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 June 30, 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) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
|
Trading symbol |
|
Name of exchange on which registered |
Common stock |
|
GLXZ |
|
OTCQB marketplace |
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the issuer has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.
Large accelerated filer |
|
☐ |
|
Accelerated filer |
|
☐ |
|
|
|
|
|||
Non-accelerated filer |
|
☐ |
|
Smaller reporting company |
|
☒ |
|
|
|
|
|
|
|
Emerging growth company |
|
☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. ☐
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 17,752,744 common shares as of August 7, 2019.
GALAXY GAMING, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 2019
TABLE OF CONTENTS
|
|
Page |
|
PART I – FINANCIAL INFORMATION
|
|
Item 1: |
3 |
|
Item 2: |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
19 |
Item 3: |
22 |
|
Item 4: |
22 |
|
|
PART II – OTHER INFORMATION
|
|
Item 1: |
23 |
|
Item 2: |
23 |
|
Item 6: |
24 |
2
PART I - FINANCIAL INFORMATION
Our financial statements included in this Form 10-Q are as follows:
Condensed Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018 |
4 |
5 |
|
6 |
|
Condensed Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (unaudited) |
7 |
8 |
3
|
|
June 30, |
|
|
December 31, |
|
||
ASSETS |
|
2019 |
|
|
2018 |
|
||
Current assets: |
|
(Unaudited) |
|
|
|
|
|
|
Cash, cash equivalents and restricted cash |
|
$ |
8,171,751 |
|
|
$ |
6,311,563 |
|
Accounts receivable, net of allowance of $82,121 and $54,136, respectively |
|
|
3,114,968 |
|
|
|
2,849,861 |
|
Inventory, net |
|
|
735,426 |
|
|
|
531,814 |
|
Income tax receivable |
|
|
43,352 |
|
|
|
— |
|
Prepaid expense |
|
|
523,789 |
|
|
|
510,254 |
|
Other current assets |
|
|
5,258 |
|
|
|
3,352 |
|
Total current assets |
|
|
12,594,544 |
|
|
|
10,206,844 |
|
Property and equipment, net |
|
|
141,776 |
|
|
|
199,585 |
|
Operating lease right-of-use assets |
|
|
162,303 |
|
|
|
— |
|
Assets deployed at client locations, net |
|
|
441,703 |
|
|
|
471,562 |
|
Goodwill |
|
|
1,091,000 |
|
|
|
1,091,000 |
|
Other intangible assets, net |
|
|
8,162,392 |
|
|
|
8,890,252 |
|
Deferred tax assets, net |
|
|
334,482 |
|
|
|
334,482 |
|
Total assets |
|
$ |
22,928,200 |
|
|
$ |
21,193,725 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,334,830 |
|
|
$ |
681,936 |
|
Accrued expenses |
|
|
1,022,693 |
|
|
|
1,295,570 |
|
Income taxes payable |
|
|
— |
|
|
|
82,091 |
|
Revenue contract liability |
|
|
1,322,770 |
|
|
|
1,438,492 |
|
Deferred rent, current portion |
|
|
— |
|
|
|
14,025 |
|
Current portion of long-term debt |
|
|
1,437,851 |
|
|
|
1,456,847 |
|
Current portion of operating lease liabilities |
|
|
142,130 |
|
|
|
— |
|
Other current liabilities |
|
|
146 |
|
|
|
21,654 |
|
Total current liabilities |
|
|
5,260,420 |
|
|
|
4,990,615 |
|
Long-term operating lease liabilities |
|
|
27,114 |
|
|
|
— |
|
Long-term debt, net |
|
|
47,043,788 |
|
|
|
8,649,828 |
|
Interest rate swap liability |
|
|
187,782 |
|
|
|
96,181 |
|
Total liabilities |
|
|
52,519,104 |
|
|
|
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; 17,752,744 and 39,921,591 shares issued and outstanding, respectively |
|
|
17,753 |
|
|
|
39,922 |
|
Additional paid-in capital |
|
|
5,265,388 |
|
|
|
4,733,701 |
|
Accumulated earnings (deficit) |
|
|
(34,874,045 |
) |
|
|
2,683,478 |
|
Total stockholders’ equity (deficit) |
|
|
(29,590,904 |
) |
|
|
7,457,101 |
|
Total liabilities and stockholders’ equity (deficit) |
|
$ |
22,928,200 |
|
|
$ |
21,193,725 |
|
The accompanying notes are an integral part of the financial statements.
4
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, 2019 |
|
|
June 30, 2018 |
|
|
June 30, 2019 |
|
|
June 30, 2018 |
|
||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product leases and royalties |
|
$ |
5,399,083 |
|
|
$ |
4,536,350 |
|
|
$ |
10,745,084 |
|
|
$ |
8,896,705 |
|
Product sales and service |
|
|
103 |
|
|
|
(177 |
) |
|
|
854 |
|
|
|
162 |
|
Total revenue |
|
|
5,399,186 |
|
|
|
4,536,173 |
|
|
|
10,745,938 |
|
|
|
8,896,867 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of ancillary products and assembled components |
|
|
46,945 |
|
|
|
36,629 |
|
|
|
129,336 |
|
|
|
59,387 |
|
Selling, general and administrative |
|
|
2,939,841 |
|
|
|
2,597,089 |
|
|
|
6,480,710 |
|
|
|
5,182,159 |
|
Research and development |
|
|
178,259 |
|
|
|
249,799 |
|
|
|
477,440 |
|
|
|
443,201 |
|
Depreciation and amortization |
|
|
481,044 |
|
|
|
458,790 |
|
|
|
963,108 |
|
|
|
910,350 |
|
Share-based compensation |
|
|
212,578 |
|
|
|
191,112 |
|
|
|
436,182 |
|
|
|
357,590 |
|
Total costs and expenses |
|
|
3,858,667 |
|
|
|
3,533,419 |
|
|
|
8,486,776 |
|
|
|
6,952,687 |
|
Income from operations |
|
|
1,540,519 |
|
|
|
1,002,754 |
|
|
|
2,259,162 |
|
|
|
1,944,180 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(289,353 |
) |
|
|
(247,319 |
) |
|
|
(457,367 |
) |
|
|
(613,412 |
) |
Foreign currency exchange (loss) gain |
|
|
(24,305 |
) |
|
|
(83,917 |
) |
|
|
12,171 |
|
|
|
21,884 |
|
Change in estimated fair value of interest rate swap liability |
|
|
(65,459 |
) |
|
|
(77,235 |
) |
|
|
(91,601 |
) |
|
|
(77,235 |
) |
Loss on extinguishment of debt |
|
|
— |
|
|
|
(1,347,506 |
) |
|
|
— |
|
|
|
(1,347,506 |
) |
Interest income |
|
|
19,850 |
|
|
|
188 |
|
|
|
20,565 |
|
|
|
631 |
|
Total other expense |
|
|
(359,267 |
) |
|
|
(1,755,789 |
) |
|
|
(516,232 |
) |
|
|
(2,015,638 |
) |
Income (loss) before (provision)/benefit for income taxes |
|
|
1,181,252 |
|
|
|
(753,035 |
) |
|
|
1,742,930 |
|
|
|
(71,458 |
) |
(Provision) / benefit for income taxes |
|
|
(126,309 |
) |
|
|
156,642 |
|
|
|
(227,323 |
) |
|
|
11,863 |
|
Net income (loss) |
|
$ |
1,054,943 |
|
|
$ |
(596,393 |
) |
|
$ |
1,515,607 |
|
|
$ |
(59,595 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.04 |
|
|
$ |
(0.01 |
) |
|
$ |
0.05 |
|
|
$ |
(0.00 |
) |
Diluted |
|
$ |
0.04 |
|
|
$ |
(0.01 |
) |
|
$ |
0.04 |
|
|
$ |
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
26,354,946 |
|
|
|
39,805,020 |
|
|
|
33,323,925 |
|
|
|
39,784,525 |
|
Diluted |
|
|
27,963,426 |
|
|
|
39,805,020 |
|
|
|
34,981,345 |
|
|
|
39,784,525 |
|
The accompanying notes are an integral part of the financial statements.
5
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
|
|
Common Stock |
|
|
Additional Paid in |
|
|
Accumulated Earnings |
|
|
Total Shareholders' |
|
||||||||
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
(Deficit) |
|
|
Equity (Deficit) |
|
|||||
Beginning balance, December 31, 2018 |
|
|
39,921,591 |
|
|
$ |
39,922 |
|
|
$ |
4,733,701 |
|
|
$ |
2,683,478 |
|
|
$ |
7,457,101 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
460,664 |
|
|
|
460,664 |
|
Stock options exercised |
|
|
98,332 |
|
|
|
98 |
|
|
|
36,134 |
|
|
|
— |
|
|
|
36,232 |
|
Share based compensation expense |
|
|
470,200 |
|
|
|
470 |
|
|
|
223,134 |
|
|
|
— |
|
|
|
223,604 |
|
Balance, March 31, 2019 |
|
|
40,490,123 |
|
|
|
40,490 |
|
|
|
4,992,969 |
|
|
|
3,144,142 |
|
|
|
8,177,601 |
|
Common stock redemption |
|
|
(23,271,667 |
) |
|
|
(23,271 |
) |
|
|
— |
|
|
|
(39,073,130 |
) |
|
|
(39,096,401 |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,054,943 |
|
|
|
1,054,943 |
|
Stock options exercised |
|
|
457,888 |
|
|
|
458 |
|
|
|
59,917 |
|
|
|
— |
|
|
|
60,375 |
|
Share based compensation expense |
|
|
76,400 |
|
|
|
76 |
|
|
|
212,502 |
|
|
|
— |
|
|
|
212,578 |
|
Balance, June 30, 2019 |
|
|
17,752,744 |
|
|
$ |
17,753 |
|
|
$ |
5,265,388 |
|
|
$ |
(34,874,045 |
) |
|
$ |
(29,590,904 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Additional Paid in |
|
|
|
|
|
|
Total Shareholders' |
|
|||||||
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Accumulated Earnings |
|
|
Equity |
|
|||||
Beginning balance, December 31, 2017 |
|
|
39,565,591 |
|
|
$ |
39,566 |
|
|
$ |
3,957,703 |
|
|
$ |
1,465,599 |
|
|
$ |
5,462,868 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
536,798 |
|
|
|
536,798 |
|
Share based compensation expense |
|
|
239,000 |
|
|
|
239 |
|
|
|
166,239 |
|
|
|
— |
|
|
|
166,478 |
|
Balance, March 31, 2018 |
|
|
39,804,591 |
|
|
|
39,805 |
|
|
|
4,123,942 |
|
|
|
2,002,397 |
|
|
|
6,166,144 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(596,393 |
) |
|
|
(596,393 |
) |
Share based compensation expense |
|
|
39,000 |
|
|
|
39 |
|
|
|
191,073 |
|
|
|
— |
|
|
|
191,112 |
|
Balance, June 30, 2018 |
|
|
39,843,591 |
|
|
$ |
39,844 |
|
|
$ |
4,315,015 |
|
|
$ |
1,406,004 |
|
|
$ |
5,760,863 |
|
6
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six Months Ended |
|
|||||
|
June 30, 2019 |
|
|
June 30, 2018 |
|
|||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,515,607 |
|
|
$ |
(59,595 |
) |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization of intangible assets |
|
|
948,823 |
|
|
|
910,350 |
|
Amortization of lease right-of-use assets |
|
|
137,599 |
|
|
|
— |
|
Amortization of debt issuance costs and debt discount |
|
|
17,954 |
|
|
|
109,563 |
|
Loss on extinguishment of debt |
|
|
— |
|
|
|
1,347,506 |
|
Bad debt expense |
|
|
34,923 |
|
|
|
45,713 |
|
Change in estimated fair value of interest rate swap liability |
|
|
91,601 |
|
|
|
77,235 |
|
Share-based compensation |
|
|
436,182 |
|
|
|
357,590 |
|
Unrealized foreign exchange gains on cash, cash equivalents and restricted cash |
|
|
(16,986 |
) |
|
|
(32,374 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(300,030 |
) |
|
|
(376,988 |
) |
Inventory |
|
|
(313,337 |
) |
|
|
(148,077 |
) |
Prepaid expenses |
|
|
(13,535 |
) |
|
|
3,216 |
|
Other current assets |
|
|
— |
|
|
|
1,986 |
|
Accounts payable |
|
|
652,894 |
|
|
|
(765,133 |
) |
Accrued expenses |
|
|
(277,442 |
) |
|
|
(68,735 |
) |
Income taxes receivable/payable |
|
|
(120,878 |
) |
|
|
(706,016 |
) |
Revenue contract liability |
|
|
(115,722 |
) |
|
|
103,668 |
|
Operating lease liabilities |
|
|
(130,397 |
) |
|
|
— |
|
Other current liabilities |
|
|
(71,435 |
) |
|
|
(27,883 |
) |
Deferred rent |
|
|
— |
|
|
|
(9,654 |
) |
Net cash provided by operating activities |
|
|
2,475,821 |
|
|
|
762,372 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Investment in intangible assets |
|
|
(27,401 |
) |
|
|
(7,000 |
) |
Acquisition of property and equipment |
|
|
(10,455 |
) |
|
|
(53,586 |
) |
Net cash used in investing activities |
|
|
(37,856 |
) |
|
|
(60,586 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from debt issued |
|
|
— |
|
|
|
11,098,986 |
|
Proceeds from stock option exercises |
|
|
160,732 |
|
|
|
— |
|
Payments of debt issuance costs |
|
|
(5,736 |
) |
|
|
(136,162 |
) |
Payment of warrant liability |
|
|
— |
|
|
|
(1,333,333 |
) |
Principal payments on finance lease obligations |
|
|
(14,198 |
) |
|
|
(16,168 |
) |
Principal payments on long-term debt |
|
|
(735,561 |
) |
|
|
(9,845,839 |
) |
Payments of long-term debt redemption premium |
|
|
— |
|
|
|
(374,500 |
) |
Net cash used in financing activities |
|
|
(594,763 |
) |
|
|
(607,016 |
) |
Effect of exchange rate changes on cash |
|
|
16,986 |
|
|
|
32,374 |
|
Net increase in cash, cash equivalents and restricted cash |
|
|
1,860,188 |
|
|
|
127,144 |
|
Cash, cash equivalents and restricted cash – beginning of period |
|
|
6,311,563 |
|
|
|
3,581,209 |
|
Cash, cash equivalents and restricted cash – end of period |
|
$ |
8,171,751 |
|
|
$ |
3,708,353 |
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
321,350 |
|
|
$ |
503,849 |
|
Cash paid for income taxes |
|
$ |
348,200 |
|
|
$ |
709,423 |
|
Supplemental schedule of non-cash activities: |
|
|
|
|
|
|
|
|
Common stock redemption in exchange for promissory note |
|
$ |
39,096,401 |
|
|
$ |
— |
|
Right-of-use assets obtained in exchange for lease liabilities |
|
$ |
299,902 |
|
|
$ |
— |
|
Inventory transferred to assets deployed at client locations |
|
$ |
109,725 |
|
|
$ |
113,117 |
|
The accompanying notes are an integral part of the financial statements.
7
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS AND RECENT DEVELOPMENTS
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.
On May 6, 2019, we redeemed all 23,271,667 shares of our common stock held by Triangulum Partners, LLC (“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 “Triangulum Promissory Note”). The Triangulum Promissory Note has no mandatory amortization, matures on May 5, 2029, and bears interest at a rate of 2% per annum, with accrued interest payable annually in arrears. It 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.
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 “Triangulum Lawsuit”). The suit alleges that the redemption and the other relief sought by us are appropriate and in accordance with the Articles of Incorporation (Galaxy Gaming, Inc. v. Triangulum Partners, LLC, Robert B. Saucier, et al, Clark County, Nevada district court (Case No. A-19-794293-B)).
The defendants to that lawsuit responded to the complaint, and Triangulum filed counterclaims based on a theory of wrongful redemption by us. The defendants also filed a Motion for Preliminary Injunction seeking the redeemed shares be held in a constructive trust. On July 11, 2019, the Court denied the defendants’ Motion for Preliminary Injunction and all related relief. Thereafter, Triangulum filed amended counterclaims. We moved to dismiss the counterclaims on a number of legal grounds and will respond when and as appropriate.
Effective June 3, 2019, our Board of Directors (the “Board”) appointed Michael Gavin Isaacs as an independent director. Upon joining the Board, Mr. Isaacs entered into a Board of Directors Services Agreement pursuant to which, among other things, Mr. Isaacs shall receive 75,000 shares of our restricted common stock, which vest in three annual installments on each of the first three anniversary dates of the services agreement. Mr. Isaacs shall also receive quarterly grants of 12,400 common shares (vesting immediately at grant date) for his continued service as a director, and shall receive $42,000 in cash compensation annually, paid monthly in arrears. As a non-employee director, he will be entitled to receive any other annual cash and equity compensation payable to our other non-employee directors from time to time.
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 1, 2019 (the “2018 10-K”).
8
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.
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.
9
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 and six months ended June 30, 2019 and 2018:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table games |
|
$ |
5,395,187 |
|
|
$ |
4,413,878 |
|
|
$ |
10,737,594 |
|
|
$ |
8,607,035 |
|
Other |
|
|
3,999 |
|
|
|
122,295 |
|
|
|
8,344 |
|
|
|
289,832 |
|
Total revenue |
|
$ |
5,399,186 |
|
|
$ |
4,536,173 |
|
|
$ |
10,745,938 |
|
|
$ |
8,896,867 |
|
The following table disaggregates our revenue by geographic location for the three and six months ended June 30, 2019 and 2018:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America and Caribbean |
|
$ |
3,907,953 |
|
|
$ |
3,494,692 |
|
|
$ |
7,752,478 |
|
|
$ |
6,945,401 |
|
Europe |
|
|
1,491,233 |
|
|
|
1,041,481 |
|
|
|
2,993,460 |
|
|
|
1,951,466 |
|
Total revenue |
|
$ |
5,399,186 |
|
|
$ |
4,536,173 |
|
|
$ |
10,745,938 |
|
|
$ |
8,896,867 |
|
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 six months ended June 30, 2019:
Beginning balance – January 1, 2019 |
|
$ |
1,438,492 |
|
Increase (advanced billings) |
|
|
7,725,356 |
|
Decrease (revenue recognition) |
|
|
(7,841,078 |
) |
Ending balance – June 30, 2019 |
|
$ |
1,322,770 |
|
Revenue recognized during the six months ended June 30, 2019 that was included in the beginning balance of revenue contract liability above was $1,430,160.
NOTE 4. INVENTORY
Inventory, net consisted of the following at June 30, 2019 and December 31, 2018:
|
|
2019 |
|
|
2018 |
|
||
Raw materials and component parts |
|
$ |
434,160 |
|
|
$ |
267,517 |
|
Finished goods |
|
|
343,304 |
|
|
|
306,335 |
|
Inventory, gross |
|
|
777,464 |
|
|
|
573,852 |
|
Less: inventory reserve |
|
|
(42,038 |
) |
|
|
(42,038 |
) |
Inventory, net |
|
$ |
735,426 |
|
|
$ |
531,814 |
|
10
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following at June 30, 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 |
|
|
170,293 |
|
|
|
159,838 |
|
Office equipment |
|
|
53,484 |
|
|
|
53,484 |
|
Property and equipment, gross |
|
|
758,387 |
|
|
|
897,932 |
|
Less: accumulated depreciation |
|
|
(616,611 |
) |
|
|
(698,347 |
) |
Property and equipment, net |
|
$ |
141,776 |
|
|
$ |
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 six months ended June 30, 2019 and 2018, depreciation expense related to property and equipment was $53,978 and $65,783, respectively.
NOTE 6. ASSETS DEPLOYED AT CLIENT LOCATIONS
Assets deployed at client locations, net consisted of the following at June 30, 2019 and December 31, 2018:
|
|
2019 |
|
|
2018 |
|
||
Enhanced table systems |
|
$ |
1,033,248 |
|
|
$ |
946,237 |
|
Less: accumulated depreciation |
|
|
(591,545 |
) |
|
|
(474,675 |
) |
Assets deployed at client locations, net |
|
$ |
441,703 |
|
|
$ |
471,562 |
|
For the six months ended June 30, 2019 and 2018, depreciation expense related to assets deployed at client locations was $139,584 and $93,101, respectively.
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill. A goodwill balance of $1,091,000 was created as a result of an asset acquisition completed in October 2011 from Prime Table Games, LLC.
Other intangible assets, net. Other intangible assets, net consisted of the following at June 30, 2019 and December 31, 2018:
|
|
2019 |
|
|
2018 |
|
||
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 |
|
|
153,415 |
|
|
|
126,015 |
|
Other intangible assets, gross |
|
|
20,579,382 |
|
|
|
20,551,982 |
|
Less: accumulated amortization |
|
|
(12,416,990 |
) |
|
|
(11,661,730 |
) |
Other intangible assets, net |
|
$ |
8,162,392 |
|
|
$ |
8,890,252 |
|
For the six months ended June 30, 2019 and 2018, amortization expense related to the other intangible assets was $755,260 and $751,464, respectively.
11
Estimated future amortization expense is as follows:
Twelve Months Ending June 30, |
|
Total |
|
|
2020 |
|
$ |
1,509,416 |
|
2021 |
|
|
1,428,674 |
|
2022 |
|
|
1,403,297 |
|
2023 |
|
|
538,385 |
|
2024 |
|
|
252,930 |
|
Thereafter |
|
|
3,029,690 |
|
Total amortization |
|
$ |
8,162,392 |
|
NOTE 8. ACCRUED EXPENSES
Accrued expenses consisted of the following at June 30, 2019 and December 31, 2018:
|
|
2019 |
|
|
2018 |
|
||
Payroll and related |
|
$ |
686,465 |
|
|
$ |
1,136,808 |
|
Interest |
|
|
119,811 |
|
|
|
— |
|
Professional fees |
|
|
76,769 |
|
|
|
23,135 |
|
Commissions and royalties |
|
|
70,049 |
|
|
|
113,462 |
|
Other |
|
|
69,599 |
|
|
|
22,165 |
|
Total accrued expenses |
|
$ |
1,022,693 |
|
|
$ |
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. 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.
As of June 30, 2019, our leases have remaining lease terms ranging from six months to 36 months. Gross right-of-use assets recorded under finance leases and operating leases were $14,286 and $285,616, respectively, and the related accumulated amortization was $14,286 and $123,313, 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 was to expire 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 a $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 was classified as a finance lease on the condensed balance sheet upon the adoption of ASC 842 and was paid in full by June 30, 2019.
12
Supplemental balance sheet information related to leases is as follows:
|
|
As of June 30, 2019 |
||||
|
|
Amount |
|
|
Classification |
|
Operating leases: |
|
|
|
|
|
|
Operating lease right-of-use lease assets |
|
$ |
162,303 |
|
|
|
|
|
|
|
|
|
|
Operating lease current liabilities |
|
$ |
142,130 |
|
|
Current portion of operating lease liabilities |
|
|
|
|
|
|
|
Operating lease long-term liabilities |
|
|
27,114 |
|
|
Long-term operating lease liabilities |
|
|
|
|
|