GLXZ 10-Q
Galaxy Gaming, Inc. (GLXZ)
Ok
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact name of small business issuer as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act: None
Title of each class |
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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.
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).
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 |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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:
GALAXY GAMING, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024
TABLE OF CONTENTS
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PART I
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Item 1: |
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Item 2: |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3: |
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Item 4: |
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Item 5: |
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PART II
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Item 1: |
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Item 2: |
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Item 6: |
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2
PART I
ITEM 1. FINANCIAL STATEMENTS
Our financial statements included in this Form 10-Q are as follows:
Condensed Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023 (unaudited) |
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Notes to Condensed Consolidated Financial Statements (unaudited) |
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3
GALAXY GAMING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS |
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June 30, |
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December 31, |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net of allowance of $ |
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Income tax receivable |
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Prepaid expenses |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use assets |
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Assets deployed at client locations, net |
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Goodwill |
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Other intangible assets, net |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ DEFICIT |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses |
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Revenue contract liability |
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Current portion of operating lease liabilities |
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Current portion of long-term debt |
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Total current liabilities |
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Long-term operating lease liabilities |
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Long-term debt and liabilities, net |
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Deferred tax liabilities, net |
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Total liabilities |
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Stockholders’ deficit |
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Preferred stock, |
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Common stock, |
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Additional paid-in capital |
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Accumulated deficit |
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Accumulated other comprehensive loss |
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Total stockholders’ deficit |
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Total liabilities and stockholders’ deficit |
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$ |
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$ |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
4
GALAXY GAMING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, 2024 |
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June 30, 2023 |
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June 30, 2024 |
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June 30, 2023 |
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Revenue: |
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Licensing fees |
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$ |
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$ |
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$ |
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$ |
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Total revenue |
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Costs and expenses: |
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Cost of ancillary products and assembled components |
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Selling, general and administrative |
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Research and development |
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Depreciation and amortization |
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Stock-based compensation |
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Total costs and expenses |
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Income from operations |
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Other income (expense): |
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Interest income |
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Interest expense |
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Foreign currency exchange (loss) gain |
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Total other expense, net |
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Income before provision for income taxes |
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Provision for income taxes |
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Net income |
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Foreign currency translation adjustment |
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Comprehensive income |
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$ |
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$ |
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$ |
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$ |
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Net income per share: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted-average shares outstanding: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
5
GALAXY GAMING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(Unaudited)
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Common Stock |
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Additional Paid-in |
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Accumulated |
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Accumulated Other Comprehensive |
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Total Stockholders' |
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Shares |
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Amount |
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Capital |
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Deficit |
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Loss |
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Deficit |
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Beginning balance, December 31, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Foreign currency translation loss |
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— |
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— |
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— |
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— |
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Stock options exercised |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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Balance, March 31, 2024 |
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Net income |
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— |
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— |
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— |
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— |
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Foreign currency translation loss |
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— |
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— |
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— |
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— |
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( |
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Stock-based compensation |
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— |
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— |
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Balance, June 30, 2024 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Common Stock |
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Additional Paid-in |
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Accumulated |
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Accumulated Other Comprehensive |
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Total Stockholders' |
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Shares |
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Amount |
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Capital |
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Deficit |
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Loss |
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Deficit |
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Beginning balance, December 31, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Foreign currency translation gain |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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Balance, March 31, 2023 |
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$ |
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$ |
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$ |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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Foreign currency translation loss |
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— |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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Balance, June 30, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
6
GALAXY GAMING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended |
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June 30, 2024 |
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June 30, 2023 |
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Cash flows from operating activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
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Amortization of right-of-use assets |
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Amortization of debt issuance costs and debt discount |
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Bad debt recovery |
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Deferred income tax |
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Stock-based compensation |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Income tax receivable |
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Prepaid expenses and other current assets |
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Other assets |
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Accounts payable |
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Accrued expenses |
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Revenue contract liability |
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Operating lease liabilities |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Investment in internally developed software |
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Acquisition of property and equipment |
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— |
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Acquisition of assets deployed at client locations |
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Transfer of title of assets deployed at client locations to perpetual license customer |
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Net cash used in investing activities |
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Cash flows from financing activities: |
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Payments of debt issuance costs |
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— |
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Proceeds from stock option exercises |
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— |
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Principal payments on long-term debt |
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( |
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Net cash used in financing activities |
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( |
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Effect of exchange rate changes on cash |
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Net increase in cash and cash equivalents |
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Cash and cash equivalents – beginning of period |
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Cash and cash equivalents – end of period |
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$ |
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$ |
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Supplemental cash flow information: |
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Cash paid for interest |
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$ |
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$ |
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Cash paid for income taxes |
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$ |
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$ |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
7
GALAXY GAMING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS
Unless the context indicates otherwise, references to “Galaxy Gaming, Inc.,” “we,” “us,” “our,” or the “Company,” refer to Galaxy Gaming, Inc., a Nevada corporation (“Galaxy Gaming”).
We are an established global gaming company specializing in the design, development, acquisition, assembly, marketing and licensing of proprietary casino table games and associated technology, platforms and systems for the casino and iGaming industries. Casinos use our proprietary products and services to enhance their gaming operations and improve their profitability, and productivity, as well as to offer popular cutting-edge gaming entertainment content and technology to their players. We market our products and services to online casinos worldwide, to land-based casino gaming companies in North America, the Caribbean, Central America, the United Kingdom, Europe and Africa, and to cruise ship companies. We license our products and services for use solely in regulated land-based gaming markets. We also license our content and distribute content from other companies to iGaming operators in gaming markets throughout the world where iGaming is legalized.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules of the U.S. Securities and Exchange Commission ("SEC"). In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all necessary adjustments (including all those of a recurring nature and those necessary in order for the financial statements to not be misleading) and all disclosures to present fairly our financial position and the results of our operations and cash flows for the periods presented.
The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes as of and for the year ended December 31, 2023 included in our 2023 Form 10-K ("2023 10-K").
Use of estimates and assumptions. The preparation of financial statements in conformity with U.S. GAAP requires the Company to make decisions based upon estimates, assumptions, and factors considered relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in future economic conditions or other business circumstances may affect the outcomes of the estimates and assumptions. Accordingly, actual results could differ materially from those anticipated.
Consolidation. The financial statements are presented on a consolidated basis and include the results of the Company and its wholly owned subsidiaries, Progressive Games Partner, LLC ("PGP") and Galaxy Gaming-01 LLC ("GG-01"). All intercompany transactions and balances have been eliminated in consolidation.
Reclassifications. Certain accounts and financial statement captions in the prior period have been reclassified to conform to the current period financial statement presentations and had no effect on net income.
Cash and cash equivalents. Cash and cash equivalents consist primarily of deposits held at major banks and highly liquid investments with original maturities of three months or less. With the exception of funds held outside the U.S., these deposits are in insured banking institutions, which are insured up to $
Accounts receivable and allowance for credit losses. Accounts receivable are stated at face value net of allowance for credit losses. Management estimates the allowance for expected credit losses balance using relevant available information from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in the current environmental economic conditions and reasonable and supportable forecast. The allowance for expected credit losses on financial instruments is measured on a collective (pool) basis when similar risk characteristics exist. Accounts receivable are non-interest bearing. Accounts are written off when management deems them to be uncollectible. Recoveries of accounts previously written off are recorded when received.
For the three and six months ended June 30, 2024, there was
8
Goodwill. The excess of the purchase price of an acquired business over the estimated fair value of the assets acquired and the liabilities assumed, is recorded as goodwill. The Company tests for possible impairment of goodwill at least annually, or when circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company has the option to begin with a qualitative assessment, commonly referred to as “Step 0”, to determine whether it is more likely than not that the reporting unit’s fair value of goodwill is less than its carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such as the general economic environment, industry and market conditions, changes in key assumptions used since the most recently performed valuation and overall financial performance of the reporting units. If the Company determines that it is more likely than not that a reporting unit’s fair value is less than its carrying value, the Company performs a quantitative goodwill impairment analysis, and depending upon the results of that measurement, the recorded goodwill may be written down and charged to income from operations when the carrying amount of the reporting unit exceeds the fair value of the reporting unit.
Other intangible assets, net.
Patents |
|
Customer relationships |
|
Trademarks |
|
Intellectual property |
|
Non-compete agreements |
|
Software |
Software relates primarily to assets where costs are capitalizable during the application development phase. External and internal labor-related costs associated with product development are included in software. The Company reviews its identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment losses are recognized for identifiable intangibles, other than goodwill, when indicators of impairment are present and the estimated undiscounted cash flows are not sufficient to recover the assets’ carrying amount.
Fair value of financial instruments. Fair value is defined as a market-based measurement intended to estimate the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs when measuring fair value. These inputs are categorized as follows:
The carrying values of cash equivalents, accounts receivable and accounts payable approximate fair value due to their short-term nature. The estimated fair value of our long-term debt approximates its carrying value based upon our expected borrowing rate for debt with similar remaining maturities and comparable risk (level 2). The Company currently has no financial instruments measured at estimated fair value on a recurring basis based on valuation reports provided by counterparties.
Leases. The Company classifies leases at inception as operating leases or finance leases in accordance with ASC 842, "Leases." We account for lease components (such as rent payments) separately from non-lease components (such as common-area maintenance costs, real estate and sales taxes and insurance costs). Operating and finance leases with terms greater than 12 months are recorded on the condensed consolidated balance sheets as right-of-use assets with corresponding lease liabilities. Lease liabilities are amortized over the lease term using the effective interest method, while lease assets are depreciated over the shorter of the asset's useful life or the lease term. The discount rate used to determine present value is typically the incremental borrowing rate at lease commencement, unless the implicit rate in the lease is readily determinable. Subsequent changes in lease terms or payments are adjusted accordingly. See Note 5.
Revenue recognition. We account for our revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"). See Note 3.
Foreign currency translation. Gains and losses from settlement of transactions involving foreign currency amounts are included in other income or expense in the Condensed Consolidated Statements of Operations. Gains and losses resulting from translating assets and liabilities from the functional currency to U.S. dollars are included in accumulated other comprehensive income or (loss) in the Condensed Consolidated Statements of Changes in Stockholders’ Deficit.
Basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated by dividing net income by the
9
weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to be purchased under the employee stock purchase plan, and unvested restricted stock units (“RSUs”).
Segment information. We define operating segments as components of our enterprise for which separate financial information is reviewed regularly by the chief operating decision-makers to evaluate performance and to make operating decisions. We currently have
Other significant accounting policies. Our significant accounting policies are described in our 2023 10-K. There have been no material changes to those policies.
Recently issued accounting pronouncements. In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2023-07, “Improvements to Reportable Segment Disclosures,” (“ASU 2023-07”), which is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and requires retrospective application to all prior periods presented in the financial statements. ASU 2023-07 provides for improved financial reporting by requiring disclosure of incremental segment information to enable investors to develop more decision-useful financial analyses. The Company is currently assessing the impact that adoption of this new accounting guidance will have on its consolidated financial statements and footnote disclosures.
Accounting Standard Update 2023-09, Improvements to Income Tax Disclosures ("ASU 2023-09"). In December 2023, the FASB issued ASU 2023-09, which requires more detailed income tax disclosures. The guidance requires entities to disclose disaggregated information about their effective tax rate reconciliation as well as expanded information on income taxes paid by jurisdiction. The disclosure requirements will be applied on a prospective basis, with the option to apply them retrospectively. The standard is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently assessing the impact that adoption of this new accounting guidance will have on its consolidated financial statements and footnote disclosures.
We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.
NOTE 3. REVENUE RECOGNITION
Revenue recognition. We generate revenue primarily from the licensing of our intellectual property and the intellectual property that we license from third parties. We recognize revenue under recurring fee license contracts monthly as we satisfy our performance obligation, which consists of granting the customer the right to use our intellectual property. Amounts billed are determined based on flat rates or usage rates stipulated in the customer contract.
We sell the perpetual right to use our intellectual property for our progressive gaming systems, that is separate from the licensing of our game content and from time to time, sell the units used to deliver the progressive gaming systems. Control transfers and we recognize revenue at a point in time when the gaming system is available for use by a customer, which is no earlier than the shipment of the products to the customer or an intermediary for the customer.
From time to time, the Company licenses intellectual property from third-party owners and re-licenses that intellectual property to its casino clients. In these arrangements, the Company usually agrees to pay the owner of the intellectual property a royalty based on the revenues the Company receives from licensing the intellectual property to its casino clients. Royalties are recorded net in revenue.
Disaggregation of revenue
The following table disaggregates our revenue by geographic location for the three and six months ended June 30, 2024, and 2023. All of the royalty expense that is charged to a contra-revenue in our online gaming operating segment has been allocated to the Europe, Middle East and Africa region in both periods presented.
|
|
Three Months |
|
|
Six Months |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
The Americas |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Europe, Middle East and Africa |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
10
Contract liabilities. Amounts billed and cash received in advance of performance obligations fulfilled are recorded as contract liabilities and recognized as revenue when performance obligations are fulfilled.
On May 10, 2023, the Company and a customer entered into an amended and restated agreement (the "Agreement"). The Agreement amends and restates a previous agreement between the parties, dated June 2, 2015, for the provision of licenses for certain table game content and related intellectual property which the Company, succeeded to as successor in interest by merger with PGP.
The Agreement guarantees a minimum payment from the customer of €
For years 5 through 10 of the contract, the amount to be billed is based on the actual usage from the Licensee. Invoices will be billed on a monthly basis. Revenue for years 5 through 10 will be recognized when actual usage is incurred.
Contract Assets. The Company’s contract assets consist solely of unbilled receivables which are recorded when the Company recognizes revenue in advance of billings. Unbilled receivables are included in the balance of Accounts receivable, net of allowance on the balance sheet and totaled $
Intellectual property agreements. From time to time, the Company purchases or licenses intellectual property from third-parties and the Company, in turn, utilizes that intellectual property in certain games sold to clients. In these purchase agreements, the Company may agree to pay the seller of the intellectual property a fee if and when the Company receives revenue from games containing the intellectual property.
On June 8, 2023, the Company entered into a license and distribution agreement with a licensor, pursuant to which the Company licenses and has rights to distribute a game. The agreement contains definitions, representations and warranties, and terms that are customary in licensing agreements. The agreement is for a set term that may be extended on an annual basis at the end of the term. The agreement sets forth royalties to be paid during the term and includes intellectual property licensing. The licensor has discretion in establishing the price for certain game content to be re-licensed by the Company. The royalties due for this portion of the game content will be netted against revenue in our Consolidated Statement of Operations and Comprehensive Income.
NOTE 4. OTHER INTANGIBLE ASSETS
Other intangible assets, net.
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Patents |
|
$ |
|
|
$ |
|
||
Customer relationships |
|
|
|
|
|
|
||
Trademarks |
|
|
|
|
|
|
||
Intellectual property |
|
|
|
|
|
|
||
Non-compete agreements |
|
|
|
|
|
|
||
Software |
|
|
|
|
|
|
||
Other intangible assets, gross |
|
|
|
|
|
|
||
Less: accumulated amortization |
|
|
( |
) |
|
|
( |
) |
Other intangible assets, net |
|
$ |
|
|
$ |
|
||
For the three months ended June 30, 2024 and 2023, amortization expense related to other intangible assets was $
NOTE 5. LEASES
We have operating leases for our corporate office,
11
maintenance costs, real estate and sales taxes and insurance costs). The discount rate represents the interest rate implicit in each lease or our incremental borrowing rate at lease commencement date.
As of June 30, 2024, no renewal option periods were included in any estimated minimum lease term as the options were not deemed reasonably certain to be exercised. Our leases have remaining lease terms ranging from
Supplemental balance sheet information related to leases is as follows:
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||
Operating leases: |
|
|
|
|
|
|
||
Operating lease right-of-use lease assets |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Operating lease current liabilities |
|
$ |
|
|
$ |
|
||
Operating lease long-term liabilities |
|
|
|
|
|
|
||
Total operating lease liabilities |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Weighted-average remaining lease term in years: |
|
|
|
|
|
|
||
Operating leases |
|
|
|
|
|
|
||
Weighted-average discount rate: |
|
|
|
|
|
|
||
Operating leases |
|
|
% |
|
|
% |
||
The components of lease expense are as follows:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Operating lease cost (1) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
(1) Classified as selling, general and administrative expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Supplemental cash flow information related to leases is as follows:
|
|
Six Months Ended June 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
||
Principal and interest payments related to operating leases |
|
$ |
|
|
$ |
|
||
As of June 30, 2024, future maturities of our operating lease liabilities are as follows:
|
|
Amount |
|
|
Years ended December 31, |
|
|
|
|
2024 |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
Total minimum lease payments |
|
|
|
|
Less: imputed interest |
|
|
( |
) |
Total operating lease liability |
|
|
|
|
Less: current portion |
|
|
( |
) |
Long-term portion |
|
$ |
|
|
12
NOTE 6. LONG-TERM DEBT AND LIABILITIES
Long-term debt and liabilities consisted of the following at:
|
June 30, |
|
|
December 31, |
|
||
|
2024 |
|
|
2023 |
|
||
Fortress credit agreement |
$ |
|
|
$ |
|
||
Insurance notes payable |
|
|
|
|
|
||
Long-term debt and liabilities, gross |
|
|
|
|
|
||
Less: Unamortized debt issuance costs |
|
( |
) |
|
|
( |
) |
Long-term debt and liabilities, net of debt issuance costs |
|
|
|
|
|
||
Less: Current portion of long-term debt |
|
( |
) |
|
|
( |
) |
Long-term debt and liabilities, net |
$ |
|
|
$ |
|
||
Fortress Credit Agreement. On November 15, 2021, the Company entered into a senior secured term loan agreement with Fortress Credit Corp. (“Fortress Credit Agreement”) in the amount of $
In connection with entering into the Fortress Credit Agreement, the Company also issued warrants to purchase a total of up to
In response to ASU No. 2020-04, Reference Rate Reform (Topic 848) and effective May 30, 2023, the Benchmark Replacement replaced LIBOR under the Fortress Credit Agreement. The Benchmark Replacement is (a) the sum of: (i) Term Secured Overnight Financing Rate ("SOFR") and (ii)
As of June 30, 2024, future maturities of our long-term obligations are as follows:
|
|
Total |
|
|
Years ended December 31, |
|
|
|
|
2024 |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Long-term liabilities, gross |
|
$ |
|
|
13
NOTE 7. COMMITMENTS AND CONTINGENCIES
Concentration of risk. We are exposed to risks associated with clients who represent a significant portion of total revenues.
For the six months ended June 30, 2024 and 2023, respectively, we had the following client concentrations:
|
|
Location |
|
Six Months Ended June 30, 2024 |
|
|
Six Months Ended June 30, 2023 |
|
|
Accounts |
|
|
Accounts |
|
||||
Client A |
|
Europe |
|
|
% |
|
|
% |
|
$ |
|
|
$ |
|
||||
Client B |
|
North America |
|
|
% |
|
|
% |
|
$ |
|
|
$ |
|
||||
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.
An unexpected adverse judgment in any pending litigation could cause a material impact on our business operations, intellectual property, results of operations or financial position. Unless otherwise expressly stated, we believe costs associated with litigation will not have a material impact on our financial position or liquidity but may be material to the results of operations in any given period and, accordingly,
Intellectual property agreements. From time to time, the Company purchases intellectual property from third-parties and the Company, in turn, utilizes that intellectual property in certain games licensed to clients. In these purchase agreements, the Company may agree to pay the seller of the intellectual property a fee, if and when, the Company receives revenue from games containing the intellectual property.
NOTE 8. INCOME TAXES
Our forecasted annual effective tax rate (“AETR”) at June 30, 2024 was
For the six months ended June 30, 2024 and 2023, our effective tax rate (“ETR”) was
NOTE 9. SUBSEQUENT EVENTS
On
Upon the closing of the Merger, each share of common stock, par value $
The Merger Agreement contains customary representations, warranties and covenants, including covenants obligating the Company to carry on its business in all material respects in the ordinary course of business, use reasonable best efforts to cooperate in seeking regulatory approvals and not to engage in certain specified activities without Parent's prior consent.
Completion of the Merger is subject to the satisfaction or waiver of customary closing conditions, including but not limited to the approval of the Merger by the Company's stockholders and receipt of certain gaming regulatory approvals.
14
The Company may terminate the Merger Agreement in certain limited circumstances, including to accept a Superior Proposal (as defined in the Merger Agreement). Parent may terminate the Merger Agreement in certain limited circumstances, including if the Board changes its recommendation that the Company’s stockholders vote to approve the Merger Agreement. In addition, either Parent or the Company may terminate the Merger Agreement if (i) the Merger has not been successfully completed by July 18, 2025 (subject to extension through October 18, 2025 in the event that certain conditions with respect to the receipt of certain gaming regulatory approvals remain unsatisfied as of such date, and through January 18, 2026 in the event that such conditions remain unsatisfied as of such subsequent date); (ii) a governmental authority of competent jurisdiction (excluding gaming regulators, other than with respect to certain gaming regulatory approvals) has issued a final and non-appealable governmental order prohibiting the Merger; (iii) the stockholders of the Company fail to approve the Merger Agreement; and (iv) the other party materially breaches its representations, warranties or covenants in the Merger Agreement, subject in certain cases, to the right of the breaching party to cure the breach.
Upon a termination of the Merger Agreement under specified circumstances, including due to a change in the Board’s recommendation that the Company’s stockholders vote to approve the Merger Agreement, the entry by the Company into a definitive agreement with respect to a Superior Proposal, or certain other triggering events set forth in the Merger Agreement, the Company may be required to pay Parent a termination fee. In addition, upon a termination of the Merger Agreement under specified circumstances, including in the event of termination resulting from the failure to obtain certain gaming regulatory approvals, Parent may be required to pay the Company a termination fee.
The Merger is expected to be completed in mid-2025. Following the closing of the Merger, shares of the Company's common stock will no longer be quoted on the OTCQB and the Company will become a privately held company.
15
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of our financial condition, results of operations and liquidity and capital resources as of and for the three and six months ended June 30, 2024 and 2023. This discussion should be read together with our audited consolidated financial statements and related notes included in Item 8. Financial Statements and Supplementary Financial Information included in our 2023 Form 10-K.
16
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the information contained in this Quarterly Report includes forward-looking statements In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “might,” “expect,” “intend,” "target," “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other similar expressions. These forward-looking statements are only predictions. We have based these forward-looking statements on our current expectations, assumptions and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks and uncertainties. These risks and uncertainties include, but are not limited to, risks related to the proposed Merger, including that the Merger may not be consummated at all or in the anticipated timeframe; restrictions on our business during the pendency of the Merger that could affect our ability to pursue business opportunities or strategic transactions; uncertainties relating to the pendency of the Merger relating to our relationships with our employees and our customers, vendors and partners; that the Merger Agreement may be terminated in circumstances that require us to pay a termination fee; significant transaction costs; and the risk of litigation and/or regulatory actions related to the proposed Merger; the ability of Galaxy Gaming to enter and maintain strategic alliances, product placements or installations in land based casinos or grow its iGaming business, garner new market share, secure licenses in new jurisdictions or maintain existing licenses, successfully develop or acquire and sell proprietary products, comply with regulations, including changes in gaming related and non-gaming related statutes and regulations that affect the revenues of our customers in land-based casino and, online casino markets, have its games approved by relevant jurisdictions, unfavorable economic conditions in the US and worldwide, our level of indebtedness, restrictions and covenants in our loan agreement, dependence on major customers, protection of intellectual property and our ability to license the intellectual property rights of third parties, failure to maintain the integrity of our information technology systems, including without limitation, cyber-attacks or other failures in our telecommunications or information technology systems, or those of our collaborators, third-party logistics providers, distributors or other contractors or consultants, could result in information theft, data corruption and significant disruption of our business, and other factors. The events and circumstances reflected in our forward-looking statements may not be achieved or occur, and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
OVERVIEW
We develop, acquire, assemble and market technology and entertainment-based products and services for the gaming industry for placement on casino floors and on legal internet gaming sites. Our products and services primarily relate to licensed casino operators’ table games activities and focus on either increasing their profitability and productivity 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 operators. 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.
Recent Developments
On July 18, 2024, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Evolution Malta Holding Limited (“Parent”), and Galaga Merger Sub, Inc., a wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which the Company will become a wholly owned subsidiary of Parent. Upon the closing of the Merger, each share of common stock, par value $0.001 per share of the Company issued and outstanding immediately prior to the effective time of the Merger, except for shares (a) owned by Company stockholders who are entitled to demand and have properly and validly demanded their appraisal rights under Nevada law, and (b) held by the Parent, Merger Sub, the Company or by any of their respective subsidiaries, will automatically be cancelled and converted into the right to receive $3.20 in cash.
Completion of the Merger is subject to the satisfaction or waiver of customary closing conditions, including but not limited to the approval of the Merger by the Company's stockholders, and receipt of certain gaming regulatory approvals.
The Company may terminate the Merger Agreement in certain limited circumstances, including to accept a Superior Proposal (as defined in the Merger Agreement). Parent may terminate the Merger Agreement in certain limited circumstances, including if the Board changes its recommendation that the Company’s stockholders vote to approve the Merger Agreement. In addition, either Parent or the Company may terminate the Merger Agreement if (i) the Merger has not been successfully completed by July 18, 2025 (subject to extension through October 18, 2025 in the event that certain conditions with respect to the receipt of certain gaming regulatory approvals remain unsatisfied as of such date, and through January 18, 2026 in the event that such conditions remain unsatisfied as of such subsequent date); (ii) a governmental authority of competent jurisdiction (excluding gaming regulators, other than with respect to certain gaming regulatory approvals) has issued a final and non-appealable governmental order prohibiting the Merger, (iii) the stockholders of the Company fail to approve the Merger Agreement and (iv) the other party materially breaches its representations, warranties or covenants in the Merger Agreement, subject in certain cases, to the right of the breaching party to cure the breach.
17
Upon a termination of the Merger Agreement under specified circumstances, including due to a change in the Board’s recommendation that the Company’s stockholders vote to approve the Merger Agreement, the entry by the Company into a definitive agreement with respect to a Superior Proposal, or certain other triggering events set forth in the Merger Agreement, the Company may be required to pay Parent a termination fee. In addition, upon a termination of the Merger Agreement under specified circumstances, including in the event of termination resulting from the failure to obtain certain gaming regulatory approvals, Parent may be required to pay the Company a termination fee.
The Merger is expected to be completed in mid-2025. Following the closing of the Merger, shares of the Company’s common stock will no longer be quoted on the OTCQB and the Company will become a privately held company.
18
Results of operations for the three months ended June 30, 2024 and 2023.
Our revenue consists of the following components:
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|||||||
|
2024 |
|
|
2023 |
|
|
$ Change |
|
|
% Change |
|
||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
||||
GG Core Revenues: |
|
|
|
|
|
|
|
|
|
|
|
||||
Recurring License Revenue |
$ |
5,271,501 |
|
|
$ |
3,784,317 |
|
|
$ |
1,487,184 |
|
|
|
39 |
% |
Perpetual License Sales of Progressive Gaming Systems |
|
1,497,300 |
|
|
|
1,556,700 |
|
|
|
(59,400 |
) |
|
|
-4 |
% |
Gross Revenue |
|
6,768,801 |
|
|
|
5,341,017 |
|
|
|
1,427,784 |
|
|
|
27 |
% |
Royalties Netted against Gross Revenue |
|
(788,259 |
) |
|
|
- |
|
|
|
(788,259 |
) |
|
|
0 |
% |
Total GG Core Revenue |
$ |
5,980,542 |
|
|
$ |
5,341,017 |
|
|
$ |
639,525 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
||||
GG Digital Revenues: |
|
|
|
|
|
|
|
|
|
|
|
||||
Recurring License Revenue |
$ |
3,528,465 |
|
|
$ |
2,795,436 |
|
|
$ |
733,029 |
|
|
|
26 |
% |
Gross Revenue |
|
3,528,465 |
|
|
|
2,795,436 |
|
|
|
733,029 |
|
|
|
26 |
% |
Royalties Netted against Gross Revenue |
|
(986,505 |
) |
|
|
(611,117 |
) |
|
|
(375,388 |
) |
|
|
61 |
% |
Total GG Digital Revenue |
$ |
2,541,960 |
|
|
$ |
2,184,319 |
|
|
$ |
357,641 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Consolidated Revenues: |
|
|
|
|
|
|
|
|
|
|
|
||||
Recurring License Revenue |
$ |
8,799,966 |
|
|
$ |
6,579,753 |
|
|
$ |
2,220,213 |
|
|
|
34 |
% |
Perpetual License Sales of Progressive Gaming Systems |
|
1,497,300 |
|
|
|
1,556,700 |
|
|
|
(59,400 |
) |
|
|
-4 |
% |
Gross Revenue |
|
10,297,266 |
|
|
|
8,136,453 |
|
|
|
2,160,813 |
|
|
|
27 |
% |
Royalties Netted against Gross Revenue |
|
(1,774,764 |
) |
|
|
(611,117 |
) |
|
|
(1,163,647 |
) |
|
|
190 |
% |
Revenue |
$ |
8,522,502 |
|
|
$ |
7,525,336 |
|
|
$ |
997,166 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of ancillary products and assembled components |
$ |
598,696 |
|
|
$ |
499,590 |
|
|
$ |
99,106 |
|
|
|
20 |
% |
Selling, general and administrative |
|
4,413,733 |
|
|
|
3,634,178 |
|
|
|
779,555 |
|
|
|
21 |
% |
Research and development |
|
269,479 |
|
|
|
199,665 |
|
|
|
69,814 |
|
|
|
35 |
% |
Depreciation and amortization |
|
701,997 |
|
|
|
495,134 |
|
|
|
206,863 |
|
|
|
42 |
% |
Stock-based compensation |
|
194,613 |
|
|
|
245,136 |
|
|
|
(50,523 |
) |
|
|
-21 |
% |
Total costs and expenses |
|
6,178,518 |
|
|
|
5,073,703 |
|
|
|
1,104,815 |
|
|
|
22 |
% |
Income from operations |
|
2,343,984 |
|
|
|
2,451,633 |
|
|
|
(107,649 |
) |
|
|
-4 |
% |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
208,519 |
|
|
|
139,007 |
|
|
|
69,512 |
|
|
|
50 |
% |
Interest expense |
|
(2,280,948 |
) |
|
|
(2,242,042 |
) |
|
|
(38,906 |
) |
|
|
2 |
% |
Foreign currency exchange (loss) gain |
|
(565 |
) |
|
|
24,848 |
|
|
|
(25,413 |
) |
|
|
-102 |
% |
Total other expense, net |
|
(2,072,994 |
) |
|
|
(2,078,187 |
) |
|
|
5,193 |
|
|
|
0 |
% |
Income before provision for income taxes |
$ |
270,990 |
|
|
$ |
373,446 |
|
|
$ |
(102,456 |
) |
|
|
-27 |
% |
Provision for income taxes |
|
(28,293 |
) |
|
|
(16,677 |
) |
|
|
(11,616 |
) |
|
|
70 |
% |
Net income |
$ |
242,697 |
|
|
$ |
356,769 |
|
|
$ |
(114,072 |
) |
|
|
-32 |
% |
Revenue
Recurring core revenue increased $1,487,184, or 39% for the three months ended June 30, 2024, as compared to the same period in the prior year. This change was driven primarily by favorable revenue from our EZ Baccarat distribution arrangement which commenced in September 2023 and the continued success of our side bets and progressive products. Royalties netted against gross core revenue increased $788,259 for the three months ended June 30, 2024, as compared to the same period in the prior year. This increase was attributable to royalties paid on our EZ Baccarat revenues. Perpetual license sales of our progressive gaming systems to customers of $1,497,300 were down 4% percent for the three months ended June 30, 2024, as compared to the same period in the prior year. Gross digital revenues of $3,528,465, were up $733,029, or 26% for the three months ended June 30, 2024, as compared to the same period in the prior year. This favorable increase reflects the ongoing expansion of our digital content into new markets and the continued success of offering competitive products with brand recognition, most notable 21+3. Net of royalties, digital revenues grew to $2,541,960, up 16% for the three months ended June 30, 2024, as compared to the same period in the prior year.
19
Costs and Expenses
Cost of ancillary products and assembled component expense increased $99,106, or 20% for the three months ended June 30, 2024, as compared to the same period in the prior year. The activity in cost of ancillary products and assembled components reflects the component costs associated with the perpetual license sales of our progressive gaming systems to customers.
Selling, general and administrative expenses increased $779,555, or 21% for the three months ended June 30, 2024, as compared to the same period in the prior year. This change was due to expenses associated with special projects of $675,044, most notable legal expenses incurred related to the acquisition by Evolution and to a lesser extent, driven by higher internal labor and related expenses (base salary, commissions, payroll-related taxes, bonus accrual and travel), increased information technology costs and those royalties that are not netted against revenues. Normalized for the impact of the acquisition by Evolution and excluding the related transaction fees of $675,044, selling, general, and administrative expenses increased $104,511, or 3% for the three months ended June 30, 2024, as compared to the same period in the prior year.
Research and development expenses for the three months ended June 30, 2024, were $269,479 compared to $199,665 for the comparable prior-year period, representing an increase of $69,814, or 35%. The increase was due to higher payroll costs from higher headcount, employee bonuses, and higher consulting fees.
Depreciation and amortization increased $206,863, or 42% for the three months ended June 30, 2024, as compared to the same period in the prior year. This increase was driven by certain intangible assets that began to amortize in July 2023.
Stock-based compensation expenses decreased 21% for the three months ended June 30, 2024, as compared to the same period in the prior year. The decrease was due primarily to a change in the level and the composition of fees paid to members of our Board of Directors in 2024 and lower stock-based compensation for officers and consultants.
Interest expense was up 2% for the three months ended June 30, 2024, as compared to the same period in the prior year. The increase was due to higher interest rates on our variable debt. Interest income was up 50% compared to the prior year period, benefitting from higher cash balances and higher interest rates.
Income tax provision was $28,293 for the three months ended June 30, 2024, compared to income tax provision of $16,677 for the comparable prior-year period. The increase in expense is primarily driven by the increased amount of permanent differences mainly attributable to the legal expenses incurred related to the acquisition by Evolution in the current period and offset by decreased income before provision for income taxes.
Primarily as a result of the factors described above, we had net income of $242,697 for the three months ended June 30, 2024, as compared to net income of approximately $356,769 for the same period in the prior year. Normalized for the impact of the acquisition by Evolution and excluding the related transactions fees of $675,044 from selling, general, and administrative expenses, net income increased $560,972, or 157% for the three months ended June 30, 2024, as compared to the same period in the prior year.
20
Results of operations for the six months ended June 30, 2024 and 2023.
Our revenue consists of the following components:
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
|||||||
|
2024 |
|
|
2023 |
|
|
$ Change |
|
|
% Change |
|
||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
||||
GG Core Revenues: |
|
|
|
|
|
|
|
|
|
|
|
||||
Recurring License Revenue |
$ |
10,670,229 |
|
|
$ |
7,687,947 |
|
|
$ |
2,982,282 |
|
|
|
39 |
% |
Perpetual License Sales of Progressive Gaming Systems |
|
2,302,493 |
|
|
|
2,824,950 |
|
|
|
(522,457 |
) |
|
|
-18 |
% |
Gross Revenue |
|
12,972,722 |
|
|
|
10,512,897 |
|
|
|
2,459,825 |
|
|
|
23 |
% |
Royalties Netted against Gross Revenue |
|
(1,594,539 |
) |
|
|
- |
|
|
|
(1,594,539 |
) |
|
|
0 |
% |
Total GG Core Revenue |
$ |
11,378,183 |
|
|
$ |
10,512,897 |
|
|
$ |
865,286 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
||||
GG Digital Revenues: |
|
|
|
|
|
|
|
|
|
|
|
||||
Recurring License Revenue |
$ |
6,984,418 |
|
|
$ |
5,832,543 |
|
|
$ |
1,151,875 |
|
|
|
20 |
% |
Gross Revenue |
|
6,984,418 |
|
|
|
5,832,543 |
|
|
|
1,151,875 |
|
|
|
20 |
% |
Royalties Netted against Gross Revenue |
|
(1,839,033 |
) |
|
|
(1,397,570 |
) |
|
|
(441,463 |
) |
|
|
32 |
% |
Total GG Digital Revenue |
$ |
5,145,385 |
|
|
$ |
4,434,973 |
|
|
$ |
710,412 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Consolidated Revenues: |
|
|
|
|
|
|
|
|
|
|
|
||||
Recurring License Revenue |
$ |
17,654,647 |
|
|
$ |
13,520,490 |
|
|
$ |
4,134,157 |
|
|
|
31 |
% |
Perpetual License Sales of Progressive Gaming Systems |
|
2,302,493 |
|
|
|
2,824,950 |
|
|
|
(522,457 |
) |
|
|
-18 |
% |
Gross Revenue |
|
19,957,140 |
|
|
|
16,345,440 |
|
|
|
3,611,700 |
|
|
|
22 |
% |
Royalties Netted against Gross Revenue |
|
(3,433,572 |
) |
|
|
(1,397,570 |
) |
|
|
(2,036,002 |
) |
|
|
146 |
% |
Revenue |
$ |
16,523,568 |
|
|
$ |
14,947,870 |
|
|
$ |
1,575,698 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of ancillary products and assembled components |
$ |
1,005,076 |
|
|
$ |
851,600 |
|
|
$ |
153,476 |
|
|
|
18 |
% |
Selling, general and administrative |
|
8,618,561 |
|
|
|
7,418,835 |
|
|
|
1,199,726 |
|
|
|
16 |
% |
Research and development |
|
521,365 |
|
|
|
406,425 |
|
|
|
114,940 |
|
|
|
28 |
% |
Depreciation and amortization |
|
1,388,190 |
|
|
|
1,071,476 |
|
|
|
316,714 |
|
|
|
30 |
% |
Stock-based compensation |
|
335,855 |
|
|
|
490,059 |
|
|
|
(154,204 |
) |
|
|
-31 |
% |
Total costs and expenses |
|
11,869,047 |
|
|
|
10,238,395 |
|
|
|
1,630,652 |
|
|
|
16 |
% |
Income from operations |
|
4,654,521 |
|
|
|
4,709,475 |
|
|
|
(54,954 |
) |
|
|
-1 |
% |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
410,385 |
|
|
|
223,757 |
|
|
|
186,628 |
|
|
|
83 |
% |
Interest expense |
|
(4,570,295 |
) |
|
|
(4,445,677 |
) |
|
|
(124,618 |
) |
|
|
3 |
% |
Foreign currency exchange gain |
|
11,612 |
|
|
|
2,160 |
|
|
|
9,452 |
|
|
|
438 |
% |
Total other expense, net |
|
(4,148,298 |
) |
|
|
(4,219,760 |
) |
|
|
71,462 |
|
|
|
-2 |
% |
Income before provision for income taxes |
$ |
506,223 |
|
|
$ |
489,715 |
|
|
$ |
16,508 |
|
|
|
3 |
% |
Provision for income taxes |
|
(54,618 |
) |
|
|
(22,252 |
) |
|
|
(32,366 |
) |
|
|
145 |
% |
Net income |
$ |
451,605 |
|
|
$ |
467,463 |
|
|
$ |
(15,858 |
) |
|
|
-3 |
% |
Revenue
Recurring core revenue increased $2,982,282, or 39% for the six months ended June 30, 2024, as compared to the same period in the prior year. This change was driven primarily by favorable revenue from our EZ Baccarat distribution arrangement which commenced in September 2023 and the continued success of our side bets and progressive products. Royalties netted against gross core revenue increased $1,594,539 for the six months ended June 30, 2024, as compared to the same period in the prior year. This increase was attributable to royalties paid on our EZ Baccarat revenues. Perpetual license sales of our progressive gaming systems to customers of $2,302,493 were down 18% percent for the six months ended June 30, 2024, as compared to the same period in the prior year. We expect perpetual license sales of our progressive gaming systems to customers to decline in the second half of 2024 as compared to the first half of 2024. Gross digital revenues of $6,984,418 were up $1,151,875, or 20% for the six months ended June 30, 2024, as compared to the same period in the prior year. This favorable increase reflects the ongoing expansion of our digital content into new markets and the continued success of offering competitive products with brand recognition, most notable 21+3. Net of royalties, digital revenues grew to $5,145,385, up 16% for the six months ended June 30, 2024, as compared to the same period in the prior year
21
Costs and Expenses
Cost of ancillary products and assembled component expense increased $153,476, or 18% for the six months ended June 30, 2024, as compared to the same period in the prior year. The activity in Cost of ancillary products and assembled components reflects the component costs associated with the perpetual license sales of our progressive gaming systems to customers.
Selling, general and administrative expenses increased $1,199,726, or 16% for the six months ended June 30, 2024, as compared to the same period in the prior year. This change was due to expenses associated with special projects of $675,044, most notable legal expenses incurred related to the acquisition by Evolution and to a lesser extent, driven by higher internal labor and related expenses (base salary, commissions, payroll-related taxes, bonus accrual and travel), increased information technology costs, and those royalties that are not netted against revenues. Normalized for the impact of the acquisition by Evolution and excluding the related transaction fees of $675,044, selling, general, and administrative expenses increased $524,682, or 7% for six months ended June 30, 2024, as compared to the same period in the prior year.
Research and development expenses were up $114,940, or 28% for the six months ended June 30, 2024, as compared to the same period in the prior year. The increase was due to higher payroll costs from higher headcount, employee bonuses, option exercises in the period, and higher consulting fees.
Depreciation and amortization increased $316,714, or 30% for the six months ended June 30, 2024, as compared to the same period in the prior year. This increase was driven by certain intangible assets that began to amortize in July 2023.
Stock-based compensation expenses decreased $154,204, or 31% for the six months ended June 30, 2024, as compared to the same period in the prior year. The decrease was due primarily to a change in the level and the composition of fees paid to members of our Board of Directors in 2024 and lower stock-based compensation for officers and consultants.
Interest expense was up $124,618, or 3% for the six months ended June 30, 2024, as compared to the same period in the prior year. The increase was due to higher interest rates on our variable debt. Interest income was up $186,628, or 83% compared to the prior year period, benefitting from higher cash balances and higher interest rates.
Income tax provision was $54,618 for the six months ended June 30, 2024, compared to income tax provision of $22,252 for the comparable prior-year period. The increase in expense is primarily driven by the increased amount of permanent differences mainly attributable to the legal expenses incurred related to the acquisition by Evolution in the current period.
Primarily as a result of the factors described above, we had net income of $451,605 for the six months ended June 30, 2024, as compared to net income of approximately $467,463 for the same period in the prior year. Normalized for the impact of the acquisition by Evolution and excluding the related transactions fees of $675,044 from selling, general, and administrative expenses, net income increased $659,186, or 141% for the six months ended June 30, 2024, as compared to the same period in the prior year.
22
Adjusted EBITDA. Adjusted EBITDA includes adjustments to net income to exclude interest, income taxes, depreciation, amortization, stock-based compensation, foreign currency exchange (gain) loss and severance and other expenses related to litigation. Adjusted EBITDA is not a measure of performance defined in accordance with 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 to Adjusted EBITDA is as follows:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
Adjusted EBITDA Reconciliation: |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Net income |
|
$ |
242,697 |
|
|
$ |
356,769 |
|
|
$ |
451,605 |
|
|
$ |
467,463 |
|
Interest expense |
|
|
2,280,948 |
|
|
|
2,242,042 |
|
|
|
4,570,295 |
|
|
|
4,445,677 |
|
Interest income |
|
|
(208,519 |
) |
|
|
(139,007 |
) |
|
|
(410,385 |
) |
|
|
(223,757 |
) |
Provision for income taxes |
|
|
28,293 |
|
|
|
16,677 |
|
|
|
54,618 |
|
|
|
22,252 |
|
Depreciation and amortization |
|
|
701,997 |
|
|
|
495,134 |
|
|
|
1,388,190 |
|
|
|
1,071,476 |
|
EBITDA |
|
|
3,045,416 |
|
|
|
2,971,615 |
|
|
|
6,054,323 |
|
|
|
5,783,111 |
|
Stock-based compensation (1) |
|
|
194,613 |
|
|
|
245,136 |
|
|
|
335,855 |
|
|
|
490,059 |
|
Employee severance costs and other expenses (2) |
|
|
— |
|
|
|
26,209 |
|
|
|
24,482 |
|
|
|
26,209 |
|
CEO transition expenses (3) |
|
|
— |
|
|
|
— |
|
|
|
8,200 |
|
|
|
— |
|
Professional fees, acquisition costs and other (4) |
|
|
675,044 |
|
|
|
— |
|
|
|
675,044 |
|
|
|
5,321 |
|
Foreign exchange loss (gain) (5) |
|
|
565 |
|
|
|
(24,848 |
) |
|
|
(11,612 |
) |
|
|
(2,160 |
) |
Adjusted EBITDA |
|
$ |
3,915,638 |
|
|
$ |
3,218,112 |
|
|
$ |
7,086,292 |
|
|
$ |
6,302,540 |
|
(1) Represents the non-cash expense associated with the value of equity awards granted to employees, directors and consultants by the Company.
(2) Represents costs associated with the severance of employees
(3) Represents Company reimbursed moving expenses incurred by the new President and CEO, Matthew Reback.
(4) Represents professional fees and transaction related fees incurred related to acquisitions, mergers and professional fees incurred for other projects not considered part of the normal course of business.
(5) Represents foreign exchange losses and gains associated with the fluctuations of foreign currency rates.
Liquidity and capital resources. We have generally been able to fund our continuing operations, our investments, and the interest expense and principal amortization under our existing borrowings through cash flow from operations. We may require additional capital to undertake acquisitions or to repay in full our indebtedness. Our ability to access capital for these activities will depend on conditions in the capital markets and investors’ perceptions of our business prospects and such conditions and perceptions may not always favor us.
As of June 30, 2024, we had total current assets of $24,041,400 and total assets of $41,470,750. This compares to $22,156,035 and $40,475,800, respectively, as of December 31, 2023. The increase in current assets as of June 30, 2024 compared to December 31, 2023 was due to the increased cash and cash equivalents driven by cash provided from operating activities, most notably increased collections of receivables. These increases were offset by a decrease in prepaid expenses for insurance, IT expenses, and deposits for trade shows. The increase in total assets as of June 30, 2024 compared to December 31, 2023 was primarily due to the increase of current assets noted above and offset by a decrease in other intangible assets and operating lease right-of-use assets as a result of amortization in the 2024 period.
Our total current liabilities as of June 30, 2024 compared to December 31, 2023 decreased to $4,837,667 from $4,875,967. This decrease was primarily due to a decrease in accrued royalties, and offset by increased accounts payable.
Based on our current forecast of operations, we believe we will have sufficient liquidity to fund our operations for at least the next 12 months and to meet the obligations under our financing arrangements as they come due.
We continue to file applications for new or enhanced licenses in several jurisdictions, which may result in significant future legal and regulatory expenses. A significant increase in such expenses may require us to postpone growth initiatives or investments in personnel, assemblies in process and research and development of our products. It is our intention to continue such initiatives and investments. However, to the extent we are not able to achieve our growth objectives or raise additional capital, we will need to evaluate the reduction of operating expenses.
23
Our operating activities provided cash of $3,873,347 for the six months ended June 30, 2024, compared to $2,494,400 provided for the comparable prior period. This change is attributable to a favorable variance of $1,222,127 in use of assets and liabilities that relate to operations. Additionally, depreciation and amortization increased $316,714 related to increased capitalization of intangible assets and offset by a $154,204 decline in stock-based compensation from the vesting of stock options.
Investing activities used cash of $676,315 for the six months ended June 30, 2024, compared to cash used of $773,559 for the six months ended June 30, 2023. This decrease in cash used was primarily due to the acquisition of assets deployed at client locations and investment in internally developed software in the 2024 period.
Cash used in financing activities during the six months ended June 30, 2024, was $465,317. This compares to $1,204,584 cash used by financing activities for the six months ended June 30, 2023. The decrease in cash used was due to the absence of principal payments on our borrowings based on the "Excess Cash Flow" calculation as defined by the terms in the Fortress Credit Agreement (Note 6), in the 2024 period.
Critical accounting policies and estimates. Our significant accounting policies and estimates are described in our 2023 Form 10-K. There have been no material changes to those policies.
Off-balance sheet arrangements. As of June 30, 2024, there were no off-balance sheet arrangements.
Recently issued accounting pronouncements. We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A smaller reporting company is not required to provide the information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed submitted under the Exchange Act is accumulated and communicated to management including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2024, our disclosure controls and procedures were effective.
Changes in internal control over financial reporting
No change in our internal control over financial reporting occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the effectiveness of control and procedures and internal controls
Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives, and our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
ITEM 5. OTHER INFORMATION
None
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have been named in and have brought lawsuits in the normal course of business. See Note 7 above and Note 10 to our audited financial statements included in Item 8 “Financial Statements and Supplementary Financial Information” in our 2023 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
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ITEM 6. EXHIBITS
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adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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101.INS |
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Inline XBRL Instance Document – the instance does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Galaxy Gaming, Inc. |
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Date: |
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August 9, 2024 |
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By: |
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/s/ MATTHEW REBACK |
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Matthew Reback |
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President and Chief Executive Officer (Principal Executive Officer) |
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Galaxy Gaming, Inc. |
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Date: |
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August 9, 2024 |
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By: |
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/s/ STEVEN KOPJO |
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Steven Kopjo |
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Chief Financial Officer (Principal Accounting Officer) |
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