The accompanying notes are an integral part of the financial statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS AND RECENT DEVELOPMENTS
Unless the context indicates otherwise, references to “Galaxy Gaming, Inc.,” “we,” “us,” “our,” or the “Company,” refer to Galaxy Gaming, Inc., a Nevada corporation (“Galaxy Gaming”).
We are an established global gaming company specializing in the design, development, assembly, marketing and acquisition of proprietary casino table games and associated technology, platforms and systems for the casino gaming industry. Casinos use our proprietary products and services to enhance their gaming floor operations and improve their profitability, productivity and security, as well as to offer popular cutting-edge gaming entertainment content and technology to their players. We market our products and services to land-based and riverboat gaming companies located in North America, the Caribbean, Central America, the British Isles, Europe and Africa and to cruise ship companies and internet gaming sites worldwide.
On March 14, 2019, we announced the completion of our previously disclosed strategic alternatives review. After a thorough evaluation of a
range of strategic alternatives, including a sale of the Company, we have decided to continue our existing plan of product line and geographic expansions as an independent company.
On May 6, 2019, we redeemed all 23,271,667 shares of our common stock held by Triangulum Partners, LLC (“Triangulum”), an entity controlled by Robert B. Saucier, Galaxy Gaming's founder, and, prior to the redemption, the holder of a majority of our outstanding common stock. The redemption of Triangulum’s shares was given effect pursuant to our Articles of Incorporation (the “Articles”), which expressly provide that if certain events occur in relation to a stockholder that is required to undergo a gaming suitability review or similar investigative process, we have the option to purchase all or any part of such stockholder’s shares at a price per share that is equal to the average closing share price over the thirty calendar days preceding the purchase. The average closing share price over the thirty calendar days preceding the redemption was $1.68 per share.
As consideration for the redemption, we issued a promissory note payable to Triangulum in the face amount of $39,096,401 (the “Triangulum Promissory Note”). The Triangulum Promissory Note has no mandatory amortization, matures on May 5, 2029, and bears interest at a rate of 2% per annum, with accrued interest payable annually in arrears. It is unsecured and is subordinated to our existing and future indebtedness in accordance with its terms. We may prepay principal and any accrued interest in full or in part at any time.
Furthermore, we filed a lawsuit on May 6, 2019 seeking (i) a declaratory judgment that we acted lawfully and in full compliance with the Articles when we redeemed the Triangulum shares and (ii) certain remedies for breach of fiduciary duty and breach of contract by Triangulum and its Managing Member, Mr. Saucier (the “Triangulum Lawsuit”). The suit alleges that the redemption and the other relief sought by us are appropriate and in accordance with the Articles of Incorporation (
Galaxy Gaming, Inc. v. Triangulum Partners, LLC, Robert B. Saucier,
et al
, Clark County, Nevada district court (Case No. A-19-794293-B)).
The defendants to that lawsuit responded to the complaint, and Triangulum filed counterclaims based on a theory of wrongful redemption by us. The defendants also filed a Motion for Preliminary Injunction seeking the redeemed shares be held in a constructive trust. On July 11, 2019, the Court denied the defendants’ Motion for Preliminary Injunction and all related relief. Thereafter, Triangulum filed amended counterclaims. We moved to dismiss the counterclaims on a number of legal grounds and will respond when and as appropriate.
Effective June 3, 2019, our Board of Directors (the “Board”) appointed Michael Gavin Isaacs as an independent director. Upon joining the Board, Mr. Isaacs entered into a Board of Directors Services Agreement pursuant to which, among other things, Mr. Isaacs shall receive 75,000 shares of our restricted common stock, which vest in three annual installments on each of the first three anniversary dates of the services agreement. Mr. Isaacs shall also receive quarterly grants of 12,400 common shares (vesting immediately at grant date) for his continued service as a director, and shall receive $42,000 in cash compensation annually, paid monthly in arrears. As a non-employee director, he will be entitled to receive any other annual cash and equity compensation payable to our other non-employee directors from time to time.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation.
The accompanying condensed financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America (“U.S. GAAP”)
and the rules of
the Securities and Exchange Commission (“SEC”)
. In the opinion of management,
the accompanying unaudited interim condensed financial statements contain all necessary adjustments (including
all
those of a recurring nature
and those necessary in order for the financial statements to be not misleading)
and all disclosures to present fairly our financial position and the results of our operations and cash flows for the periods presented
.
As permitted by the rules and regulations of the SEC, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations.
These unaudited interim condensed financial statements should be read in conjunction with the financial statements and the related notes thereto included in our Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on April 1, 2019 (the “2018 10-K”).
8
The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
Basis of accounting.
The financial statements have been prepared on the accrual basis of accounting in conformity with U.S. GAAP. Revenues are recognized as income when earned and expenses are recognized when they are incurred. We do not have significant categories of cost of revenues. Expenses such as wages, consulting expenses, legal, regulatory and professional fees and rent are recorded when the expense is incurred.
Use of estimates and assumptions.
We are required to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our company and the industry as a whole, and information available from other outside sources. Our estimates affect reported amounts for assets, liabilities, revenues, expenses and related disclosures. Actual results may differ from initial estimates.
Reclassifications.
Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period financial statement presentations.
Other Significant Accounting Policies.
S
ee Note 3 in Item 8. “Financial Statements and Supplementary Data” included in our 2018 10-K.
Recently adopted accounting standards
Leases.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“
ASU”) No. 2016-02,
Leases (Topic 842)
(“ASC 842”)
.
The amended guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. We have adopted the new standard effective January 1, 2019, using the modified retrospective transition approach and recognized $161,310 of right-of-use operating lease assets and $175,335 of operating lease liabilities on our balance sheets upon adoption (Note 9). In addition, we eliminated leasehold improvements related to a finance lease from fixed assets, recognized $14,286 of right-of-use finance lease assets and maintained the finance lease liability at the carrying cost of the previous capital lease liability of $14,198 upon adoption. The adoption has increased our total assets and liabilities as of January 1, 2019. Lessor accounting related to our enhanced table system remains unchanged.
New accounting standards not yet adopted
Fair Value Measurement.
In August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement
. ASU 2018-13 addresses the required disclosures around fair value measurement, removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The standard is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted. We do not believe the adoption of this guidance will have a material impact on our financial statements.
Internal-Use Software.
In August 2018, the FASB issued ASU No. 2018-15,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
. ASU 2018-15. This new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption (including early adoption in any interim period) permitted. We do not believe the adoption of this guidance will have a material impact on our financial statements.
NOTE 3. REVENUE RECOGNITION
Revenue recognition.
We generate revenue primarily from the licensing of our intellectual property. We also, occasionally, receive a one-time sale of certain products and/or reimbursement of our equipment.
License fees.
We derive product lease and royalty revenue
from negotiated recurring fee license agreements and the performance of our products. We account for these agreements as month-to-month contracts and recognize revenue each month as we satisfy our performance obligations by granting access to intellectual property to our clients. In addition, revenue associated with performance-based agreements is recognized during the month that the usage of the product or intellectual property occurs.
9
Some of our intellectual proper
ty
require
s
the installation of certain equipment
and
b
oth the intellectual propert
y
and
the related
equipment are licensed in one bundled package. We have determined that the equipment is not distinct from the intellectual propert
y
and, therefore, we have only one performance obligation and
, as a result,
the allocation of the transaction price to different performance obligations is not necessary.
Product sales.
Occasionally, we sell certain incidental products or receive reimbursement of our equipment after the commencement of the new license agreement. Revenue from such sales is recognized as a separate performance obligation when we ship the items.
Disaggregation of revenue
The following table disaggregates our revenue by major source for the three and six months ended June 30, 2019 and 2018:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table games
|
|
$
|
5,395,187
|
|
|
$
|
4,413,878
|
|
|
$
|
10,737,594
|
|
|
$
|
8,607,035
|
|
Other
|
|
|
3,999
|
|
|
|
122,295
|
|
|
|
8,344
|
|
|
|
289,832
|
|
Total revenue
|
|
$
|
5,399,186
|
|
|
$
|
4,536,173
|
|
|
$
|
10,745,938
|
|
|
$
|
8,896,867
|
|
The following table disaggregates our revenue by geographic location for the three and six months ended June 30, 2019 and 2018:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America and Caribbean
|
|
$
|
3,907,953
|
|
|
$
|
3,494,692
|
|
|
$
|
7,752,478
|
|
|
$
|
6,945,401
|
|
Europe
|
|
|
1,491,233
|
|
|
|
1,041,481
|
|
|
|
2,993,460
|
|
|
|
1,951,466
|
|
Total revenue
|
|
$
|
5,399,186
|
|
|
$
|
4,536,173
|
|
|
$
|
10,745,938
|
|
|
$
|
8,896,867
|
|
Revenue contract liability
We invoice our clients monthly in advance for unlimited use of our intellectual property licenses and
recognize a revenue contract liability that represents such advanced billing
to our clients for unsatisfied performance. We reduce the revenue contract liability and recognize revenue when we transfer those goods or services and, therefore, satisfy our performance obligation.
The table below summarizes changes in the revenue contract liability during the six months ended June 30, 2019:
Beginning balance – January 1, 2019
|
|
$
|
1,438,492
|
|
Increase (advanced billings)
|
|
|
7,725,356
|
|
Decrease (revenue recognition)
|
|
|
(7,841,078
|
)
|
Ending balance – June 30, 2019
|
|
$
|
1,322,770
|
|
Revenue recognized during the
six months ended June 30, 2019
that was included in the beginning balance of revenue contract liability above was $1,430,160.
NOTE 4. INVENTORY
Inventory, net consisted of the following at June 30, 2019 and December 31, 2018:
|
|
2019
|
|
|
2018
|
|
Raw materials and component parts
|
|
$
|
434,160
|
|
|
$
|
267,517
|
|
Finished goods
|
|
|
343,304
|
|
|
|
306,335
|
|
Inventory, gross
|
|
|
777,464
|
|
|
|
573,852
|
|
Less: inventory reserve
|
|
|
(42,038
|
)
|
|
|
(42,038
|
)
|
Inventory, net
|
|
$
|
735,426
|
|
|
$
|
531,814
|
|
10
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following at June 30, 2019 and December 31, 2018:
|
|
2019
|
|
|
2018
|
|
Furniture and fixtures
|
|
$
|
312,640
|
|
|
$
|
312,640
|
|
Automotive vehicles
|
|
|
215,127
|
|
|
|
215,127
|
|
Leasehold improvements
|
|
|
6,843
|
|
|
|
156,843
|
|
Computer equipment
|
|
|
170,293
|
|
|
|
159,838
|
|
Office equipment
|
|
|
53,484
|
|
|
|
53,484
|
|
Property and equipment, gross
|
|
|
758,387
|
|
|
|
897,932
|
|
Less: accumulated depreciation
|
|
|
(616,611
|
)
|
|
|
(698,347
|
)
|
Property and equipment, net
|
|
$
|
141,776
|
|
|
$
|
199,585
|
|
Property and equipment, net included $150,000 of leasehold improvements acquired under capital leases and $135,714 of related accumulated depreciation as of December 31, 2018, both of which were reclassified to finance lease right-of-use assets upon the adoption of ASC 842 on January 1, 2019 (Note 9).
For the six months ended June 30, 2019 and 2018, depreciation expense related to property and equipment was $53,978 and $65,783, respectively.
NOTE 6. ASSETS DEPLOYED AT CLIENT LOCATIONS
Assets deployed at client locations, net
consisted of the following at June 30, 2019 and December 31, 2018:
|
|
2019
|
|
|
2018
|
|
Enhanced table systems
|
|
$
|
1,033,248
|
|
|
$
|
946,237
|
|
Less: accumulated depreciation
|
|
|
(591,545
|
)
|
|
|
(474,675
|
)
|
Assets deployed at client locations, net
|
|
$
|
441,703
|
|
|
$
|
471,562
|
|
For the six months ended June 30, 2019 and 2018, depreciation expense related to a
ssets deployed at client locations was
$139,584 and $93,101, respectively.
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill.
A goodwill balance of $1,091,000 was created as a result of
an asset acquisition completed in October 2011 from Prime Table Games, LLC.
Other intangible assets, net.
Other intangible assets, net consisted of the following at June 30, 2019 and December 31, 2018:
|
|
2019
|
|
|
2018
|
|
Patents
|
|
$
|
13,485,000
|
|
|
$
|
13,485,000
|
|
Customer relationships
|
|
|
3,400,000
|
|
|
|
3,400,000
|
|
Trademarks
|
|
|
2,880,967
|
|
|
|
2,880,967
|
|
Non-compete agreements
|
|
|
660,000
|
|
|
|
660,000
|
|
Internally-developed software
|
|
|
153,415
|
|
|
|
126,015
|
|
Other intangible assets, gross
|
|
|
20,579,382
|
|
|
|
20,551,982
|
|
Less: accumulated amortization
|
|
|
(12,416,990
|
)
|
|
|
(11,661,730
|
)
|
Other intangible assets, net
|
|
$
|
8,162,392
|
|
|
$
|
8,890,252
|
|
For the six months ended June 30, 2019 and 2018, amortization expense related to the other intangible assets was $755,260 and $751,464, respectively.
11
Estimated
future
amortization expense
is
as follows:
Twelve Months Ending June 30,
|
|
Total
|
|
2020
|
|
$
|
1,509,416
|
|
2021
|
|
|
1,428,674
|
|
2022
|
|
|
1,403,297
|
|
2023
|
|
|
538,385
|
|
2024
|
|
|
252,930
|
|
Thereafter
|
|
|
3,029,690
|
|
Total amortization
|
|
$
|
8,162,392
|
|
NOTE 8. ACCRUED EXPENSES
Accrued expenses consisted of the following at June 30, 2019 and December 31, 2018:
|
|
2019
|
|
|
2018
|
|
Payroll and related
|
|
$
|
686,465
|
|
|
$
|
1,136,808
|
|
Interest
|
|
|
119,811
|
|
|
|
—
|
|
Professional fees
|
|
|
76,769
|
|
|
|
23,135
|
|
Commissions and royalties
|
|
|
70,049
|
|
|
|
113,462
|
|
Other
|
|
|
69,599
|
|
|
|
22,165
|
|
Total accrued expenses
|
|
$
|
1,022,693
|
|
|
$
|
1,295,570
|
|
NOTE 9. LEASES
Lessee
We have operating leases for corporate offices, two satellite facilities in the state of Washington and certain equipment. We account for lease components (such as rent payments) separately from the non-lease components (such as common-area maintenance costs, real estate and sales taxes and insurance costs). Discount rate represents the interest rate implicit in each lease or our incremental borrowing rate at lease commencement date.
Some leases include one or more options to renew and the exercise of lease renewal options is at our sole discretion. The depreciable life of assets and leasehold improvements is limited by the expected lease term.
As of June 30, 2019, our leases have remaining lease terms ranging from six months to 36 months. Gross right-of-use assets recorded under finance leases and operating leases were $14,286 and $285,616, respectively, and the related accumulated amortization was $14,286 and $123,313, respectively.
Effective April 1, 2014, we entered into a five-year lease for a new corporate office in Las Vegas, Nevada with an unrelated third party (the “Spencer Lease”). The Spencer Lease is for approximately 24,000 square feet of space, comprising of approximately 16,000 square feet of office space and 8,000 square feet of warehouse space.
The initial term of the Spencer Lease commenced on April 1, 2014 and was to expire on June 30, 2019. Annual base rent was $153,000 in the first year, which increases by approximately 4% each year and we are also obligated to pay real estate taxes and other building operating costs. Subject to certain conditions, we have certain rights under the Spencer Lease, including rights of first offer to purchase the premises if the landlord elects to sell.
On January 28, 2019, we executed a first amendment to the Spencer Lease to amend the lease expiration date from June 30, 2019 to December 31, 2019 with monthly base rents of $20,508 from July 1, 2019 to December 31, 2019. As a result of the amendment, we recorded a $117,755 increase to operating lease right-of-use asset and operating lease liability.
In connection with the Spencer Lease, the landlord agreed to finance tenant improvements of $150,000 (“TI Allowance”). The base rent is increased by an amount sufficient to fully amortize the TI Allowance through the initial Spencer Lease term upon equal monthly payments of principal and interest, with interest imputed on the outstanding principal balance at the rate of 5.5% per annum. The TI Allowance was classified as a finance lease on the condensed balance sheet upon the adoption of ASC 842 and was paid in full by June 30, 2019.
12
Supplemental balance sheet information related to leases
is
as follows:
|
|
As of June 30, 2019
|
|
|
Amount
|
|
|
Classification
|
Operating leases:
|
|
|
|
|
|
|
Operating lease right-of-use lease assets
|
|
$
|
162,303
|
|
|
|
|
|
|
|
|
|
|
Operating lease current liabilities
|
|
$
|
142,130
|
|
|
Current portion of operating lease liabilities
|
|
|
|
|
|
|
|
Operating lease long-term liabilities
|
|
|
27,114
|
|
|
Long-term operating lease liabilities
|
|
|
|
|
|
|
|
Total operating lease liabilities
|
|
$
|
169,244
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease
term:
|
|
|
|
|
|
|
Operating leases
|
|
1.1 years
|
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate:
|
|
|
|
|
|
|
Operating leases
|
|
|
5.9
|
%
|
|
|
The components of lease expense are as follows:
|
|
Three Months Ended June 30, 2019
|
|
|
Amount
|
|
|
Classification
|
Finance lease cost:
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
5,714
|
|
|
Depreciation and amortization
|
Interest on lease liabilities
|
|
|
40
|
|
|
Interest expense
|
Total finance lease cost
|
|
$
|
5,754
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
65,222
|
|
|
Selling, general and administrative expense
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
Amount
|
|
|
Classification
|
Finance lease cost:
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
14,286
|
|
|
Depreciation and amortization
|
Interest on lease liabilities
|
|
|
195
|
|
|
Interest expense
|
Total finance lease cost
|
|
$
|
14,481
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
128,931
|
|
|
Selling, general and administrative expense
|
13
Supplemental cash flow information related to leases
i
s as follows:
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
Amount
|
|
|
Classification
|
Cash paid for amounts included in the
measure of lease liabilities:
|
|
|
|
|
|
|
Operating Cash flows from finance leases
|
|
$
|
195
|
|
|
Net income
|
Financing cash flows from finance leases
|
|
$
|
14,198
|
|
|
Principal payments on finance lease obligations
|
Operating Cash flows from operating leases
|
|
$
|
128,931
|
|
|
Net income
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange
for lease liabilities:
|
|
|
|
|
|
|
Finance leases
|
|
$
|
14,286
|
|
|
Supplemental cash flow information
|
Operating leases
|
|
$
|
285,616
|
|
|
Supplemental cash flow information
|
As of June 30, 2019, future maturities of our operating lease liabilities are as follows:
Twelve Months Ending June 30,
|
|
Amount
|
|
2020
|
|
$
|
142,130
|
|
2021
|
|
|
15,218
|
|
2022
|
|
|
11,896
|
|
Total lease liabilities
|
|
$
|
169,244
|
|
Lessor
Our agreements with the casino clients for the license of
proprietary tables games are outside of the scope of ASC 842 as such agreements are related to the license of intellectual properties.
Enhanced table systems are electronic enhancements used on casino table games to add to player appeal and enhance game security. An example in this category is our Bonus Jackpot System (“BJS”), an advanced electronic system installed on gaming tables designed to collect data by detecting player wagers and other game activities. Typically, the BJS system includes a server, a laptop, an electronic video display, known as
TableVision
, which shows game information designed to generate player interest and to promote various aspects of the game and other electronic components. Our BJS agreements with clients convey the rights to use equipment to our clients. However,
these agreements
are month-to-month and there is no penalty for either party to terminate the agreements without permission from the other party. As a result, these agreements are not considered leases and, therefore, are outside of the scope of
ASC 842 as well.
NOTE 10. LONG-TERM DEBT
Long-term debt consisted of the following at June 30, 2019 and December 31, 2018:
|
|
2019
|
|
|
2018
|
|
Nevada State Bank credit agreement
|
|
$
|
9,382,100
|
|
|
$
|
10,042,400
|
|
Triangulum Promissory Note
|
|
|
39,096,401
|
|
|
|
—
|
|
Vehicle notes payable
|
|
|
64,932
|
|
|
|
85,043
|
|
Insurance notes payable
|
|
|
18,644
|
|
|
|
73,794
|
|
Long-term debt, gross
|
|
|
48,562,077
|
|
|
|
10,201,237
|
|
Less: Unamortized debt issuance costs
|
|
|
(80,438
|
)
|
|
|
(94,562
|
)
|
Long-term debt, net
|
|
|
48,481,639
|
|
|
|
10,106,675
|
|
Less: Current portion
|
|
|
(1,437,851
|
)
|
|
|
(1,456,847
|
)
|
Long-term debt, long-term portion
|
|
$
|
47,043,788
|
|
|
$
|
8,649,828
|
|
Nevada State Bank credit agreement.
On April 24, 2018 (the “Closing Date”), we entered into a credit agreement with
ZB, N.A.
dba Nevada State Bank (“NSB” and the “Credit Agreement”), which provides for a $11.0 million five-year term loan (the “Term Loan”) and
14
a $1.0 million one-year revolving credit faci
lity (the “Revolv
ing Loan
”).
On April 22, 2019, we entered into a
F
irst
A
mendment to the Credit Agreement
(the “First Amendment”)
to
extend the Revolv
ing Loan
M
aturity
D
ate from
April 24, 2019
to
April 24, 2021
.
$1.0 million was available under the Revolv
i
ng Loan
at
June 30, 2019
and the filing date of this Quarterly Report on Form 10-Q
.
Effective May 1, 2018, we entered into an interest rate swap agreement with an affiliate of NSB (the “Swap Agreement”) to lock the interest rate on the Term Loan at 6.43% (assuming a Leverage Ratio less than 2.0) for three years. The notional amount of the Swap Agreement is initially $10.9 million but will decrease over time as a result of the anticipated principal paydowns.
On May 6, 2019, we entered into a Second Amendment to the Credit Agreement (the “Second Amendment”) to (i) provide an additional $10 million of availability under the Term Loan; and (ii) waive for a period of 180 days the breach of any covenant in the Credit Agreement that might occur as a result of the redemption of common stock held by Triangulum.
Outstanding balances under the Term Loan and the Revolving Loan accrue interest based on one-month US dollar
London interbank offered rate
(“LIBOR”) plus an Applicable Margin of 3.50%, or 4.00%, depending on our Leverage Ratio (as defined in the Credit Agreement).
We are required to make monthly principal and interest payments on the Term Loan, both of which are calculated over a seven-year term, with a balloon payment due on April 24, 2023. Borrowings under the Credit Agreement are secured by a lien on substantially all our assets.
The Credit Agreement contains affirmative and negative financial covenants and other restrictions customary for borrowings of this nature. In particular, we are required to maintain (i) a minimum trailing-four-quarters Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of 1.25; (ii) a maximum Leverage Ratio of 3.00 and (iii) a maximum Senior Leverage Ratio of 3.00. The Credit Agreement allows us to make share repurchases and to incur up to an additional $1.0 million of unsecured indebtedness provided that we are in compliance with the covenants in the Credit Agreement on a pro forma basis. We were in compliance with the Fixed Charge Coverage Ratio as of June 30, 2019. However, our Leverage Ratio and Senior Leverage Ratio exceeded the 3.00 maximum as of June 30, 2019 as a result of the addition of the Triangulum Promissory Note. Such non-compliance was waived by NSB in accordance with the Second Amendment.
Triangulum Promissory Note.
On May 6, 2019, we issued the Triangulum Promissory Note in the face amount of $39,096,401. The Triangulum Promissory Note has no mandatory amortization, matures on May 5, 2029, and
bears
interest at a rate of 2% per annum, with accrued interest payable annually in arrears. It is unsecured and is subordinated
to
our existing and future indebtedness in accordance with its terms. We may prepay principal and any accrued interest in full or in part at any time (Note 1).
As of June 30, 2019, future maturities of our long-term debt obligations are as follows:
Twelve Months Ending June 30,
|
|
Total
|
|
2020
|
|
$
|
1,437,851
|
|
2021
|
|
|
1,505,143
|
|
2022
|
|
|
1,595,582
|
|
2023
|
|
|
4,927,100
|
|
2024
|
|
|
—
|
|
Thereafter
|
|
|
39,096,401
|
|
Long-term debt, gross
|
|
|
48,562,077
|
|
Less:
|
|
|
|
|
Unamortized debt issuance costs
|
|
|
(80,438
|
)
|
Long-term debt, net
|
|
$
|
48,481,639
|
|
NOTE 11. 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, 2019 and 2018, respectively, we had the following client revenue concentration:
|
|
Location
|
|
2019
Revenue
|
|
|
2018
Revenue
|
|
|
Accounts
Receivable
June 30, 2019
|
|
|
Accounts
Receivable
December 31, 2018
|
|
Client A
|
|
North America
|
|
9.4%
|
|
|
11.2%
|
|
|
$
|
167,936
|
|
|
$
|
207,343
|
|
Client B
|
|
Europe
|
|
11.5%
|
|
|
10.2%
|
|
|
$
|
60,057
|
|
|
$
|
156,478
|
|
15
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.
On May 6, 2019, we redeemed all 23,271,667 shares of our common stock held by Triangulum Partners, LLC (“Triangulum”), an entity controlled by Robert B. Saucier, Galaxy Gaming's founder, and, prior to the redemption, the holder of a majority of our outstanding common stock. The redemption of Triangulum’s shares was given effect pursuant to our Articles of Incorporation (the “Articles”), which expressly provide that if certain events occur in relation to a stockholder that is required to undergo a gaming suitability review or similar investigative process, we have the option to purchase all or any part of such stockholder’s shares at a price per share that is equal to the average closing share price over the thirty calendar days preceding the purchase. The average closing share price over the thirty calendar days preceding the redemption was $1.68 per share.
As consideration for the redemption, we issued a promissory note payable to Triangulum in the face amount of $39,096,401 (the “Triangulum Promissory Note”). The Triangulum Promissory Note has no mandatory amortization, matures on May 5, 2029, and bears interest at a rate of 2% per annum, with accrued interest payable annually in arrears. It is unsecured and is subordinated to our existing and future indebtedness in accordance with its terms. We may prepay principal and any accrued interest in full or in part at any time.
In relation to the redemption of the Triangulum shares, on May 6, 2019, we filed a lawsuit against Triangulum and Robert Saucier seeking (i) a declaratory judgment that we acted lawfully and in full compliance with the Articles when we redeemed the Triangulum shares and (ii) certain remedies for breach of fiduciary duty and breach of contract by Triangulum and its Managing Member, Mr. Saucier (the “Triangulum Lawsuit”). The suit alleges that the redemption and the other relief sought by us are appropriate and in accordance with our Articles of Incorporation. (
Galaxy Gaming, Inc. v. Triangulum Partners, LLC, Robert B. Saucier,
et al
, Clark County, Nevada district court (Case No. A-19-794293-B)). The defendants to that lawsuit responded to the complaint, and Triangulum filed counterclaims based on a theory of wrongful redemption by us. The defendants also filed a Motion for Preliminary Injunction seeking the redeemed shares be held in a constructive trust. On July 11, 2019, the Court denied the Defendants’ Motion for Preliminary Injunction and all related relief. Thereafter, Triangulum filed amended counterclaims. We moved to dismiss the counterclaims on a number of legal grounds and will respond as and when appropriate.
On May 31, 2019 and June 6, 2019 respectively, Derek Webb and Hannah O’Donnell together filed a complaint and a related Motion for Order Granting Request to Compel an Annual Meeting, or in the Alternative for a Writ of Mandamus and Injunctive Relief (the “Motion”). The Motion sought the Court to compel us to hold an Annual Shareholder’s Meeting in 2019 and also sought related relief: that we not issue shares or redeem any shares or amend its Bylaws in any manner that could affect the obligation to hold the meeting or elect directors at the meeting. Webb and O’Donnell later withdrew their request that we not redeem any shares prior to the annual meeting. On June 6, 2019, we notified the public of the holding of an Annual Meeting to take place on August 28, 2019 for shareholders of record of July 17, 2019. During a hearing held on July 11, 2019, the Court denied Webb and O’Donnell’s Motion and all related relief.
NOTE 12. STOCKHOLDERS’ EQUITY (DEFICIT)
On March 29, 2019, we issued an aggregate of 70,200 restricted shares of our common stock valued at $112,320, to Messrs. Mark Lipparelli, Norm DesRosiers, Bryan Waters and William Zender who are members of our
Board
,
in consideration of their service on the Board during the three months ended March 31, 2019. These shares vested immediately on the grant date.
On June 28, 2019, we issued an aggregate of 76,400 restricted shares of our common stock valued at $124,532, to Messrs. Mark Lipparelli, Norm DesRosiers, Gavin Isaacs, Bryan Waters and William Zender who are members of our
Board
,
in consideration of their service on the Board during the three months ended June 30, 2019. These shares vested immediately on the grant date.
On May 6, 2019, we redeemed all 23,271,667 shares of our common stock held by Triangulum.
On April 24, 2018, our Board authorized the repurchase of shares of our common stock in an amount not to exceed $1.0 million. Such repurchases may be made from time to time based on market conditions and may be completed in the open market or in privately negotiated transactions. Repurchase transactions will be executed only when we believe that we will remain in compliance with the covenants of the Credit Agreement. Finally, execution of share repurchases may require regulatory approval in one or more jurisdictions. Except for the redemption from Triangulum described above, we have not repurchased any of our common stock as of June 30, 2019.
16
NOTE 13. INCOME TAXES
Our forecasted annual effective tax rate at June 30, 2019 was 22.3%, as compared to 16.6% at June 30, 2018. This increase was primarily due to changes in
permanent book-to-tax differences f
or the six months ended June 30, 2019. For the six months ended June 30, 2019 and 2018, our effective tax rate was 13.0% and 16.6%, respectively. This decrease was primarily due to tax benefits related to stock options exercised during the six months ended June 30, 2019.
NOTE 14. STOCK OPTIONS
On May 10, 2018, the Board ratified and confirmed the 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan is a broad-based plan under which 5,550,750 shares of our common stock are authorized for issuance for awards, including stock options, stock appreciation rights, restricted stock, and cash incentive awards to
members of our Board, executive officers, employees and independent contractors
. As of
June 30, 2019
, 295,234 shares remained available for issuance as new awards under the 2014 Plan.
Stock options.
During the six months ended June 30, 2019 and 2018, we issued 195,000 and 270,000 options to purchase our common stock, respectively, to members of our Board, executive officers, employees and independent contractors. The fair value of all stock options granted for the six months ended June 30, 2019 and 2018 was determined to be $366,900 and $169,777, respectively, using the Black-Scholes option pricing model with the following assumptions:
|
|
Options Issued 2019
|
|
|
Options Issued 2018
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
Expected volatility
|
|
|
72
|
%
|
|
78%
|
|
Risk free interest rate
|
|
1.83% - 2.51%
|
|
|
2.46% - 2.73%
|
|
Expected life (years)
|
|
|
5.00
|
|
|
|
5.00
|
|
On February 21, 2019, we entered into Amendment #1 to the employment agreement dated July 27, 2017 (the “Employment Agreement”) with Todd Cravens (“Amendment #1”), our President and Chief Executive Officer. In connection with the Employment Agreement, we agreed to grant to Mr. Cravens an option to purchase an 150,000 shares of our common stock (the “2020 Option”) with a strike price equal to the price per share of our common stock as reported on OTC Markets on August 1, 2020 (or the nearest trading date thereafter), which option will vest on August 1, 2020 (or the nearest trading date thereafter), provided that Mr. Cravens is a full-time employee on August 1, 2020,
Among other things, Amendment #1 provided that the 2020 Option vest in full in the event of termination following a change of control and that the exercise price of the 2020 Option be set at $1.90 per share, the closing price of our common stock on February 21, 2019.
A summary of stock option activity is as follows:
|
|
Common
Stock Options
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Weighted-Average
Remaining Contractual
Term (Years)
|
|
Outstanding – December 31, 2018
|
|
|
3,496,250
|
|
|
$
|
0.66
|
|
|
$
|
2,608,329
|
|
|
|
3.04
|
|
Issued
|
|
|
195,000
|
|
|
|
1.88
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(637,917
|
)
|
|
|
0.36
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited or expired
|
|
|
(13,333
|
)
|
|
|
1.17
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding – June 30, 2019
|
|
|
3,040,000
|
|
|
$
|
0.80
|
|
|
$
|
2,514,333
|
|
|
|
3.00
|
|
Exercisable – June 30, 2019
|
|
|
1,920,000
|
|
|
$
|
0.60
|
|
|
$
|
1,974,042
|
|
|
|
2.45
|
|
A summary of unvested stock option activity is as follows:
|
|
Common
Stock Options
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Weighted-Average
Remaining Contractual
Term (Years)
|
|
Unvested – December 31, 2018
|
|
|
1,161,666
|
|
|
$
|
0.95
|
|
|
$
|
535,475
|
|
|
|
4.15
|
|
Granted
|
|
|
195,000
|
|
|
|
1.88
|
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(223,333
|
)
|
|
|
0.75
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited or expired
|
|
|
(13,333
|
)
|
|
|
1.17
|
|
|
|
—
|
|
|
|
—
|
|
Unvested – June 30, 2019
|
|
|
1,120,000
|
|
|
$
|
1.15
|
|
|
$
|
538,617
|
|
|
|
3.94
|
|
As of June 30, 2019, our unrecognized share-based compensation expense associated with the stock options issued was $468,874, which will be amortized over a weighted-average of 1.98 years.
17
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
We estimate fair value for financial assets and liabilities in accordance with Accounting Standards Codification (“ASC”) Topic 820,
Fair Value Measurement
(“ASC 820”). ASC 820 defines fair value, provides guidance for measuring fair value, requires certain disclosures and discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). ASC 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
|
•
|
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
•
|
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
|
|
•
|
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
|
The estimated fair value of cash equivalents, restricted cash, accounts receivable and accounts payable approximates their carrying amount due to their short-term nature. The estimated fair value of our long-term debt and lease obligations approximates their carrying value based upon our expected borrowing rate for debt with similar remaining maturities and comparable risk. As of
June 30, 2019
,
the interest rate swap agreement was
the only financial instrument measured at estimated fair value on a recurring basis based on
valuation reports provided by counterparties, which are classified as
level 2 inputs.
NOTE 16. SUBSEQUENT EVENTS
We evaluate subsequent events through the date of issuance of the financial statements. There have been no subsequent events that occurred during such period that would require adjustment to or disclosure in the financial statements as of and for the quarter ended June 30, 2019.
18