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Ok

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, 2024

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

 

img156253068_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: None

 

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: 24,999,503 common shares as of November 1, 2024.

 

 


 

GALAXY GAMING, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024

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

16

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

25

Item 4:

Controls and Procedures

25

Item 5:

Other Information

25

 

PART II

 

Item 1:

Legal Proceedings

26

Item 1A:

Risk Factors

26

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 6:

Exhibits

29

 

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, 2024 (unaudited) and December 31, 2023

4

Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2024 and 2023 (unaudited)

5

Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the three and nine months ended September 30, 2024 and 2023 (unaudited)

6

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2024 and 2023 (unaudited)

7

Notes to Condensed Consolidated Financial Statements (unaudited)

8

 

3


 

GALAXY GAMING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

ASSETS

 

September 30,
2024

 

 

December 31,
2023

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,899,185

 

 

$

16,691,514

 

Accounts receivable, net of allowance of $150,589 and $200,192, respectively

 

 

5,643,349

 

 

 

4,173,990

 

Income tax receivable

 

 

83,755

 

 

 

80,718

 

Prepaid expenses

 

 

1,205,230

 

 

 

1,209,813

 

Total current assets

 

 

24,831,519

 

 

 

22,156,035

 

Property and equipment, net

 

 

25,254

 

 

 

98,053

 

Operating lease right-of-use assets

 

 

596,305

 

 

 

785,543

 

Assets deployed at client locations, net

 

 

3,302,683

 

 

 

3,268,294

 

Goodwill

 

 

1,091,000

 

 

 

1,091,000

 

Other intangible assets, net

 

 

11,852,986

 

 

 

12,755,735

 

Other assets

 

 

267,374

 

 

 

321,140

 

Total assets

 

$

41,967,121

 

 

$

40,475,800

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

3,229,275

 

 

$

1,002,061

 

Accrued expenses

 

 

2,623,995

 

 

 

2,584,231

 

Revenue contract liability

 

 

335

 

 

 

167,014

 

Current portion of operating lease liabilities

 

 

281,588

 

 

 

268,541

 

Current portion of long-term debt

 

 

930,371

 

 

 

854,120

 

Total current liabilities

 

 

7,065,564

 

 

 

4,875,967

 

Long-term operating lease liabilities

 

 

371,854

 

 

 

585,879

 

Long-term debt and liabilities, net

 

 

53,889,284

 

 

 

53,196,585

 

Deferred tax liabilities, net

 

 

21,402

 

 

 

60,790

 

Total liabilities

 

 

61,348,104

 

 

 

58,719,221

 

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; 24,999,503 and 24,845,439 shares issued and outstanding, respectively

 

 

25,000

 

 

 

24,846

 

Additional paid-in capital

 

 

19,569,152

 

 

 

18,972,901

 

Accumulated deficit

 

 

(38,870,435

)

 

 

(37,124,126

)

Accumulated other comprehensive loss

 

 

(104,700

)

 

 

(117,042

)

Total stockholders’ deficit

 

 

(19,380,983

)

 

 

(18,243,421

)

Total liabilities and stockholders’ deficit

 

$

41,967,121

 

 

$

40,475,800

 

 

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

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2024

 

 

September 30, 2023

 

 

September 30, 2024

 

 

September 30, 2023

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Licensing fees

 

$

7,646,298

 

 

$

6,103,861

 

 

$

24,169,866

 

 

$

21,051,731

 

Total revenue

 

 

7,646,298

 

 

 

6,103,861

 

 

 

24,169,866

 

 

 

21,051,731

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of ancillary products and assembled components

 

 

342,865

 

 

 

187,841

 

 

 

1,347,941

 

 

 

1,039,441

 

Selling, general and administrative

 

 

6,260,283

 

 

 

4,185,893

 

 

 

14,878,844

 

 

 

11,604,729

 

Research and development

 

 

261,493

 

 

 

226,405

 

 

 

782,858

 

 

 

632,830

 

Depreciation and amortization

 

 

701,127

 

 

 

567,628

 

 

 

2,089,317

 

 

 

1,639,104

 

Stock-based compensation

 

 

204,467

 

 

 

225,971

 

 

 

540,322

 

 

 

716,029

 

Total costs and expenses

 

 

7,770,235

 

 

 

5,393,738

 

 

 

19,639,282

 

 

 

15,632,133

 

(Loss) income from operations

 

 

(123,937

)

 

 

710,123

 

 

 

4,530,584

 

 

 

5,419,598

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

207,488

 

 

 

202,477

 

 

 

617,873

 

 

 

426,234

 

Interest expense

 

 

(2,293,239

)

 

 

(2,301,878

)

 

 

(6,863,534

)

 

 

(6,747,555

)

Foreign currency exchange gain (loss)

 

 

18,971

 

 

 

(24,238

)

 

 

30,583

 

 

 

(22,078

)

Total other expense, net

 

 

(2,066,780

)

 

 

(2,123,639

)

 

 

(6,215,078

)

 

 

(6,343,399

)

Loss before provision for income taxes

 

 

(2,190,717

)

 

 

(1,413,516

)

 

 

(1,684,494

)

 

 

(923,801

)

Provision for income taxes

 

 

(7,197

)

 

 

(41,642

)

 

 

(61,815

)

 

 

(63,894

)

Net loss

 

 

(2,197,914

)

 

 

(1,455,158

)

 

 

(1,746,309

)

 

 

(987,695

)

Foreign currency translation adjustment

 

 

94,729

 

 

 

21,493

 

 

 

12,342

 

 

 

12,850

 

Comprehensive loss

 

$

(2,103,185

)

 

$

(1,433,665

)

 

$

(1,733,967

)

 

$

(974,845

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.09

)

 

$

(0.06

)

 

$

(0.07

)

 

$

(0.04

)

Diluted

 

$

(0.09

)

 

$

(0.06

)

 

$

(0.07

)

 

$

(0.04

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

24,968,113

 

 

 

24,479,301

 

 

 

24,912,808

 

 

 

25,229,971

 

Diluted

 

 

24,968,113

 

 

 

24,479,301

 

 

 

24,912,808

 

 

 

25,229,971

 

 

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, 2023

 

 

24,845,439

 

 

$

24,846

 

 

$

18,972,901

 

 

$

(37,124,126

)

 

$

(117,042

)

 

$

(18,243,421

)

Net income

 

 

 

 

 

 

 

 

 

 

 

208,908

 

 

 

 

 

 

208,908

 

Foreign currency translation loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(30,394

)

 

 

(30,394

)

Stock options exercised

 

 

20,000

 

 

 

20

 

 

 

24,180

 

 

 

 

 

 

 

 

 

24,200

 

Stock-based compensation

 

 

45,243

 

 

 

45

 

 

 

141,197

 

 

 

 

 

 

 

 

 

141,242

 

Balance, March 31, 2024

 

 

24,910,682

 

 

 

24,911

 

 

 

19,138,278

 

 

 

(36,915,218

)

 

 

(147,436

)

 

 

(17,899,465

)

Net income

 

 

 

 

 

 

 

 

 

 

 

242,697

 

 

 

 

 

 

242,697

 

Foreign currency translation loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(51,993

)

 

 

(51,993

)

Stock-based compensation

 

 

46,811

 

 

 

47

 

 

 

194,566

 

 

 

 

 

 

 

 

 

194,613

 

Balance, June 30, 2024

 

 

24,957,493

 

 

$

24,958

 

 

$

19,332,844

 

 

$

(36,672,521

)

 

$

(199,429

)

 

$

(17,514,148

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(2,197,914

)

 

 

 

 

 

(2,197,914

)

Foreign currency translation gain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

94,729

 

 

 

94,729

 

Stock options exercised

 

 

18,333

 

 

 

18

 

 

 

31,864

 

 

 

 

 

 

 

 

 

31,882

 

Stock-based compensation

 

 

23,677

 

 

 

24

 

 

 

204,444

 

 

 

 

 

 

 

 

 

204,468

 

Balance, September 30, 2024

 

 

24,999,503

 

 

$

25,000

 

 

$

19,569,152

 

 

$

(38,870,435

)

 

$

(104,700

)

 

$

(19,380,983

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Stock-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

)

Net income

 

 

 

 

 

 

 

 

 

 

 

356,769

 

 

 

 

 

 

356,769

 

Foreign currency translation loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,280

)

 

 

(25,280

)

Stock-based compensation

 

 

28,391

 

 

 

28

 

 

 

245,107

 

 

 

 

 

 

 

 

 

245,135

 

Balance, June 30, 2023

 

 

24,466,881

 

 

$

24,467

 

 

$

18,065,398

 

 

$

(34,849,077

)

 

$

(177,297

)

 

$

(16,936,509

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(1,455,158

)

 

 

 

 

 

(1,455,158

)

Foreign currency translation loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,493

 

 

 

21,493

 

Stock options exercised

 

 

30,000

 

 

 

30

 

 

 

67,470

 

 

 

 

 

 

 

 

 

67,500

 

Stock-based compensation

 

 

25,316

 

 

 

25

 

 

 

225,946

 

 

 

 

 

 

 

 

 

225,971

 

Balance, September 30, 2023

 

 

24,522,197

 

 

$

24,522

 

 

$

18,358,814

 

 

$

(36,304,235

)

 

$

(155,804

)

 

$

(18,076,703

)

 

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

6


 

GALAXY GAMING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Nine Months Ended

 

 

 

September 30, 2024

 

 

September 30, 2023

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(1,746,309

)

 

$

(987,695

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

2,089,317

 

 

 

1,639,104

 

Amortization of right-of-use assets

 

 

189,238

 

 

 

179,207

 

Amortization of debt issuance costs and debt discount

 

 

1,142,699

 

 

 

1,134,240

 

Bad debt (recovery) expense

 

 

(31,875

)

 

 

109,533

 

Loss on disposal of property & equipment

 

 

33,245

 

 

 

 

Deferred income tax

 

 

(39,388

)

 

 

3,059

 

Stock-based compensation

 

 

540,322

 

 

 

716,029

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(1,433,623

)

 

 

(327,667

)

Income tax receivable

 

 

(5,739

)

 

 

1,104,190

 

Prepaid expenses and other current assets

 

 

334,954

 

 

 

12,066

 

Other assets

 

 

53,766

 

 

 

(2,513

)

Accounts payable

 

 

2,226,036

 

 

 

(496,874

)

Accrued expenses

 

 

42,468

 

 

 

(2,677,583

)

Revenue contract liability

 

 

(166,678

)

 

 

177,641

 

Operating lease liabilities

 

 

(200,977

)

 

 

(183,287

)

Net cash provided by operating activities

 

 

3,027,456

 

 

 

399,450

 

Cash flows from investing activities:

 

 

 

 

 

 

Investment in internally developed software

 

 

(562,247

)

 

 

(556,040

)

Acquisition of property and equipment

 

 

 

 

 

(15,494

)

Acquisition of assets deployed at client locations

 

 

(1,722,064

)

 

 

(1,483,671

)

Transfer of title of assets deployed at client locations to perpetual license customer

 

 

1,102,908

 

 

 

764,865

 

Net cash used in investing activities

 

 

(1,181,403

)

 

 

(1,290,340

)

Cash flows from financing activities:

 

 

 

 

 

 

Payments of debt issuance costs

 

 

 

 

 

(26,897

)

Proceeds from stock option exercises

 

 

56,082

 

 

 

67,500

 

Principal payments on long-term debt

 

 

(704,120

)

 

 

(1,450,406

)

Net cash used in financing activities

 

 

(648,038

)

 

 

(1,409,803

)

Effect of exchange rate changes on cash

 

 

9,656

 

 

 

1,252

 

Net increase (decrease) in cash and cash equivalents

 

 

1,207,671

 

 

 

(2,299,441

)

Cash and cash equivalents – beginning of period

 

 

16,691,514

 

 

 

18,237,513

 

Cash and cash equivalents – end of period

 

$

17,899,185

 

 

$

15,938,072

 

Supplemental cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

5,762,757

 

 

$

5,734,663

 

Cash paid for income taxes

 

$

101,536

 

 

$

161,124

 

Supplemental schedule of non-cash activities:

 

 

 

 

 

 

Insurance acquired under note payable

 

$

330,371

 

 

$

378,000

 

 

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 and iGaming industries. 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, 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 regulated land-based gaming markets. We also license our content and distribute content from other companies to iGaming operators in gaming markets throughout the world where iGaming is legalized.

On July 18, 2024, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Evolution Malta Holding Limited, a company registered in Malta (“Parent”), and Galaga Merger Sub, Inc., a Nevada corporation and direct wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which, subject to the terms and conditions thereof, Merger Sub would merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent.

Upon the closing of the Merger, each share of common stock, par value $0.001 per share of the Company issued and outstanding immediately prior to the effective time of the Merger, other than any Company common stock (i) owned by Company stockholders who are entitled to demand and have properly and validly demanded their appraisal rights under Nevada law or (ii) owned by Parent, Merger Sub, the Company or by any of their respective subsidiaries, will be converted automatically into the right to receive $3.20 per share in cash, without interest and subject to any applicable withholding taxes.

Consummation of the Merger is subject to the satisfaction or waiver of certain closing conditions, including approval by at least a majority of the voting power of the outstanding shares of the Company’s common stock of the Merger Agreement and the transactions contemplated thereby, including the Merger, and the receipt of certain gaming regulatory approvals. The Merger is expected to be completed in mid-2025, subject to satisfaction or waiver of the closing conditions.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation. The accompanying condensed consolidated 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 U.S. Securities and Exchange Commission ("SEC"). In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all necessary adjustments (including all those of a recurring nature and those necessary in order for the financial statements to not be misleading) and all disclosures to present fairly our financial position and the results of our operations and cash flows for the periods presented.

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. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes as of and for the year ended December 31, 2023 included in our 2023 Form 10-K ("2023 10-K").

Use of estimates and assumptions. The preparation of financial statements in conformity with U.S. GAAP requires the Company to make decisions based upon estimates, assumptions, and factors considered relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in future economic conditions or other business circumstances may affect the outcomes of the estimates and assumptions. Accordingly, actual results could differ materially from those anticipated.

8


 

Consolidation. The financial statements are presented on a consolidated basis and include the results of the Company and its wholly owned subsidiaries, Progressive Games Partner, LLC ("PGP") and Galaxy Gaming-01 LLC ("GG-01"). 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.

Cash and cash equivalents. Cash and cash equivalents consist primarily of deposits held at major banks and highly liquid investments with original maturities of three months or less. With the exception of funds held outside the U.S., these deposits are in insured banking institutions, which are insured up to $250,000 per account. To date, we have not experienced uninsured losses.

Accounts receivable and allowance for credit losses. Accounts receivable are stated at face value net of allowance for credit losses. Management estimates the allowance for expected credit losses balance using relevant available information from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in the current environmental economic conditions and reasonable and supportable forecast. The allowance for expected credit losses on financial instruments is measured on a collective (pool) basis when similar risk characteristics exist. Accounts receivable are non-interest bearing. Accounts are written off when management deems them to be uncollectible. Recoveries of accounts previously written off are recorded when received.

For the three and nine months ended September 30, 2024, there was no material activity in allowance for credit losses.

Goodwill. The excess of the purchase price of an acquired business over the estimated fair value of the assets acquired and the liabilities assumed, is recorded as goodwill. The Company tests for possible impairment of goodwill at least annually, or when circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company has the option to begin with a qualitative assessment, commonly referred to as “Step 0”, to determine whether it is more likely than not that the reporting unit’s fair value of goodwill is less than its carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such as the general economic environment, industry and market conditions, changes in key assumptions used since the most recently performed valuation and overall financial performance of the reporting units. If the Company determines that it is more likely than not that a reporting unit’s fair value is less than its carrying value, the Company performs a quantitative goodwill impairment analysis, and depending upon the results of that measurement, the recorded goodwill may be written down and charged to income from operations when the carrying amount of the reporting unit exceeds the fair value of the reporting unit.

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

 

Software relates primarily to assets where costs are capitalizable during the application development phase. External and internal labor-related costs associated with product development are included in software. The Company reviews its identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment losses are recognized for identifiable intangibles, other than goodwill, when indicators of impairment are present and the estimated undiscounted cash flows are not sufficient to recover the assets’ carrying amount. No impairment was recorded for the three and nine months ended September 30, 2024. See Note 4.

 

Fair value of financial instruments. Fair value is defined as a market-based measurement intended to estimate the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs when measuring fair value. These inputs are categorized as follows:

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.

9


 

The carrying values of cash equivalents, accounts receivable and accounts payable approximate fair value 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 (level 2). The Company currently has no financial instruments measured at estimated fair value on a recurring basis based on valuation reports provided by counterparties.

Leases. The Company classifies leases at inception as operating leases or finance leases in accordance with ASC 842, "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 liabilities are amortized over the lease term using the effective interest method, while lease assets are depreciated over the shorter of the asset's useful life or the lease term. The discount rate used to determine present value is typically the incremental borrowing rate at lease commencement, unless the implicit rate in the lease is readily determinable. Subsequent changes in lease terms or payments are adjusted accordingly. See Note 5.

Revenue recognition. We account for our revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"). See Note 3.

Foreign currency translation. Gains and losses from settlement of transactions involving foreign currency amounts are included in other income or expense in the Condensed 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 loss in the Condensed Consolidated Statements of Changes in Stockholders’ Deficit.

Basic and diluted loss per share. Basic earnings per share is calculated by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to be purchased under the employee stock purchase plan, and unvested restricted stock units (“RSUs”).

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 reporting segment.

Other significant accounting policies. Our significant accounting policies are described in our 2023 10-K. There have been no material changes to those policies.

Recently issued accounting pronouncements. In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2023-07, “Improvements to Reportable Segment Disclosures,” (“ASU 2023-07”), which is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and requires retrospective application to all prior periods presented in the financial statements. ASU 2023-07 provides for improved financial reporting by requiring disclosure of incremental segment information to enable investors to develop more decision-useful financial analyses. The Company is currently assessing the impact that adoption of this new accounting guidance will have on its consolidated financial statements and footnote disclosures.

Accounting Standard Update 2023-09, Improvements to Income Tax Disclosures ("ASU 2023-09"). In December 2023, the FASB issued ASU 2023-09, which requires more detailed income tax disclosures. The guidance requires entities to disclose disaggregated information about their effective tax rate reconciliation as well as expanded information on income taxes paid by jurisdiction. The disclosure requirements will be applied on a prospective basis, with the option to apply them retrospectively. The standard is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently assessing the impact that adoption of this new accounting guidance will have on its consolidated financial statements and footnote disclosures.

Accounting Standard Update 2024-03, Disaggregation of Income Statement Expenses ("ASU 2024-03"). In November 2024, the FASB issued ASU 2024-03, which requires public business entities to disclose additional information about specific expense categories in the notes to financial statements at interim and annual reporting periods. The amendments in ASU 2024-03 are effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption is permitted. The Company is currently assessing the impact that adoption of this new accounting guidance will have on its consolidated financial statements and footnote disclosures.

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.

10


 

NOTE 3. REVENUE RECOGNITION

Revenue recognition. We generate revenue primarily from the licensing of our intellectual property and the intellectual property that we license from third parties. 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.

From time to time, we may sell the perpetual right to use our intellectual property for our progressive gaming systems, that is separate from the licensing of our game content and from time to time, sell the units used to deliver the progressive gaming systems. 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.

From time to time, the Company licenses intellectual property from third-party owners and re-licenses that intellectual property to its casino clients. In these arrangements, the Company usually agrees to pay the owner of the intellectual property a royalty based on the revenues the Company receives from licensing the intellectual property to its casino clients. Royalties are recorded net in revenue.

Disaggregation of revenue

The following table disaggregates our revenue by geographic location for the three and nine months ended September 30, 2024, and 2023. All of the royalty expense that is charged to a contra-revenue in our online gaming operating segment has been allocated to the Europe, Middle East and Africa region in both periods presented.

 

 

 

Three Months
Ended September 30,

 

 

Nine Months
Ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

The Americas

 

$

4,580,666

 

 

$

3,892,829

 

 

$

14,751,736

 

 

$

13,219,678

 

Europe, Middle East and Africa

 

 

3,065,632

 

 

 

2,211,032

 

 

 

9,418,130

 

 

 

7,832,053

 

Total revenue

 

$

7,646,298

 

 

$

6,103,861

 

 

$

24,169,866

 

 

$

21,051,731

 

 

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.

 

On May 10, 2023, the Company and a customer entered into an amended and restated agreement (the "Agreement"). The Agreement amends and restates a previous agreement between the parties, dated June 2, 2015, for the provision of licenses for certain table game content and related intellectual property which the Company, succeeded to as successor in interest by merger with PGP.

 

The Agreement guarantees a minimum payment from the customer of €6,000,000 (converted to approximately $6,702,000 as of September 30, 2024) per each year ended March 31, for years 1 through 4 of the contract. The amount is to be billed and paid based on minimum monthly payments of €500,000 (converted to approximately $558,500 as of September 30, 2024). Any usage amount lower than the minimum monthly payment is deferred until the end of the contract year when the revenue is considered earned and can be recognized. For the nine months ended September 30, 2024, the Company recognized a total of $168,944 of deferred revenue upon the completion of the first year of the contract.

 

For years 5 through 10 of the contract, the amount to be billed is based on the actual usage from the Licensee. Invoices will be billed on a monthly basis. Revenue for years 5 through 10 will be recognized when actual usage is incurred.

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 are included in the balance of Accounts receivable, net of allowance on the balance sheet and totaled $1,374,380, $1,091,068 and $1,210,567 as of September 30, 2024, December 31, 2023 and September 30, 2023, respectively.

Intellectual property agreements. From time to time, the Company purchases or licenses intellectual property from third-parties and the Company, in turn, utilizes that intellectual property in certain games sold to clients. In these purchase 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.

11


 

NOTE 4. OTHER INTANGIBLE ASSETS

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

 

 

September 30,

 

 

December 31,

 

 

 

2024

 

 

2023

 

Patents

 

$

13,509,003

 

 

$

13,507,799

 

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

 

 

1,994,593

 

 

 

1,432,397

 

Other intangible assets, gross

 

 

35,085,419

 

 

 

34,522,019

 

Less: accumulated amortization

 

 

(23,232,433

)

 

 

(21,766,284

)

Other intangible assets, net

 

$

11,852,986

 

 

$

12,755,735

 

For the three months ended September 30, 2024 and 2023, amortization expense related to other intangible assets was $489,852 and $472,247, respectively. For the nine months ended September 30, 2024 and 2023, amortization expense related to other intangible assets was $1,464,995 and $1,357,132, respectively.

NOTE 5. LEASES

We have operating leases for our corporate office, two satellite facilities in the state of Washington, and leases for certain office 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 September 30, 2024, 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 8 months to 30 months.

Supplemental balance sheet information related to leases is as follows:

 

 

 

September 30, 2024

 

 

December 31, 2023

 

Operating leases:

 

 

 

 

 

 

Operating lease right-of-use lease assets

 

$

596,305

 

 

$

785,543

 

 

 

 

 

 

 

 

Operating lease current liabilities

 

$

281,588

 

 

$

268,541

 

Operating lease long-term liabilities

 

 

371,854

 

 

 

585,879

 

Total operating lease liabilities

 

$

653,442

 

 

$

854,420

 

 

 

 

 

 

 

 

Weighted-average remaining lease term in years:

 

 

 

 

 

 

Operating leases

 

 

2.23

 

 

 

3.12

 

Weighted-average discount rate:

 

 

 

 

 

 

Operating leases

 

 

4.4

%

 

 

5.4

%

 

The components of lease expense are as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2024

 

 

2023

 

 

2024

 

 

2023

 

Operating lease cost (1)

 

$

71,515

 

 

$

72,071

 

 

$

219,322

 

 

$

216,213

 

(1) Classified as selling, general and administrative expense

 

 

 

 

 

 

 

 

 

 

 

 

 

12


 

Supplemental cash flow information related to leases is as follows:

 

 

 

Nine Months Ended September 30,

 

 

 

2024

 

 

2023

 

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

 

 

 

 

 

 

Principal and interest payments related to operating leases

 

$

222,862

 

 

$

216,243

 

 

As of September 30, 2024, future maturities of our operating lease liabilities are as follows:

 

 

Amount

 

Years ended December 31,

 

 

 

2024

 

$

76,733

 

2025

 

 

306,055

 

2026

 

 

302,011

 

2027

 

 

2,985

 

Total minimum lease payments

 

 

687,784

 

Less: imputed interest

 

 

(34,342

)

Total operating lease liability

 

 

653,442

 

Less: current portion

 

 

(281,588

)

Long-term portion

 

$

371,854

 

 

NOTE 6. LONG-TERM DEBT AND LIABILITIES

Long-term debt and liabilities consisted of the following at:

 

September 30,

 

 

December 31,

 

 

2024

 

 

2023

 

Fortress credit agreement

$

57,726,929

 

 

$

58,176,929

 

Insurance notes payable

 

330,371

 

 

 

254,120

 

Long-term debt and liabilities, gross

 

58,057,300

 

 

 

58,431,049

 

Less: Unamortized debt issuance costs

 

(3,237,645

)

 

 

(4,380,344

)

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

 

54,819,655

 

 

 

54,050,705

 

Less: Current portion of long-term debt

 

(930,371

)

 

 

(854,120

)

Long-term debt and liabilities, net

$

53,889,284

 

 

$

53,196,585

 

 

Fortress Credit Agreement. On November 15, 2021, the Company entered into a senior secured term loan agreement with Fortress Credit Corp. (“Fortress Credit Agreement”) in the amount of $60,000,000. The proceeds of the loan were used to (i) pay $39,507,716 to Triangulum as full payment of the settlement amount due under the previously filed settlement agreement between Galaxy Gaming and Triangulum, as set forth above; (ii) repay $11,118,955 due and owing to NSB under the MSPLP and under the Amended and Restated Credit Agreement, dated as of May 13, 2021, made between Galaxy Gaming and Zions Bancorporation, N.A. dba Nevada State Bank, a Nevada state banking corporation, and (iii) $4,079,800 was used to pay fees and expenses. The remaining $5,293,529 was added to the Company’s cash on hand and used for corporate and operating purposes.

The Fortress Credit Agreement bears interest at a rate equal to, at the Company’s option, either (a) London Interbank Offered Rate ("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 commencing in 2023 based on results for the prior fiscal year. The 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 no more than 5.00x for the quarter ended September 30, 2024. As of September 30, 2024, the Company was in compliance with the covenants in the Fortress Credit Agreement. The Fortress Credit Agreement has no prepayment penalty after November 15, 2023.

13


 

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.

In response to ASU No. 2020-04, Reference Rate Reform (Topic 848) and effective May 30, 2023, the Benchmark Replacement replaced LIBOR under the Fortress Credit Agreement. The Benchmark Replacement is (a) the sum of: (i) Term Secured Overnight Financing Rate ("SOFR") and (ii) 0.11448% for an Available Tenor of one-month's duration, 0.26161% for an Available Tenor of three-months duration, and 0.42826% for an Available Tenor of six months duration, or (b) the sum of: (i) Daily Simple SOFR and (ii) the spread adjustment selected or recommended by the Relevant Governmental Body for the replacement of the tenor of USD LIBOR with a SOFR-based rate having approximately the same length as the interest payment period.

As of September 30, 2024, future maturities of our long-term obligations are as follows:

 

 

Total

 

Years ended December 31,

 

 

 

2024

 

$

238,089

 

2025

 

 

842,281

 

2026

 

 

56,976,930

 

Long-term liabilities, gross

 

$

58,057,300

 

 

NOTE 7. 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, 2024 and 2023, respectively, we had the following client concentrations:

 

 

 

Location

 

Nine Months Ended September 30, 2024
Revenue

 

 

Nine Months Ended September 30, 2023
Revenue

 

 

Accounts
Receivable
September 30, 2024

 

 

Accounts
Receivable
December 31, 2023

 

Client A

 

Europe

 

 

20.5

%

 

 

21.3

%

 

$

1,193,441

 

 

$

565,253

 

Client B

 

North America

 

 

10.7

%

 

 

14.7

%

 

$

1,527,100

 

 

$

631,507

 

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. See "Litigation Related to the Merger" in Item 1 of Part II of this Quarterly Report.

An unexpected adverse judgment in any pending litigation could cause a material impact on our business operations, intellectual property, results of operations or financial position. Unless otherwise expressly stated, we believe costs associated with litigation will not have a material impact on our financial position or liquidity but may be material to the results of operations in any given period and, accordingly, no provision for loss has been reflected in the accompanying financial statements related to those matters.

Intellectual property agreements. From time to time, the Company purchases intellectual property from third-parties and the Company, in turn, utilizes that intellectual property in certain games licensed to clients. In these purchase 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 8. INCOME TAXES

Our forecasted annual effective tax rate (“AETR”) at September 30, 2024 was -3.6%, as compared to -6.5% at September 30, 2023. This decrease was primarily driven by the increased amount of permanent differences mainly attributable to the legal expenses incurred related to the acquisition by Evolution and larger forecasted pre-tax book loss. See Note 9.

For the nine months ended September 30, 2024 and 2023, our effective tax rate (“ETR”) was -3.7% and -6.9%, respectively. The decrease in the ETR for the nine months ended September 30, 2024 is mainly attributable to the increase in the forecasted pre-tax book loss as compared to the nine months ended September 30, 2023.

14


 

NOTE 9. SUBSEQUENT EVENTS

None

15


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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, 2024 and 2023. 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 2023 Form 10-K.

16


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the information contained in this Quarterly Report includes forward-looking statements In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “might,” “expect,” “intend,” "target," “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other similar expressions. These forward-looking statements are only predictions. We have based these forward-looking statements on our current expectations, assumptions and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks and uncertainties. These risks and uncertainties include, but are not limited to, the ability to complete the Merger (as defined herein) on the proposed terms or on the anticipated timeline, or at all, including risks and uncertainties related to securing the necessary stockholder approval, gaming regulatory approvals and satisfaction of other closing conditions to consummate the proposed Merger; the occurrence of any event, change or other circumstance that could give rise to the termination of the Merger Agreement (as defined herein); risks that the proposed Merger disrupts the Company’s current plans and operations or diverts the attention of the Company’s management or employees from ongoing business operations; the risk that certain restrictions during the pendency of the Merger may impact the Company's ability to pursue certain business opportunities or strategic transactions; the risk of potential difficulties with the Company’s ability to retain and hire key personnel and maintain relationships with customers and other third parties as a result of the proposed Merger, including during the pendency of the Merger; the risk that the proposed Merger may involve unexpected costs and/or unknown or inestimable liabilities; the risk that the Company’s business may suffer as a result of uncertainty surrounding the proposed Merger; the risk that stockholder litigation in connection with the proposed Merger may affect the timing or occurrence of the proposed Merger or result in significant costs of defense, indemnification and liability; effects relating to the announcement of the proposed Merger or any further announcem