

68,750

 

Operating lease liabilities

 

 

(60,418

)

 

 

(56,088

)

Net cash (used in) provided by operating activities

 

 

(652,218

)

 

 

1,476,946

 

Cash flows from investing activities:

 

 

 

 

 

 

Investment in internally developed software

 

 

(283,049

)

 

 

(59,616

)

Acquisition of property and equipment

 

 

(6,908

)

 

 

(6,131

)

Acquisition of assemblies in process assets

 

 

(13,937

)

 

 

(110,710

)

Net cash used in investing activities

 

 

(303,894

)

 

 

(176,457

)

Cash flows from financing activities:

 

 

 

 

 

 

Payments of debt issuance costs

 

 

(6,829

)

 

 

 

Proceeds from stock option exercises

 

 

 

 

 

195,456

 

Principal payments on long-term debt

 

 

(899,410

)

 

 

(315,936

)

Net cash used in financing activities

 

 

(906,239

)

 

 

(120,480

)

Effect of exchange rate changes on cash

 

 

11,299

 

 

 

3,379

 

Net increase in cash and cash equivalents

 

 

(1,851,052

)

 

 

1,183,388

 

Cash and cash equivalents – beginning of period

 

 

18,237,513

 

 

 

16,058,714

 

Cash and cash equivalents – end of period

 

$

16,386,461

 

 

$

17,242,102

 

Supplemental cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

1,823,227

 

 

$

1,358,531

 

Cash paid for income taxes

 

$

18,350

 

 

$

 

 

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 $250,000 per account. To date, we have not experienced uninsured losses. In general, we invest amounts in excess of the insurance maximums in a money market fund that invests solely in US government and agency securities.

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. 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

Customer relationships

 

9 - 22 years

Trademarks

 

20 - 30 years

Intellectual property

 

12 years

Non-compete agreements

 

9 years

Software

 

3 years

 

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. No impairment was recorded for the three months ended March 31, 2023.

 

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:

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 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 two operating segments (land-based gaming ("GG Core") and online gaming ("GG Digital")) which are aggregated into one reporting segment.

 

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) 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 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

9


 

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) 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 1, 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.

 

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 $574,979 on our condensed consolidated statements of operations. The Company recorded the payroll tax credit as a receivable in other current assets on the consolidated balance sheets as of December 31, 2022 and March 31, 2023.

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

10


 

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.

 

 

 

Three Months
Ended March 31,

 

 

 

2023

 

 

2022

 

The Americas

 

$

4,471,631

 

 

$

3,045,365

 

Europe, Middle East and Africa

 

 

2,950,903

 

 

 

2,873,234

 

Total revenue

 

$

7,422,534

 

 

$

5,918,599

 

 

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 $1,105,851 and $771,293 as of March 31, 2023 and December 31, 2022, respectively, and are included in the accounts receivable balance in the accompanying condensed consolidated balance sheets.

NOTE 4. 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 (“PTG”).

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

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Patents

 

$

13,507,799

 

 

$

13,507,997

 

Customer relationships

 

 

14,040,856

 

 

 

14,040,856

 

Trademarks

 

 

2,880,967

 

 

 

2,880,967

 

Intellectual property

 

 

2,000,000

 

 

 

2,000,000

 

Non-compete agreements

 

 

660,000

 

 

 

660,000

 

Software

 

 

1,251,412

 

 

 

968,362

 

Other intangible assets, gross

 

 

34,341,034

 

 

 

34,058,182

 

Less: accumulated amortization

 

 

(20,630,402

)

 

 

(20,152,071

)

Other intangible assets, net

 

$

13,710,632

 

 

$

13,906,111

 

For the three months ended March 31, 2023 and 2022, amortization expense related to other intangible assets was $478,331 and $653,330, respectively.

NOTE 5. LEASES

Lessee

11


 

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

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 9 months to 48 months.

Supplemental balance sheet information related to leases is as follows:

 

 

 

As of March 31, 2023

 

 

Amount

 

 

Classification

Operating leases:

 

 

 

 

 

Operating lease right-of-use lease assets

 

$

943,691

 

 

 

 

 

 

 

 

 

Operating lease current liabilities

 

$

250,569

 

 

 Current portion of operating lease liabilities

 

 

 

 

 

 

Operating lease long-term liabilities

 

 

767,619

 

 

 Long-term operating lease liabilities

 

 

 

 

 

 

Total operating lease liabilities

 

$

1,018,188

 

 

 

 

 

 

 

 

 

Weighted-average remaining lease term:

 

 

 

 

 

Operating leases

 

 

3.70

 

 

 

 

 

 

 

 

 

Weighted-average discount rate:

 

 

 

 

 

Operating leases

 

 

4.4

%

 

 

 

The components of lease expense are as follows:

 

 

 

Three Months Ended March 31, 2023

 

 

Amount

 

 

Classification

Operating lease cost

 

$

72,071

 

 

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
   measurement of lease liabilities:

 

 

 

 

 

Operating cash flows from operating leases

 

$

72,081

 

 

 Net income

 

 

 

 

 

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

 

 

 

 

 

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

 

$

218,796

 

Years ending December 31,

 

 

 

2024

 

$

288,892

 

2025

 

 

294,507

 

2026