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 December 31, 2019 except as follows as disclosed in Note 1 and as follows:

On February 17, 2020 we entered into Amendment #2 to the employment agreement with our Chief Executive Officer (“Mr. Craven”). Among other things, Amendment #2 provides (i) that Mr. Craven’s base salary will increase to $275,000, effective January 1, 2020; (ii) that Mr. Craven receive a grant of 225,000 options at a strike price of $1.93, vest as follows: 88,000 shares on July 26, 2021, 87,000 shares on July 26, 2022 and 50,000 shares on July 26, 2023; (iii) that the end date of the term of employment be extended from July 27, 2020 to July 26, 2022.

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 interest 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.

Coronavirus. On March 11, 2020, the World Health Organization declared a pandemic related to the rapidly spreading coronavirus (COVID-19) outbreak, which has led to a global health emergency. The public-health impact of the outbreak is currently unknown and rapidly evolving, and the related health crisis could adversely affect the global economy, resulting in an economic downturn that could impact demand for our products.

As of the date of this filing, almost all our casinos clients have closed or will shortly close. It is not known for how long they will remain closed. On March 17, 2020, the Company announced that it would suspend billing to customers who had closed their doors due to the COVID-19 outbreak. As a result, we do not expect to earn revenue for the use of our games by our casino customers until they reopen. And once they reopen, it may take an additional period of time for their operations to return to pre-crisis levels. We have receivables for products and services outstanding prior to the shutdown related to COVID-19. Because of COVID-19 related shutdowns, there can be no assurance that we will be paid timely or at all. Finally, our casino clients may defer paying vendors for a period of time after reopening as they attempt to replenish their own liquidity. For this reason, we may not receive payments from our clients for an extended period of time even after they reopen.

In general, the online gaming customers who license our games through our distributor remain in operation in spite of the COVID-19 crisis. We expect to continue to earn revenue from them during the crisis, but at levels that may be lower than we previously received.

We rely on third-party suppliers and manufacturers in China, many of whom have been shut down or have severely cut back production. This may have an effect on our supply chain depending upon how long they remain closed and when they re-open, especially in relation to post-pandemic demand by our customers. Any disruption of our suppliers and their contract manufacturers may impact our sales and operating results.

Because of the uncertainties and potential material adverse impact of COVID-19, the Company drew on its revolving loan in the amount of $1.0 million on March 12, 2020. As of the date of this filing, the Company believes that it has adequate liquidity to meet its near-term obligations even in the absence of receiving payments from customers. Further, we do not anticipate that the current casino closures will result in an impairment of our assets or a default under our loan agreements. If the casino closures last more than a few months, 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 impose reduced hours of operation or even outright closure of such places of public accommodation. A long-term reduction in play at or closure of one or more of our clients’ facilities 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.