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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended June 30, 2020

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: 18,336,277 common shares as of August 12, 2020.

 



 

 

GALAXY GAMING, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 2020

TABLE OF CONTENTS

 

 

 

 

 

PART I  

 

 

Item 1:

Financial Statements (unaudited)

3

Item 2:

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

19

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

22

Item 4:

Controls and Procedures

22

 

 

 

PART II

 

 

Item 1:

Legal Proceedings

23

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

24

Item 6:

Exhibits

24

 

 

2


PART I

 

ITEM 1. FINANCIAL STATEMENTS

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

 

Condensed Balance Sheets as of June 30, 2020 and December 31, 2019 (unaudited)

4

Condensed Statements of Operations for the three and six months ended June 30, 2020 and 2019 (unaudited)

5

Condensed Statements of Changes in Stockholders’ Equity (Deficit) for the three and six months ended June 30, 2020 and 2019 (unaudited)

 

6

Condensed Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (unaudited)

7

Notes to Condensed Financial Statements (unaudited)

8

 

3


GALAXY GAMING, INC.

CONDENSED BALANCE SHEETS

(Unaudited)

 

ASSETS

 

June 30,

2020

 

 

December 31,

2019

 

Current assets:

 

(Unaudited)

 

 

 

 

 

Cash and cash equivalents

 

$

9,641,392

 

 

$

9,686,698

 

Accounts receivable, net of allowance of $125,973 and $77,433, respectively

 

 

1,013,548

 

 

 

3,099,586

 

Inventory, net

 

 

725,297

 

 

 

665,654

 

Income tax receivable

 

 

272,347

 

 

 

260,347

 

Prepaid expense and other current assets

 

 

875,497

 

 

 

761,650

 

Total current assets

 

 

12,528,081

 

 

 

14,473,935

 

Property and equipment, net

 

 

122,073

 

 

 

144,909

 

Operating lease right-of-use assets

 

 

168,559

 

 

 

306,859

 

Assets deployed at client locations, net

 

 

307,583

 

 

 

405,522

 

Goodwill

 

 

1,091,000

 

 

 

1,091,000

 

Other intangible assets, net

 

 

6,674,225

 

 

 

7,430,643

 

Deferred tax assets, net

 

 

1,025,798

 

 

 

399,283

 

Total assets

 

$

21,917,319

 

 

$

24,252,151

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,199,450

 

 

$

766,305

 

Accrued expenses

 

 

411,291

 

 

 

1,450,879

 

Revenue contract liability

 

 

371,256

 

 

 

1,294,265

 

Current portion of long-term debt

 

 

2,564,812

 

 

 

1,634,527

 

Current portion of operating lease liabilities

 

 

151,330

 

 

 

276,963

 

Total current liabilities

 

 

4,698,139

 

 

 

5,422,939

 

Long-term operating lease liabilities

 

 

17,650

 

 

 

30,325

 

Long-term liabilities, net

 

 

46,377,926

 

 

 

46,291,014

 

Interest rate swap liability

 

 

174,175

 

 

 

140,495

 

Total liabilities

 

 

51,267,890

 

 

 

51,884,773

 

Commitments and Contingencies (See Note 11)

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit)

 

 

 

 

 

 

 

 

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;

   18,336,277 and 18,017,944 shares issued and outstanding, respectively

 

 

18,336

 

 

 

18,018

 

Additional paid-in capital

 

 

6,167,346

 

 

 

5,795,636

 

Accumulated deficit

 

 

(35,536,253

)

 

 

(33,446,276

)

Total stockholders’ deficit

 

 

(29,350,571

)

 

 

(27,632,622

)

Total liabilities and stockholders’ deficit

 

$

21,917,319

 

 

$

24,252,151

 

 

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

 

4


GALAXY GAMING, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2020

 

 

June 30, 2019

 

 

June 30, 2020

 

 

June 30, 2019

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product leases, royalties and other

 

$

663,972

 

 

$

5,399,186

 

 

$

5,158,289

 

 

$

10,745,938

 

Total revenue

 

 

663,972

 

 

 

5,399,186

 

 

 

5,158,289

 

 

 

10,745,938

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of ancillary products and assembled components

 

 

7,902

 

 

 

46,945

 

 

 

29,713

 

 

 

129,336

 

Selling, general and administrative

 

 

2,438,635

 

 

 

2,939,841

 

 

 

5,430,688

 

 

 

6,480,710

 

Research and development

 

 

138,599

 

 

 

178,259

 

 

 

294,252

 

 

 

477,440

 

Depreciation and amortization

 

 

454,485

 

 

 

481,044

 

 

 

924,291

 

 

 

963,108

 

Share-based compensation

 

 

176,669

 

 

 

212,578

 

 

 

334,265

 

 

 

436,182

 

Total costs and expenses

 

 

3,216,290

 

 

 

3,858,667

 

 

 

7,013,209

 

 

 

8,486,776

 

Income (loss) from operations

 

 

(2,552,318

)

 

 

1,540,519

 

 

 

(1,854,920

)

 

 

2,259,162

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

2,126

 

 

 

19,850

 

 

 

23,900

 

 

 

20,565

 

Interest expense

 

 

(177,170

)

 

 

(169,541

)

 

 

(344,841

)

 

 

(337,555

)

Share redemption consideration

 

 

(195,482

)

 

 

(119,812

)

 

 

(390,964

)

 

 

(119,812

)

Foreign currency exchange (loss) gain

 

 

11,302

 

 

 

(24,305

)

 

 

(115,989

)

 

 

12,171

 

Change in estimated fair value of interest rate swap liability

 

 

42,483

 

 

 

(65,459

)

 

 

(33,680

)

 

 

(91,601

)

Total other expense

 

 

(316,741

)

 

 

(359,267

)

 

 

(861,574

)

 

 

(516,232

)

Income before benefit (provision) for income taxes

 

 

(2,869,059

)

 

 

1,181,252

 

 

 

(2,716,494

)

 

 

1,742,930

 

Benefit (provision) for income taxes

 

 

662,477

 

 

 

(126,309

)

 

 

626,515

 

 

 

(227,323

)

Net income (loss)

 

$

(2,206,582

)

 

$

1,054,943

 

 

$

(2,089,979

)

 

$

1,515,607

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.12

)

 

$

0.04

 

 

$

(0.12

)

 

$

0.05

 

Diluted

 

$

(0.12

)

 

$

0.04

 

 

$

(0.11

)

 

$

0.04

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

18,247,266

 

 

 

26,354,946

 

 

 

18,135,013

 

 

 

33,323,925

 

Diluted

 

 

19,003,252

 

 

 

27,963,426

 

 

 

19,044,402

 

 

 

34,981,345

 

 

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

5


GALAXY GAMING, INC.

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, 2019

 

 

18,017,944

 

 

$

18,018

 

 

$

5,795,636

 

 

$

(33,446,276

)

 

$

(27,632,622

)

Net income

 

 

 

 

 

 

 

 

 

 

 

116,605

 

 

 

116,605

 

Stock options exercised

 

 

25,000

 

 

 

25

 

 

 

7,475

 

 

 

 

 

 

7,500

 

Share-based compensation

 

 

63,333

 

 

 

63

 

 

 

157,533

 

 

 

 

 

 

157,596

 

Balance, March 31, 2020

 

 

18,106,277

 

 

$

18,106

 

 

$

5,960,644

 

 

$

(33,329,671

)

 

$

(27,350,921

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(2,206,582

)

 

 

(2,206,582

)

Stock options exercised

 

 

150,000

 

 

 

150

 

 

 

30,113

 

 

 

 

 

 

30,263

 

Share based compensation

 

 

80,000

 

 

 

80

 

 

 

176,589

 

 

 

 

 

 

176,669

 

Balance, June 30, 2020

 

 

18,336,277

 

 

$

18,336

 

 

$

6,167,346

 

 

$

(35,536,253

)

 

$

(29,350,571

)

 

 

 

 

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

 

 

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

 

 

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

)

 

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

6


GALAXY GAMING, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30, 2020

 

 

June 30, 2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(2,089,979

)

 

$

1,515,607

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization of intangible assets

 

 

924,291

 

 

 

948,823

 

Non-cash lease expense

 

 

138,300

 

 

 

137,599

 

Amortization of debt issuance costs and debt discount

 

 

18,121

 

 

 

17,954

 

Bad debt expense

 

 

166,003

 

 

 

34,923

 

Change in estimated fair value of interest rate swap liability

 

 

33,680

 

 

 

91,601

 

Deferred income tax benefit

 

 

(626,515

)

 

 

 

Share-based compensation

 

 

334,265

 

 

 

436,182

 

Unrealized foreign exchange loss (gain)

 

 

101,301

 

 

 

(15,389

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,895,310

 

 

 

(306,073

)

Inventory

 

 

(84,260

)

 

 

(313,337

)

Income tax receivable/payable

 

 

(12,000

)

 

 

(120,878

)

Prepaid expenses and other current assets

 

 

(115,281

)

 

 

(13,535

)

Accounts payable

 

 

433,405

 

 

 

653,028

 

Accrued expenses

 

 

(1,039,786

)

 

 

(273,130

)

Revenue contract liability

 

 

(923,009

)

 

 

(115,722

)

Operating lease liabilities

 

 

(138,308

)

 

 

(130,397

)

Other current liabilities

 

 

 

 

 

(71,435

)

Net cash provided by (used in) operating activities

 

 

(984,462

)

 

 

2,475,821

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Investment in intangible assets

 

 

 

 

 

(27,401

)

Acquisition of property and equipment

 

 

(22,480

)

 

 

(10,455

)

Net cash used in investing activities

 

 

(22,480

)

 

 

(37,856

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from draw on revolving loan

 

 

1,000,000

 

 

 

 

Proceeds from Paycheck Protection Program

 

 

835,300

 

 

 

 

Proceeds from stock option exercises

 

 

37,763

 

 

 

160,732

 

Payments of debt issuance costs

 

 

 

 

 

(5,736

)

Principal payments on finance lease obligations

 

 

 

 

 

(14,198

)

Principal payments on long-term debt

 

 

(834,790

)

 

 

(735,561

)

Net cash provided by (used in) financing activities

 

 

1,038,273

 

 

 

(594,763

)

Effect of exchange rate changes on cash

 

 

(76,637

)

 

 

16,986

 

Net increase (decrease) in cash and cash equivalents

 

 

(45,306

)

 

 

1,860,188

 

Cash and cash equivalents – beginning of period

 

 

9,686,698

 

 

 

6,311,563

 

Cash and cash equivalents – end of period

 

$

9,641,392

 

 

$

8,171,751

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

311,467

 

 

$

321,350

 

Cash paid for income taxes

 

$

 

 

$

348,200

 

Supplemental schedule of non-cash activities:

 

 

 

 

 

 

 

 

Common stock redemption in exchange for share redemption consideration obligation

 

$

 

 

$

39,096,401

 

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

 

$

 

 

$

299,902

 

Inventory transferred to assets deployed at client locations

 

$

24,617

 

 

$

109,725

 

 

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

7


GALAXY GAMING, INC.

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 online casinos worldwide and to land-based casino gaming companies in North America, the Caribbean, Central America, the British Isles, Europe and Africa and to cruise ship companies. We license our products and services for use solely in legalized gaming markets.

 

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. Our Articles of Incorporation (the “Articles”) 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.

 

The consideration owed to Triangulum for the redemption is $39,096,401 (the “Redemption Consideration”). See Note 10.

 

There is ongoing litigation between the Company and Triangulum related to the redemption and other matters. See Note 11.

On February 25, 2020, Galaxy Gaming entered into a Membership Interest Purchase Agreement, dated February 25, 2020 (the “Purchase Agreement”), between the Company and the membership interest holders of Progressive Games Partners LLC (“PGP”). Pursuant to the Purchase Agreement, the Company will pay $12.425 million to acquire all of the issued equity interests of PGP. Of the consideration, at least $6.425 million, but no more than $10.425 million will be paid in cash, with the balance of the consideration being paid in newly issued shares of the Company’s common stock valued at $1.91 per share. Completion of the purchase is subject to various customary closing conditions, including but not limited to (i) further due diligence by Galaxy, (ii) any necessary gaming approvals having been obtained from the relevant gaming authorities, (iii) no material adverse effect or other specified adverse events occurring with respect to Galaxy or PGP, (iv) subject to certain exceptions, the accuracy of the representations and warranties of the parties, and (v) performance and compliance in all material respects with agreements and covenants contained in the Purchase Agreement.

COVID-19. On March 11, 2020, the World Health Organization declared a pandemic related to the COVID-19 outbreak, which led to a global health emergency. The public-health impact of the outbreak continues to remain largely unknown and still evolving. The related health crisis could continue to adversely affect the global economy, resulting in continued economic downturn that could impact demand for our products.

On March 17, 2020, the Company announced that it suspended billing to customers who had closed their doors due to the COVID-19 outbreak. As a result, we did not earn revenue for the use of our games by our physical casino customers during the time that they were closed. In general, the online gaming customers who license our games through our distributor remained and continue to remain in operation in spite of the COVID-19 crisis. We earned revenue from them during the crisis and expect to continue to do so, but potentially at levels that may be lower than we previously received.

As of the date of this filing, many land-based casinos have begun to re-open with significantly reduced occupancy and other limitations. As they reopen, it will take additional time for their operations to return to pre-crisis levels. Given the uncertainties around casino re-openings, we instituted a phased billing approach for our clients through fiscal year 2020, which will result in us realizing substantially less revenue than we might otherwise expect. In addition, because of COVID-19-related financial pressures on our physical casino customers, there can be no assurance that our accounts receivable we will be paid timely (or at all) for revenues earned prior to the shutdowns. Finally, some of our casino clients have notified vendors (including us) that they will lengthen payment terms for a period of time after reopening as they attempt to preserve their own liquidity.

We also rely on third-party suppliers and manufacturers in China, many of whom were shut down or severely cut back production during the shutdown. Although this has not had a material effect on our supply chain, any future disruption of our suppliers and their contract manufacturers may impact our sales and operating results going forward.

8


Because of the uncertainties of COVID-19, the Company drew on its Revolving Loan in the amount of $1,000,000 on March 12, 2020. Also, on April 17, 2020, the Company obtained an unsecured loan of $835,300 through Zions Bancorporation, N.A. dba Nevada State Bank under the Paycheck Protection Program (the “PPP Loan”) pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the Paycheck Protection Program Flexibility Act (the “Flexibility Act”). See Note 10. As of the date of this filing, the Company believes that it has adequate liquidity to meet its near-term obligations. If the effects of the COVID-19 crisis endure or there is a second period of casino closures, we may be required to reassess our obligations, including our ability to pay employee compensation and benefits.

The COVID-19 crisis may change the behavior of gaming patrons. Most of our clients operate places of public accommodation, and their patrons may reduce visitation and play as a precaution. Further, governmental authorities may continue to impose reduced hours of operation or limit the capacity of such places of public accommodation. A long-term reduction in play could have a material adverse impact on our results of operations. Depending on the length and severity of any such adverse impact, we may fail to comply with our obligations, including covenants in our credit agreement, and we may need to reassess the carrying value of our assets.

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, 2019, filed with the SEC on March 30, 2020 (the “2019 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.

Impairment considerations. We considered whether the impact of the current COVID-19 pandemic on operations and financial results is an indicator that impairment may exist related to the Company’s inventory (Note 4), property and equipment (Note 5), assets deployed at client locations (Note 6) and intangible assets (Note 7). As a result of its impairment assessments, management has determined that its assets are not currently impaired. We considered the following:

 

Inventory. We considered whether additional write-offs or reserves were necessary to our inventory balance as a result of the impact of COVID-19. The vast majority of our Inventory is not sold to customers but, rather, is used to support new installations and repairs of our electronic table game systems which we account for as Assets Deployed at Client Locations. Based on our assessment, we determined additional write-offs and reserves were not required. We are in the process of developing a new generation of electronic table game systems and, once that new generation of system is available for customer installation, we will review inventory to determine how much of existing Inventory can be used in the next generation of systems. To the extent that there is Inventory that 1) cannot be used in the new generation of systems and 2) is in excess of what we might expect to need for repair of older generation systems that we expect to remain in the field, we may incur an impairment charge with respect to Inventory that is obsolete.

 

Long-lived assets. Our long-lived assets include property and equipment, assets deployed at client locations, and intangible assets. We assessed whether there was an indication of impairment of each asset group due to COVID-19 noting that based on the current contracts, including the lengthened payment terms noted above, the carrying value of our long-lived asset groups were recoverable.

Goodwill. We performed a qualitative assessment and determined that it was not more likely than not that the carrying value of the reporting unit was impaired. As part of our qualitative assessment, we considered our previous forecasts and assumptions based on our current projections, which are subject to various risks and uncertainties, including projected revenue, projected operating income, terminal growth rates, and the cost of capital.

9


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

Correction of immaterial errors in previously issued financial statements. During the preparation of the Company’s financial statements as of and for the three and six months ended June 30, 2020, it was discovered the Company incorrectly accounted for two lease amendments in the fourth quarter of 2019. As a result of the error, at December 31, 2019, Operating Lease Right-of-Use Assets, Current Portion of Operating Lease Liabilities and Long-term Operating Lease Liabilities were understated by $269,171, $257,823 and $11,348, respectively. In accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company evaluated the error and determined that the related impact was not material to results of operations or financial position for any prior annual or interim period. However, to correctly present the Operating Lease Right-of-Use Assets, Current Portion of Operating Lease Liabilities and Long-term Operating Lease Liabilities in the appropriate periods, management has corrected the consolidated balance sheet as of December 31, 2019.   

Other significant accounting policies. See Note 2 in Item 8. “Financial Statements and Supplementary Financial Information” included in our 2019 10-K.

Recently adopted accounting standards

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. We have adopted the new standard effective January 1, 2020, which did not have a material effect on our financial statements or related disclosures.

New accounting standards not yet adopted

Financial Instruments – Credit Losses. In February 2020, the FASB issued ASU No. 2020-02, Financial Instruments – Credit Losses (Topic 326). ASU 2020-02 provides updated guidance on how an entity should measure credit losses on financial instruments and delayed the effective date of Topic 326 for certain smaller reporting companies until fiscal years beginning after December 15, 2022. Early adoption is permitted. We do not believe the adoption of this guidance will have a material impact on our financial statements or related disclosures.

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. In addition, revenue associated with performance-based agreements is recognized during the month that the usage of the product or intellectual property occurs.

 

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 geographic location for the following periods:

 

 

 

Three Months

Ended June 30,

 

 

Six Months

Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

North America and Caribbean

 

$

159,085

 

 

$

3,907,953

 

 

$

3,291,260

 

 

$

7,752,478

 

Europe, Middle East and Africa

 

 

504,887

 

 

 

1,491,233

 

 

 

1,867,029

 

 

 

2,993,460

 

Total revenue

 

$

663,972

 

 

$

5,399,186

 

 

$

5,158,289

 

 

$

10,745,938

 

 

10


Revenue contract liability  

 

For a portion of our business, 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, 2020:

 

Beginning balance – January 1, 2020

 

$

1,294,265

 

Increase (advanced billings)

 

 

5,704,713

 

Decrease (revenue recognition)

 

 

(6,627,722

)

Ending balance – June 30, 2020

 

$

371,256

 

 

Revenue recognized during the three months ended June 30, 2020 that was included in the beginning balance of revenue contract liability was $6,250. Revenue recognized during the six months ended June 30, 2020 that was included in the beginning balance of revenue contract liability above was $1,285,932.

NOTE 4. INVENTORY

Inventory, net consisted of the following at: 

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Raw materials and component parts

 

$

385,790

 

 

$

359,349

 

Finished goods

 

 

400,561

 

 

 

343,305

 

Inventory, gross

 

 

786,351

 

 

 

702,654

 

Less: inventory reserve

 

 

(61,054

)

 

 

(37,000

)

Inventory, net

 

$

725,297

 

 

$

665,654

 

 

NOTE 5. PROPERTY AND EQUIPMENT

Property and equipment, net consisted of the following at: 

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Furniture and fixtures

 

$

312,639

 

 

$

312,639

 

Automotive vehicles

 

 

215,127

 

 

 

215,127

 

Office and computer equipment

 

 

324,777

 

 

 

302,296

 

Leasehold improvements

 

 

6,843

 

 

 

6,843

 

Property and equipment, gross

 

 

859,386

 

 

 

836,905

 

Less: accumulated depreciation

 

 

(737,313

)

 

 

(691,996

)

Property and equipment, net

 

$

122,073

 

 

$

144,909

 

 

For the three months ended June 30, 2020 and 2019, depreciation expense related to property and equipment was $22,322 and $26,838, respectively. For the six months ended June 30, 2020 and 2019, depreciation expense related to property and equipment was $45,316 and $53,978, respectively.

NOTE 6. ASSETS DEPLOYED AT CLIENT LOCATIONS

 

Assets deployed at client locations, net consisted of the following at:

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Enhanced table systems

 

$

942,960

 

 

$

993,127

 

Less: accumulated depreciation

 

 

(635,377

)

 

 

(587,605

)

Assets deployed at client locations, net

 

$

307,583

 

 

$

405,522

 

 

11


For the three months ended June 30, 2020 and 2019, depreciation expense related to assets deployed at client locations was $58,244 and $70,447, respectively. For the six months ended June 30, 2020 and 2019, depreciation expense related to assets deployed at client locations was $122,556 and $139,584, respectively.

 

NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill. A goodwill balance of $1,091,000 was created as a result of a business combination completed in October 2011 from Prime Table Games, LLC (“PTG”).

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

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

 

 

183,415

 

 

 

183,415

 

Other intangible assets, gross

 

 

20,609,382

 

 

 

20,609,382

 

Less: accumulated amortization

 

 

(13,935,157

)

 

 

(13,178,739

)

Other intangible assets, net

 

$

6,674,225

 

 

$

7,430,643

 

 

For the three months ended June 30, 2020 and 2019, amortization expense related to other intangibles was $373,919 and $378,045, respectively. For the six months ended June 30, 2020 and 2019, amortization expense related to the other intangible assets was $756,418 and $755,260, respectively.

Estimated future amortization expense is as follows:

 

Twelve Months Ending June 30,

 

Total

 

2021

 

$

1,438,174

 

2022

 

 

1,412,297

 

2023

 

 

541,135

 

2024

 

 

252,930

 

2025

 

 

252,930

 

Thereafter

 

 

2,776,759

 

Total amortization

 

$

6,674,225

 

 

NOTE 8. ACCRUED EXPENSES

Accrued expenses consisted of the following at: 

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Payroll and related

 

$

162,696

 

 

$

747,458

 

Interest

 

 

25,148

 

 

 

9,895

 

Share redemption consideration

 

 

119,812

 

 

 

510,776

 

Commissions and royalties

 

 

32,688

 

 

 

78,528

 

Income tax payable

 

 

64,832

 

 

 

64,832

 

Other

 

 

6,115

 

 

 

39,390

 

Total accrued expenses

 

$

411,291

 

 

$

1,450,879

 

 

NOTE 9. LEASES

 

Lessee

 

We have operating leases for our corporate office, two satellite facilities in the state of Washington, and for certain equipment. We account for lease components (such as rent payments) separately from the non-lease components (such as common-area maintenance

12


costs, real estate and sales taxes and insurance costs). The discount rate represents the interest rate implicit in each lease or our incremental borrowing rate at lease commencement date.

As of June 30, 2020, our leases have remaining lease terms ranging from zero months to 24 months.

Supplemental balance sheet information related to leases is as follows:

 

 

 

As of June 30, 2020

 

 

Amount

 

 

Classification

Operating leases:

 

 

 

 

 

 

Operating lease right-of-use lease assets

 

$

168,559

 

 

 

 

 

 

 

 

 

 

Operating lease current liabilities

 

$

151,330

 

 

Current portion of operating lease liabilities

 

 

 

 

 

 

 

Operating lease long-term liabilities

 

 

17,650

 

 

Long-term operating lease liabilities

 

 

 

 

 

 

 

Total operating lease liabilities

 

$

168,980

 

 

 

 

 

 

 

 

 

 

Weighted-average remaining lease

   term:

 

 

 

 

 

 

Operating leases

 

0.8 years

 

 

 

 

 

 

 

 

 

 

Weighted-average discount rate:

 

 

 

 

 

 

Operating leases

 

 

5.6

%

 

 

 

The components of lease expense are as follows:

 

 

 

Three Months Ended June 30, 2020

 

 

Amount

 

 

Classification

Operating lease cost

 

$

71,715

 

 

Selling, general and administrative expense

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2020

 

 

Amount

 

 

Classification

Operating lease cost

 

$

143,426

 

 

Selling, general and administrative expense

 

Supplemental cash flow information related to leases is as follows:

 

 

 

Six Months Ended June 30, 2020

 

 

Amount

 

 

Classification

Cash paid for amounts included in the

   measurement of lease liabilities:

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

143,426

 

 

Net income

 

As of June 30, 2020, future maturities of our operating lease liabilities are as follows:

 

Twelve Months Ending June 30,

 

Amount

 

2021

 

$

151,330

 

2022

 

 

17,650

 

2023

 

 

 

Total lease liabilities

 

$

168,980

 

On July 3, 2020 we entered into a new 75-month lease for our corporate headquarters in Las Vegas. Pursuant to the new lease, we will occupy approximately 14,000 square feet of office and warehouse space. The lease commences on October 1, 2020,