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, 2019

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

 

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.)

 

 

 

6767 Spencer Street, Las Vegas, NV 89119

(Address of principal executive offices)

 

(702) 939-3254

(Issuer’s telephone number)

 

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.          

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

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 17,274,706 common shares as of May 9, 2019.



 

 

GALAXY GAMING, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2019

TABLE OF CONTENTS

 

 

 

Page

 

PART I – FINANCIAL INFORMATION  

 

 

Item 1:

Financial Statements (unaudited)

3

Item 2:

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

17

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

19

Item 4:

Controls and Procedures

19

 

 

PART II – OTHER INFORMATION

 

 

Item 1:

Legal Proceedings

21

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

21

Item 6:

Exhibits

21

 

 

2


PART I - FINANCIAL INFORMATION

 

 

ITEM 1. FINANCIAL STATEMENTS

Our financial statements included in this Form 10-Q are as follows:

 

Condensed Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018

4

Condensed Statements of Operations for the three months ended March 31, 2019 and 2018 (unaudited)

5

Condensed Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (unaudited)

6

Notes to Condensed Financial Statements (unaudited)

7

 

3


GALAXY GAMING, INC.

CONDENSED BALANCE SHEETS

 

 

 

March 31,

 

 

December 31,

 

ASSETS

 

2019

 

 

2018

 

Current assets:

 

(Unaudited)

 

 

 

 

 

Cash, cash equivalents and restricted cash

 

$

6,594,225

 

 

$

6,311,563

 

Accounts receivable, net of allowance of $87,126 and $54,136, respectively

 

 

2,976,102

 

 

 

2,849,861

 

Inventory, net

 

 

621,918

 

 

 

531,814

 

Prepaid expense

 

 

542,528

 

 

 

510,254

 

Other current assets

 

 

6,397

 

 

 

3,352

 

Total current assets

 

 

10,741,170

 

 

 

10,206,844

 

Property and equipment, net

 

 

165,099

 

 

 

199,585

 

Operating lease right-of-use assets

 

 

217,925

 

 

 

 

Assets deployed at client locations, net

 

 

460,441

 

 

 

471,562

 

Goodwill and other intangible assets, net

 

 

9,616,286

 

 

 

9,981,252

 

Deferred tax assets, net

 

 

334,482

 

 

 

334,482

 

Total assets

 

$

21,535,403

 

 

$

21,193,725

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,067,195

 

 

$

681,936

 

Accrued expenses

 

 

641,392

 

 

 

1,295,570

 

Income taxes payable

 

 

180,466

 

 

 

82,091

 

Revenue contract liability

 

 

1,355,836

 

 

 

1,438,492

 

Deferred rent, current portion

 

 

 

 

 

14,025

 

Current portion of long-term debt

 

 

1,446,794

 

 

 

1,456,847

 

Current portion of operating lease liabilities

 

 

196,613

 

 

 

 

Other current liabilities

 

 

5,718

 

 

 

21,654

 

Total current liabilities

 

 

4,894,014

 

 

 

4,990,615

 

Long-term operating lease liabilities

 

 

31,101

 

 

 

 

Long-term debt, net

 

 

8,310,364

 

 

 

8,649,828

 

Interest rate swap liability

 

 

122,323

 

 

 

96,181

 

Total liabilities

 

 

13,357,802

 

 

 

13,736,624

 

Commitments and Contingencies (See Note 11)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Preferred stock, 10,000,000 shares authorized, $0.001 par value;

   0 shares issued and outstanding, respectively

 

 

 

 

 

 

Common stock, 65,000,000 shares authorized; $0.001 par value;

   40,490,123 and 39,921,591 shares issued and outstanding, respectively

 

 

40,490

 

 

 

39,922

 

Additional paid-in capital

 

 

4,992,969

 

 

 

4,733,701

 

Accumulated earnings

 

 

3,144,142

 

 

 

2,683,478

 

Total stockholders’ equity

 

 

8,177,601

 

 

 

7,457,101

 

Total liabilities and stockholders’ equity

 

$

21,535,403

 

 

$

21,193,725

 

 

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

 

4


GALAXY GAMING, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Revenue:

 

 

 

 

 

 

 

 

Product leases and royalties

 

$

5,346,001

 

 

$

4,360,356

 

Product sales and service

 

 

750

 

 

 

339

 

Total revenue

 

 

5,346,751

 

 

 

4,360,695

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of ancillary products and assembled components

 

 

82,391

 

 

 

22,758

 

Selling, general and administrative

 

 

3,540,870

 

 

 

2,585,070

 

Research and development

 

 

299,180

 

 

 

193,402

 

Depreciation and amortization

 

 

482,064

 

 

 

451,560

 

Share-based compensation

 

 

223,604

 

 

 

166,478

 

Total costs and expenses

 

 

4,628,109

 

 

 

3,419,268

 

Income from operations

 

 

718,642

 

 

 

941,427

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense

 

 

(168,013

)

 

 

(366,093

)

Foreign currency exchange gain

 

 

36,476

 

 

 

105,801

 

Change in estimated fair value of interest rate swap liability

 

 

(26,142

)

 

 

 

Interest income

 

 

715

 

 

 

442

 

Total other expense

 

 

(156,964

)

 

 

(259,850

)

Income before provision for income taxes

 

 

561,678

 

 

 

681,577

 

Provision for income taxes

 

 

(101,014

)

 

 

(144,779

)

Net income

 

$

460,664

 

 

$

536,798

 

Net income per share, basic and diluted

 

$

0.01

 

 

$

0.01

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

40,370,338

 

 

 

39,763,802

 

Diluted

 

 

42,242,557

 

 

 

42,153,901

 

 

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

 

5


GALAXY GAMING, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

460,664

 

 

$

536,798

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization of intangible assets

 

 

473,493

 

 

 

451,560

 

Amortization of lease right-of-use assets

 

 

69,711

 

 

 

 

Amortization of debt issuance costs and debt discount

 

 

9,776

 

 

 

72,590

 

Bad debt expense

 

 

31,762

 

 

 

5,000

 

Change in estimated fair value of interest rate swap liability

 

 

26,142

 

 

 

 

Share-based compensation

 

 

223,604

 

 

 

166,478

 

Unrealized foreign exchange gains on cash, cash equivalents and restricted cash

 

 

(29,296

)

 

 

(88,240

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(158,003

)

 

 

(260,264

)

Inventory

 

 

(148,120

)

 

 

(90,786

)

Prepaid expenses

 

 

(32,274

)

 

 

64,425

 

Other current assets

 

 

 

 

 

(7,000

)

Accounts payable

 

 

385,259

 

 

 

(622,649

)

Accrued expenses

 

 

(656,817

)

 

 

(305,096

)

Income taxes payable

 

 

101,014

 

 

 

121,156

 

Revenue contract liability

 

 

(82,656

)

 

 

25,914

 

Operating lease liabilities

 

 

(65,376

)

 

 

 

Other current liabilities

 

 

(7,455

)

 

 

3,464

 

Deferred rent

 

 

 

 

 

(4,827

)

Net cash provided by operating activities

 

 

601,428

 

 

 

68,523

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Investment in intangible assets

 

 

(12,250

)

 

 

 

Acquisition of property and equipment

 

 

(6,940

)

 

 

(31,458

)

Net cash used in investing activities

 

 

(19,190

)

 

 

(31,458

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

36,232

 

 

 

 

Principal payments on finance lease obligations

 

 

(8,481

)

 

 

(8,034

)

Principal payments on long-term debt

 

 

(356,623

)

 

 

(302,891

)

Net cash used in financing activities

 

 

(328,872

)

 

 

(310,925

)

Effect of exchange rate changes on cash

 

 

29,296

 

 

 

88,241

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

282,662

 

 

 

(185,619

)

Cash, cash equivalents and restricted cash – beginning of period

 

 

6,311,563

 

 

 

3,581,209

 

Cash, cash equivalents and restricted cash – end of period

 

$

6,594,225

 

 

$

3,395,590

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

160,557

 

 

$

293,503

 

Inventory transferred to assets deployed at client locations

 

$

58,016

 

 

$

41,774

 

Cash paid for income taxes

 

$

 

 

$

23,664

 

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

 

$

293,350

 

 

$

 

 

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

 

 

6


GALAXY GAMING, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. NATURE OF OPERATIONS AND 2019 SIGNIFICANT BUSINESS DEVELOPMENT

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, assembly, marketing and acquisition 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 floor 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 land-based and riverboat gaming companies located in North America, the Caribbean, Central America, the British Isles, Europe and Africa and to cruise ship companies and internet gaming sites worldwide.  

 

On March 14, 2019, we announced the completion of our previously-disclosed strategic alternatives review.  After a thorough evaluation of a range of strategic alternatives, including a sale of the company, we have decided to continue our existing plan of product line and geographic expansions as an independent company.

 

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation.  The accompanying condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited interim condensed financial statements contain all necessary adjustments (including all those of a recurring nature and those necessary in order for the financial statements to be not misleading) and all disclosures to present fairly our financial position and the results of our operations and cash flows for the periods presented. As permitted by the rules and regulations of the SEC, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations.  

These unaudited interim condensed financial statements should be read in conjunction with the financial statements and the related notes thereto included in our Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on April 2, 2018 (the “2018 10-K”).

The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.

Basis of accounting. The financial statements have been prepared on the accrual basis of accounting in conformity with U.S. GAAP. Revenues are recognized as income when earned and expenses are recognized when they are incurred. We do not have significant categories of cost of revenues. Expenses such as wages, consulting expenses, legal, regulatory and professional fees and rent are recorded when the expense is incurred.

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.

Reclassifications. Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period financial statement presentations.

Other Significant Accounting Policies. See Note 3 in Item 8. “Financial Statements and Supplementary Data” included in our 2018 10-K.

Recently adopted accounting standards

Leases.  In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASC 842”).  The amended guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  We have adopted the new standard effective January 1, 2019, using the modified retrospective transition approach and recognized $161,310 of right-of-use operating lease assets and $175,335 of operating lease liabilities on our balance sheets upon adoption (Note 9).  In addition, we eliminated leasehold improvements related to a finance lease from fixed assets, recognized $14,286 of right-of-use finance lease assets and maintained the finance lease liability at the carrying cost of the previous capital lease liability of $14,198 upon adoption.  The adoption has increased our total assets and liabilities as of January 1, 2019. Lessor accounting related to our enhanced table system remains unchanged.

7


New accounting standards not yet adopted

Fair Value Measurement.  In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 addresses the required disclosures around fair value measurement, removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The standard is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted. We do not believe the adoption of this guidance will have a material impact on our financial statements.

Internal-Use Software. In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15. This new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption (including early adoption in any interim period) permitted. We do not believe the adoption of this guidance will have a material impact on our financial statements.

 

NOTE 3. REVENUE RECOGNITION

 

Revenue recognition

We generate revenue primarily from the licensing of our intellectual property. We also, occasionally, receive a one-time sale of certain products and/or reimbursement of our equipment.

 

License Fees. We derive product lease and royalty revenue from negotiated recurring fee license agreements and the performance of our products. We account for these agreements as month-to-month contracts and recognize revenue each month as we satisfy our performance obligations by granting access to intellectual property to our clients. In addition, revenue associated with performance-based agreements is recognized during the month that the usage of the product or intellectual property occurs.  

 

Some of our intellectual property requires the installation of certain equipment and both the intellectual property and the related equipment are licensed in one bundled package. We have determined that the equipment is not distinct from the intellectual property and, therefore, we have only one performance obligation and, as a result, the allocation of the transaction price to different performance obligations is not necessary.

 

Product sales.  Occasionally, we sell certain incidental products or receive reimbursement of our equipment after the commencement of the new license agreement. Revenue from such sales is recognized as a separate performance obligation when we ship the items.  

 

Disaggregation of revenue.  The following table disaggregates our revenue by major source for the three months ended March 31, 2019 and 2018:

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

Table games

 

$

5,342,406

 

 

$

4,193,158

 

Other

 

 

4,345

 

 

 

167,537

 

Total revenue

 

$

5,346,751

 

 

$

4,360,695

 

 

The following table disaggregates our revenue by geographic location for the three months ended March 31, 2019 and 2018:

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

North America and Caribbean

 

$

3,844,525

 

 

$

3,502,810

 

Europe

 

 

1,502,226

 

 

 

857,885

 

Total revenue

 

$

5,346,751

 

 

$

4,360,695

 

 

8


Revenue contract liability  

 

We invoice our clients monthly in advance for unlimited use of our intellectual property licenses and recognize a revenue contract liability that represents such advanced billing to our clients for unsatisfied performance.  We reduce the revenue contract liability and recognize revenue when we transfer those goods or services and, therefore, satisfy our performance obligation.

The table below summarizes changes in the revenue contract liability during the three months ended March 31, 2019:

 

Beginning balance – December 31, 2018

 

$

1,438,492

 

Increase (advanced billings)

 

 

3,877,619

 

Decrease (revenue recognition)

 

 

(3,960,275

)

Ending balance – March 31, 2019

 

$

1,355,836

 

 

Revenue recognized during the three months ended March 31, 2019 that was included in the beginning balance of revenue contract liability above was $1,426,951.

 

 

NOTE 4. INVENTORY

Inventory, net consisted of the following at March 31, 2019 and December 31, 2018: 

 

 

 

2019

 

 

2018

 

Raw materials and component parts

 

$

357,825

 

 

$

267,517

 

Finished goods

 

 

306,132

 

 

 

306,335

 

     Inventory, gross

 

 

663,957

 

 

 

573,852

 

Less: inventory reserve

 

 

(42,039

)

 

 

(42,038

)

     Inventory, net

 

$

621,918

 

 

$

531,814

 

 

 

NOTE 5. PROPERTY AND EQUIPMENT

Property and equipment, net consisted of the following at March 31, 2019 and December 31, 2018: 

 

 

 

2019

 

 

2018

 

Furniture and fixtures

 

$

312,640

 

 

$

312,640

 

Automotive vehicles

 

 

215,127

 

 

 

215,127

 

Leasehold improvements

 

 

6,843

 

 

 

156,843

 

Computer equipment

 

 

166,778

 

 

 

159,838

 

Office equipment

 

 

53,484

 

 

 

53,484

 

Property and equipment, gross

 

 

754,872

 

 

 

897,932

 

Less: accumulated depreciation

 

 

(589,773

)

 

 

(698,347

)

Property and equipment, net

 

$

165,099

 

 

$

199,585

 

 

Property and equipment, net included $150,000 of leasehold improvements acquired under capital leases and $135,714 of related accumulated depreciation as of December 31, 2018, both of which were reclassified to finance lease right-of-use assets upon the adoption of ASC 842 on January 1, 2019 (Note 9).

 

For the three months ended March 31, 2019 and 2018, depreciation expense related to property and equipment was $27,140 and $32,275, respectively.

 

NOTE 6. ASSETS DEPLOYED AT CLIENT LOCATIONS

 

Assets deployed at client locations, net consisted of the following at March 31, 2019 and December 31, 2018:

 

 

 

2019

 

 

2018

 

Enhanced table systems

 

$

995,607

 

 

$

946,237

 

Less: accumulated depreciation

 

 

(535,166

)

 

 

(474,675

)

Assets deployed at client locations, net

 

$

460,441

 

 

$

471,562

 

 

9


For the three months ended March 31, 2019 and 2018, depreciation expense related to assets deployed at client locations was $69,137 and $43,553, respectively.

 

 

NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets, net consisted of the following at March 31, 2019 and December 31, 2018:

 

 

 

2019

 

 

2018

 

Goodwill

 

$

1,091,000

 

 

$

1,091,000

 

Other intangible assets:

 

 

 

 

 

 

 

 

Patents

 

 

13,485,000

 

 

 

13,485,000

 

Customer relationships

 

 

3,400,000

 

 

 

3,400,000

 

Trademarks

 

 

2,880,967

 

 

 

2,880,967

 

Non-compete agreements

 

 

660,000

 

 

 

660,000

 

Internally-developed software

 

 

138,265

 

 

 

126,015

 

Other intangible assets, gross

 

 

20,564,232

 

 

 

20,551,982

 

Less: accumulated amortization

 

 

(12,038,946

)

 

 

(11,661,730

)

Other intangible assets, net

 

 

8,525,286

 

 

 

8,890,252

 

Goodwill and other intangible assets, net

 

$

9,616,286

 

 

$

9,981,252

 

 

For the three months ended March 31, 2019 and 2018 amortization expense related to the other intangible assets was $377,216 and $375,732, respectively.

Estimated future amortization expense is as follows:

 

Twelve Months Ending March 31,

 

Total

 

2020

 

$

1,512,947

 

2021

 

 

1,441,958

 

2022

 

 

1,401,267

 

2023

 

 

823,263

 

2024

 

 

252,930

 

Thereafter

 

 

3,092,921

 

Total amortization

 

$

8,525,286

 

 

NOTE 8. ACCRUED EXPENSES

Accrued expenses consisted of the following at March 31, 2019 and December 31, 2018:

 

 

 

2019

 

 

2018

 

Payroll and related

 

$

518,074

 

 

$

1,136,808

 

Commissions and royalties

 

 

52,095

 

 

 

113,462

 

Professional fees

 

 

39,948

 

 

 

23,135

 

Other

 

 

31,275

 

 

 

22,165

 

Total accrued expenses

 

$

641,392

 

 

$

1,295,570

 

 

NOTE 9. LEASES

 

Lessee

 

We have operating leases for corporate offices, two satellite facilities in the state of Washington, and certain equipment and one finance lease in connection with leasehold improvements at our corporate offices. 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).  Discount rate represents the interest rate implicit in each lease or our incremental borrowing rate at lease commencement date.

 

Some leases include one or more options to renew and the exercise of lease renewal options is at our sole discretion. The depreciable life of assets and leasehold improvements is limited by the expected lease term.

10


As of March 31, 2019, our leases have remaining lease terms ranging from two months to 39 months. gross right-of-use assets recorded under finance leases and operating leases were $14,286 and $279,065, respectively, and the related accumulated amortization was $8,571 and $61,140, respectively.

Effective April 1, 2014, we entered into a five-year lease for a new corporate office in Las Vegas, Nevada with an unrelated third party (the “Spencer Lease”). The Spencer Lease is for approximately 24,000 square feet of space, comprising of approximately 16,000 square feet of office space and 8,000 square feet of warehouse space.

The initial term of the Spencer Lease commenced on April 1, 2014 and expires on June 30, 2019. Annual base rent was $153,000 in the first year, which increases by approximately 4% each year and we are also obligated to pay real estate taxes and other building operating costs. Subject to certain conditions, we have certain rights under the Spencer Lease, including rights of first offer to purchase the premises if the landlord elects to sell.

On January 28, 2019, we executed a first amendment to the Spencer Lease to amend the lease expiration date from June 30, 2019 to December 31, 2019 with monthly base rents of $20,508 from July 1, 2019 to December 31, 2019. As a result of the amendment, we recorded an $117,755 increase to operating lease right-of-use asset and operating lease liability.

In connection with the Spencer Lease, the landlord agreed to finance tenant improvements of $150,000 (“TI Allowance”). The base rent is increased by an amount sufficient to fully amortize the TI Allowance through the initial Spencer Lease term upon equal monthly payments of principal and interest, with interest imputed on the outstanding principal balance at the rate of 5.5% per annum. The TI Allowance has been classified as a finance lease on the condensed balance sheet.

Supplemental balance sheet information related to leases is as follows:

 

 

 

As of March 31, 2019

 

 

Amount

 

 

Classification

Finance leases:

 

 

 

 

 

 

Finance lease right-of-use lease assets

 

$

5,714

 

 

Other current assets

 

 

 

 

 

 

 

Finance lease current liabilities

 

$

5,718

 

 

Other current liabilities

 

 

 

 

 

 

 

Operating leases:

 

 

 

 

 

 

Operating lease right-of-use lease assets

 

$

217,925

 

 

 

 

 

 

 

 

 

 

Operating lease current liabilities

 

$

196,613

 

 

Current portion of operating lease liabilities

 

 

 

 

 

 

 

Operating lease long-term liabilities

 

 

31,101

 

 

Long-term operating lease liabilities

 

 

 

 

 

 

 

Total operating lease liabilities

 

$

227,714

 

 

 

 

 

 

 

 

 

 

Weighted-average remaining lease

   term :

 

 

 

 

 

 

Finance leases

 

0.2 years

 

 

 

Operating leases

 

1.1 years

 

 

 

 

 

 

 

 

 

 

Weighted-average discount rate:

 

 

 

 

 

 

Finance leases

 

 

5.5%

 

 

 

Operating leases

 

 

5.9%

 

 

 

 

11


The components of lease expense are as follows:

 

 

 

Three Months Ended March 31, 2019

 

 

Amount

 

 

Classification

Finance lease cost:

 

 

 

 

 

 

Amortization of right-of-use assets

 

$

8,571

 

 

Depreciation and amortization

Interest on lease liabilities

 

 

156

 

 

Interest expense

Total finance lease cost

 

$

8,727

 

 

 

 

 

 

 

 

 

 

Operating lease cost

 

$

63,709

 

 

General selling, general and administrative expense

 

Supplemental cash flow information related to leases is as follows:

 

 

 

Three Months Ended March 31, 2019

 

 

Amount

 

 

Classification

Cash paid for amounts included in the

   measure of lease liabilities:

 

 

 

 

 

 

Operating Cash flows from finance leases

 

$

156

 

 

Net income

Financing cash flows from finance leases

 

$

8,481

 

 

Principal payments on finance lease obligations

Operating Cash flows from operating leases

 

$

63,709

 

 

Net income

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange

   for lease liabilities:

 

 

 

 

 

 

Finance leases

 

$

14,286

 

 

Supplemental cash flow  information

Operating leases

 

$

279,065

 

 

Supplemental cash flow  information

 

As of March 31, 2019, future maturities of our lease liabilities are as follows:

 

Twelve Months Ending March 31,

 

Finance

Leases

 

 

Operating

Leases

 

2020

 

$

5,718

 

 

$

196,613

 

2021

 

 

 

 

 

15,699

 

2022

 

 

 

 

 

13,014

 

2023

 

 

 

 

 

2,388

 

Total lease liabilities

 

$

5,718

 

 

$

227,714

 

 

Lessor

 

Our agreements with the casino clients for the license of proprietary tables games are outside of the scope of ASC 842 as such agreements are related to the license of intellectual properties.

Enhanced table systems are electronic enhancements used on casino table games to add to player appeal and enhance game security.  An example in this category is our Bonus Jackpot System (“BJS”), an advanced electronic system installed on gaming tables designed to collect data by detecting player wagers and other game activities.  Typically, the BJS system includes a server, a laptop, an electronic video display, known as TableVision, which shows game information designed to generate player interest and to promote various aspects of the game and other electronic components.  Our BJS agreements with clients convey the rights to use equipment to our clients. However, these agreements are month-to-month and there is no penalty for either party to terminate the agreements without permission from the other party. As a result, these agreements are not considered leases and, therefore, are outside of the scope of ASC 842 as well.

 

12


NOTE 10. LONG-TERM DEBT

Long-term debt consisted of the following at March 31, 2019 and December 31, 2018:

 

 

 

2019

 

 

2018

 

Nevada State Bank Term Loan and Revolving Loan

 

$

9,723,200

 

 

$

10,042,400

 

Vehicle notes payable

 

 

75,049

 

 

 

85,043

 

Insurance notes payable

 

 

46,365

 

 

 

73,794

 

Notes payable, gross

 

 

9,844,614

 

 

 

10,201,237

 

Less:

 

 

 

 

 

 

 

 

Unamortized debt issuance costs

 

 

(87,456

)

 

 

(94,562

)

Notes payable, net

 

 

9,757,158

 

 

 

10,106,675

 

Less: Current portion

 

 

(1,446,794

)

 

 

(1,456,847

)

Long-term debt, net

 

$

8,310,364

 

 

$

8,649,828

 

 

Nevada State Bank credit agreement.  On April 24, 2018 (the “Closing Date”), we entered into a credit agreement with ZB, N.A. dba Nevada State Bank (“NSB” and the “Credit Agreement”), which provides for a $11.0 million five-year term loan (the “Term Loan”) and a $1.0 million one-year revolving credit facility (the “Revolving Loan”).  On April 22, 2019, we entered into a First Amendment to the Credit Agreement (the “First Amendment”) to extend the Revolving Loan Maturity Date from April 24, 2019 to April 24, 2021. $1.0 million was available under the Revolving Loan at March 31, 2019 and the filing date of this Quarterly Report on Form 10-Q.

 

On May 6, 2019, we entered into a Second Amendment to the Credit Agreement to (i) provide an additional $10 million of availability under the Term Loan; and (ii) waive for a period of 180 days the breach of any covenant in the Credit Agreement that might occur as a result of the redemption of common stock held by Triangulum Partners, LLC (“Triangulum)” (Note 16).

 

Outstanding balances under the Term Loan and the Revolving Loan accrue interest based on one-month US dollar London interbank offered rate (“LIBOR”) plus an Applicable Margin of 3.50%, or 4.00%, depending on our Leverage Ratio (as defined in the Credit Agreement).  

We are required to make monthly principal and interest payments on the Term Loan, both of which are calculated over a seven-year term, with a balloon payment due on April 24, 2023.  Borrowings under the Credit Agreement are secured by a lien on substantially all of our assets.

Effective May 1, 2018, we entered into an interest rate swap agreement with an affiliate of NSB (the “Swap Agreement”) to lock the interest rate on the Term Loan at 6.43% (assuming a Leverage Ratio less than 2.0) for three years. The notional amount of the Swap Agreement is initially $10.9 million but will decrease over time as a result of the anticipated principal paydowns.

The Credit Agreement contains affirmative and negative financial covenants and other restrictions customary for borrowings of this nature.  In particular, we are required to maintain a minimum trailing-four-quarters Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of 1.25 and a maximum Leverage Ratio of 3.00.  The Credit Agreement allows us to make share repurchases and to incur up to an additional $1.0 million of unsecured indebtedness provided that we are in compliance with the covenants in the Credit Agreement on a pro forma basis. We were in compliance with the financial covenants of the Credit Agreement as of March 31, 2019.

 

As of March 31, 2019, future maturities of our long-term debt obligations are as follows:    

 

Twelve Months ending March 31,

 

Total

 

2019

 

$

1,446,794

 

2020

 

 

1,480,138

 

2021

 

 

1,574,482

 

2022

 

 

1,664,400

 

Thereafter

 

 

3,678,800

 

Total notes payable

 

 

9,844,614

 

Less:

 

 

 

 

Unamortized debt issuance costs

 

 

(87,456

)

Notes payable, net

 

$

9,757,158

 

 

 

13


NOTE 11. COMMITMENTS AND CONTINGENCIES

Concentration of risk. We are exposed to risks associated with a client who represent a significant portion of total revenues. For the three months ended March 31, 2019 and 2018, respectively, we had the following client revenue concentration:

 

 

 

Location

 

2019

Revenue

 

 

2018

Revenue

 

 

Accounts

Receivable

March 31, 2019

 

 

Accounts

Receivable

December 31, 2018

 

Client A

 

North America

 

9.7%

 

 

11.3%

 

 

$

251,421

 

 

$

207,343

 

Client B

 

Europe

 

11.6%

 

 

9.2%

 

 

$

237,689

 

 

$

156,478

 

 

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.  We record accruals for such contingencies to the extent we conclude that it is probable that a liability will be incurred and the amount of the related loss can be reasonably estimated.  Our assessment of each matter may change based on future unexpected events.  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.  We assume no obligation to update the status of pending litigation, except as may be required by U.S. GAAP, applicable law, statue or regulation.

In September 2018, we were served with a complaint by TableMAX Gaming, Inc.(“TMAX”) regarding an operating and license agreement executed in 2011 (the “TMAX Agreement”) and terminated in August 2018. The complaint, filed in the Eighth Judicial District Court in Clark County, Nevada, alleges that we breached the TMAX Agreement, among other allegations. We filed an answer denying the allegations and counterclaiming for breach of contract, abuse of process and fraud in the inducement, among other counterclaims.  We also filed a partial motion for summary judgment seeking dismissal of the plaintiff’s claims.  Pursuant to a motion to dismiss brought by the co-defendant and former CEO of TMAX, the suit has been dismissed, subject to the right of the plaintiff to file an amended complaint on or before March 20, 2019.  The plaintiff did not file an amended complaint within the time period set by the Judge.  We consider the matter closed.

NOTE 12. STOCKHOLDERS’ EQUITY

On March 29, 2019, we issued an aggregate of 70,200 restricted shares of our common stock valued at $112,320, to Messrs. Mark Lipparelli, Norm DesRosiers, Bryan Waters and William Zender, who are members of our Board of Directors (the “Board”), in consideration of their service on the Board during the three months ended March 31, 2019.  These shares vested immediately on the grant date.

On April 24, 2018, our Board authorized the repurchase of shares of our common stock in an amount not to exceed $1.0 million. Such repurchases may be made from time to time based on market conditions and may be completed in the open market or in privately-negotiated transactions. Repurchase transactions will be executed only when we believe that we will remain in compliance with the covenants of the Credit Agreement.  Finally, execution of share repurchases may require regulatory approval in one or more jurisdictions. We have not repurchased any of our common stock as of March 31, 2019.

On May 6, 2019,  we redeemed all 23,271,667 shares of the common stock held by Triangulum (Note 16).

 

NOTE 13. INCOME TAXES

 

Our forecasted annual effective tax rate at March 31, 2019 was 22.7%, as compared to 21.2% at March 31, 2018.  This increase was primarily due to changes in permanent book-to-tax differences for the three months ended March 31, 2019, as compared to the prior year period.  For the three months ended March 31, 2019 and 2018, our effective tax rate was 18.0% and 21.2%, respectively. This decrease was primarily due to tax benefits related to stock options exercised during the three months ended March 31, 2019.

 

14


NOTE 14. STOCK OPTIONS

 

On May 10, 2018, the Board ratified and confirmed the 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan is a broad-based plan under which 5,550,750 shares of our common stock are authorized for issuance for awards, including stock options, stock appreciation rights, restricted stock, and cash incentive awards to members of our Board, executive officers, employees and independent contractors. As of March 31, 2019, 478,301 shares remained available for issuance as new awards under the 2014 Plan.

 

Stock options. During the three months ended March 31, 2019 and 2018, we issued 150,000 and 145,000 options to purchase our common stock, respectively, to members of our Board, executive officers, employees and independent contractors.  The fair value of all stock options granted for the three months ended March 31, 2019 and 2018 was determined to be $171,985 and $98,333, respectively, using the Black-Scholes option pricing model with the following assumptions:

 

 

 

Options Issued 2019

 

 

Options Issued 2018

 

Dividend yield

 

 

0%

 

 

 

0%

 

Expected volatility

 

 

72

%

 

78%

 

Risk free interest rate

 

 

2.51

%

 

2.46% - 2.56%

 

Expected life (years)

 

 

5.00

 

 

 

5.00

 

 

On February 21, 2019, we entered into Amendment #1 to the employment agreement dated July 27, 2017 (the “Employment Agreement”) with Todd Cravens (“Amendment #1”), our President and Chief Executive Officer.  In connection with the Employment Agreement, we agreed to grant to Mr. Cravens an option to purchase an 150,000 shares of our common stock (the “2020 Option”) with a strike price equal to the price per share of our common stock as reported on OTC Markets on August 1, 2020 (or the nearest trading date thereafter), which option will vest on August 1, 2020 (or the nearest trading date thereafter), provided that Mr. Cravens is a full-time employee on August 1, 2020,  Among other things, Amendment #1 provided that the 2020 Option vest in full in the event of termination following a change of control and that the exercise price of the 2020 Option be set at $1.90 per share, the closing price of our common stock on February 21, 2019.

 

A summary of stock option activity is as follows:

 

 

 

Common Stock Options

 

 

Weighted-

Average

Exercise Price

 

 

Aggregate

Intrinsic

Value

 

 

Weighted-Average

Remaining Contractual

Term (Years)

 

Outstanding – December 31, 2018

 

 

3,496,250

 

 

$

0.66

 

 

$

2,608,329

 

 

 

3.04

 

Issued

 

 

150,000

 

 

 

1.90

 

 

 

 

 

 

 

Exercised

 

 

(98,333

)

 

 

0.37

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding – March 31, 2019

 

 

3,547,917

 

 

$

0.72

 

 

$

3,105,642

 

 

 

2.93

 

Exercisable – March 31, 2019

 

 

2,317,917

 

 

$

0.54

 

 

$

2,451,150

 

 

 

2.33

 

 

A summary of unvested stock option activity is as follows:

 

 

 

Common Stock Options

 

 

Weighted-

Average

Exercise Price

 

 

Aggregate

Intrinsic

Value

 

 

Weighted-Average

Remaining Contractual

Term (Years)

 

Unvested – December 31, 2018

 

 

1,161,666

 

 

$

0.95

 

 

$

535,475

 

 

 

4.15

 

Granted

 

 

150,000

 

 

 

1.90

 

 

 

 

 

 

 

Vested

 

 

(81,666

)

 

 

0.87

 

 

 

 

 

 

 

Forfeited or expired

 

 

 

 

 

 

 

 

 

 

 

 

Unvested – March 31, 2019

 

 

1,230,000

 

 

$

1.07

 

 

$

650,233

 

 

 

4.06

 

 

As of March 31, 2019, our unrecognized stock-based compensation expense associated with the stock options issued was $561,020, which will be amortized over a weighted-average of 2.02 years.

 

 

NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS

We estimate fair value for financial assets and liabilities in accordance with 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

15


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 value of cash equivalents, restricted cash, accounts receivable and accounts payable approximates their carrying amount due to their short-term nature. The estimated fair value of our long-term debt and lease obligations approximates their carrying value based upon our expected borrowing rate for debt with similar remaining maturities and comparable risk. As of March 31, 2019, the interest rate swap agreement was the only financial instrument measured at estimated fair value on a recurring basis based on valuation reports provided by counterparties, which are classified as level 2 inputs.

 

 

NOTE 16. SUBSEQUENT EVENTS

 

We evaluate subsequent events through the date of issuance of the financial statements.  There have been no subsequent events that occurred during such period that would require adjustment to or disclosure in the financial statements as of and for the quarter ended March 31, 2019, except as follows:

 

On April 22, 2019, we entered into the First Amendment to the Credit Agreement with Zions Bancorporation, N.A. dba Nevada State Bank to extend the Revolving Loan Maturity Date from April 24, 2019 to April 24, 2021.

 

On May 6, 2019, we redeemed all 23,271,667 shares of the common stock held by Triangulum, an entity controlled by Robert B. Saucier, Galaxy Gaming's founder, and, prior to the redemption, the holder of a majority of our outstanding Common Stock.  The redemption of Triangulum’s shares was given effect pursuant to our Articles of Incorporation (the “Articles”), which expressly provide that if certain events occur in relation to a stockholder that is required to undergo a gaming suitability review or similar investigative process, we have the option to purchase all or any part of such stockholder’s shares at a price per share that is equal to the average closing share price over the thirty calendar days preceding the purchase.  The average closing share price over the thirty calendar days preceding the redemption was $1.68 per share.

 

As consideration for the redemption, we issued a promissory note payable to Triangulum in the face amount of $39,096,401.  The promissory note matures on May 5, 2029, and bears interest at a rate of 2% per annum, with accrued interest payable annually in arrears. The promissory note is unsecured and is subordinated to our existing and future indebtedness in accordance with its terms.  We may prepay principal and any accrued interest in full or in part at any time.

Also on May 6, 2019, we entered into a Second Amendment to the Credit Agreement to (i) provide an additional $10 million of availability under the Term Loan component of the facility; and (ii) waive for a period of 180 days the breach of any covenant in the Credit Agreement that might occur as a result of the redemption.

Furthermore, we filed a lawsuit on May 6, 2019 seeking (i) a declaratory judgment that we acted lawfully and in full compliance with the Articles when we redeemed the Triangulum Shares and (ii) certain remedies for breach of fiduciary duty and breach of contract by Triangulum and its Managing Member, Mr. Saucier.  The suit alleges that the redemption and the other relief sought by us are appropriate because of, among other things, the failure of Mr. Saucier to cooperate with our gaming regulatory efforts in Nevada, California and certain other jurisdictions.  Galaxy Gaming, Inc. v. Triangulum Partners, LLC, Robert B. Saucier, et al, Clark County, Nevada district court (Case No. A-19-794293-B).

 

 

 

 

16


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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q.  This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act, and is subject to the safe harbors created by those sections.  Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward-looking statements.  In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements.  These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict.  Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. Such forward-looking statements speak only as of the date of this report; we undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements.  Readers are urged to carefully review and consider the various disclosures made by us in this report, as well as the disclosures made in the 2018 10-K, and other filings we make with the Securities and Exchange Commission, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, operating results, financial condition and stock price.

Due to possible uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statements contained in this Quarterly Report, which speak only as of the date of this Quarterly Report, or to make predictions about future performance based solely on historical financial performance.  We disclaim any obligation to update forward-looking statements contained in this Quarterly Report.

OVERVIEW

We develop, acquire, assemble and market technology and entertainment-based products and services for the gaming industry for placement on the casino floor and legal internet gaming sites. Our products and services primarily relate to licensed casino operators’ table games activities and focus on either increasing their profitability, productivity and security or expanding their gaming entertainment offerings in the form of proprietary table games, electronically enhanced table game platforms, fully-automated electronic tables and other ancillary equipment. In addition, we license intellectual property to legal internet gaming sites.  Our products and services are offered in highly regulated markets throughout the world. Our products are assembled at our headquarters in Las Vegas, Nevada, as well as outsourced for certain sub-assemblies in the United States.

Additional information regarding our products and product categories may be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2018 10-K and on our web site, www.galaxygaming.com. Information found on the web site should not be considered part of this report.

Results of operations for the three months ended March 31, 2019 and 2018. For the three months ended March 31, 2019, we generated gross revenues of $5,346,751 compared to gross revenues of $4,360,695 for the comparable prior-year period, representing an increase of 986,056, or 22.6%.  This increase was primarily attributable to higher revenue from: (i) Bonus Jackpot System due to additional game placements; (ii) premium Games such as High Card Flush and Heads Up Hold ’em, which command a higher price point per unit; and (iii) internet-based gaming activities.

Selling, general and administrative expenses for the three months ended March 31, 2019 were $3,540,870 compared to $2,585,070 for the comparable prior period, representing an increase of $955,800, or 37.0%. This increase was primarily due to $595,555 in costs associated with the strategic alternatives review for the three months ended March 31, 2019 and higher compensation and related expense as a result of higher revenue and our continued investment in personnel.  Excluding the strategic alternatives review costs, selling, general and administrative expenses as a percentage of gross revenue decreased to 55.1% for the three months ended March 31, 2019 from 59.3% for the comparable prior-year period.

Research and development expenses for the three months ended March 31, 2019 were $299,180, compared to $193,402 for the comparable prior-year period, representing an increase of $105,778, or 54.7%. This increase was primarily due to increased costs associated with testing our products currently in development.

Stock-based compensation expenses for the three months ended March 31, 2019 was $223,604, as compared to $166,478 for the comparable prior-year period, representing an increase of $57,126, or 34.3%. This increase was mainly due to additional grants issued to members of the Board, executive officers, employees and independent contractors.

17


Income from operations decreased $222,785 or 23.7% to $718,642 for the three months ended March 31, 2019, compared to $941,427 for the comparable prior-year period. This decrease was primarily attributable to higher selling, general and administrative expenses and research and development expenses, partially offset by higher revenue.

Total interest expense decreased $198,080, or 54.1%, to $168,013 for the three months ended March 31, 2019, compared to $366,093 for the comparable prior-year period. The decrease was mainly attributable to lower interest rate on the Term Loan as compared to the previous term loan with Breakaway Capital Management, LLC that was extinguished in April 24, 2018 using the proceeds from the Term Loan and the Revolving Loan.

Income tax provision was $101,014 for the three months ended March 31, 2019, compared to $144,779 for the comparable prior-year period.  This decrease was primarily attributable to the decrease in income before provision for income taxes and tax benefits related to stock options exercised during the three months ended March 31, 2019.  

Adjusted EBITDA. Adjusted EBITDA includes adjustments to net income to exclude interest, taxes, depreciation, amortization, share based compensation, loss on extinguishment of debt, foreign currency exchange gains, change in estimated fair value of warrant liability, change in estimated fair value of interest rate swap liability, and other non-recurring losses and non-cash charges. Adjusted EBITDA is not a measure of performance defined in accordance with U.S. U.S. GAAP. However, Adjusted EBITDA is used by management to evaluate our operating performance. Management believes that disclosure of the Adjusted EBITDA metric offers investors, regulators and other stakeholders a view of our operations in the same manner management evaluates our performance. When combined with U.S. GAAP results, management believes Adjusted EBITDA provides a comprehensive understanding of our financial results. Adjusted EBITDA should not be considered as an alternative to net income or to net cash provided by operating activities as a measure of operating results or of liquidity. It may not be comparable to similarly titled measures used by other companies, and it excludes financial information that some may consider important in evaluating our performance. A reconciliation of U.S. GAAP net income from operations to Adjusted EBITDA is as follows:

 

 

 

Three Months Ended March 31,

 

Adjusted EBITDA Reconciliation:

 

2019

 

 

2018

 

Net income

 

$

460,664

 

 

$

536,798

 

Interest expense

 

 

168,013

 

 

 

366,093

 

Foreign currency exchange gain

 

 

(36,476

)

 

 

(105,801

)

Change in estimated fair value of interest rate swap

   liability

 

 

26,142