NOTES TO CONDENSED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2019 AND 2018
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”). See Note 10.
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 (Galaxy Gaming, Inc. v. Triangulum Partners, LLC, Robert B. Saucier, 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. On September 6, 2019, defendants appealed the denial of the Motion for Preliminary Injunction to the Nevada Supreme Court. Separately, Triangulum filed amended counterclaims, which we moved to dismiss on a number of legal grounds. The Court denied the motion, stating that the amended complaint was sufficiently plead. The Company filed a Petition for a Writ of Mandamus challenging the ruling, which the Supreme Court denied on January 23, 2020. The Defendants' opening brief is due on March 9, 2020, and we will oppose the appeal to uphold the preliminary injunction.
On October 18, 2019, Saucier also filed counterclaims against Galaxy and the Board, centered similarly on a theory of wrongful redemption. In addition, Saucier brought claims for breach of contract and quantum meruit, alleging Galaxy Gaming was obligated to pay Saucier his year-end bonuses, despite his resignation. Galaxy Gaming and the Board filed an answer on October 18, 2019 disputing these claims. Discovery is ongoing, with trial currently set for October 19, 2020.
Effective June 3, 2019, 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.
On August 28, 2019, the Company held its Annual Shareholder meeting. The detailed results are available for review as previously reported on Form 8-K. The Company’s current Board of Directors were reelected to stand for the next period.
20
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 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.
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.
Cash, cash equivalents and restricted cash. We consider cash on hand, cash in banks, certificates of deposit, and other short-term securities with maturities of three months or less when purchased, as cash and cash equivalents. Our cash in bank balances are deposited in insured banking institutions, which are insured up to $250,000 per account. To date, we have not experienced uninsured losses, and we believe the risk of future loss is negligible.
Accounts receivable and allowance for doubtful accounts. Accounts receivable are stated at face value less an allowance for doubtful accounts. Accounts receivable are non-interest bearing. The Company reviews the accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. The allowance for doubtful accounts is estimated based on specific customer reviews, historical collection trends and current economic and business conditions.
Inventory. Inventory consists of ancillary products such as signs, layouts, and bases for the various games and electronic devices and components to support our Enhanced Table Systems (Note 4), and we maintain inventory levels based on historical and industry trends. We regularly assess inventory quantities for excess and obsolescence primarily based on forecasted product demand. Inventory is valued at the lower of net realizable value or cost, which is determined by the average cost method.
Assets deployed at client locations, net. Our Enhanced Table Systems are assembled by us and accounted for as inventory until deployed at our casino clients’ premises (Note 6). Once deployed and placed into service at client locations, the assets are transferred from inventory and reported as assets deployed at client locations. These assets are stated at cost, net of accumulated depreciation. Depreciation on assets deployed at client locations is calculated using the straight-line method over a three-year period.
Property and equipment, net. Property and equipment are being depreciated over their estimated useful lives (3 to 5 years) using the straight-line method of depreciation for book purposes (Note 5). Property and equipment are analyzed for potential impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable and exceeds their fair value.
Goodwill. Goodwill (Note 7) is assessed for impairment at least annually or at other times during the year if events or circumstances indicate that it is more likely than not that the fair value of a reporting asset is below the carrying amount. If found to be impaired, the carrying amount will be reduced, and an impairment loss will be recognized.
Other intangible assets, net. The following intangible assets have finite lives and are being amortized using the straight-line method over their estimated economic lives as follows:
Patents
|
|
52 - 240 months
|
Client relationships
|
|
264 months
|
Trademarks
|
|
360 months
|
Non-compete agreements
|
|
108 months
|
Internally-developed software
|
|
12 - 36 months
|
Other intangible assets (Note 7) are analyzed for potential impairment at least annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable and exceeds the fair value, which is the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the intangible assets. There were no events or changes in circumstances that would indicate a possible impairment as of December 31, 2019.
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.
|
21
|
•
|
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 values of cash equivalents, restricted cash, accounts receivable and accounts payable approximate their carrying amounts 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. As of December 31, 2019, an 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.
Leases. In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842), which was adopted by us effective January 1, 2019. 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 balance sheet as right-of-use assets with corresponding right-of-use liabilities. Lease expense is recognized on a straight-line basis using the discount rate implicit in each lease or our incremental borrowing rate at lease commencement date (Note 9).
Revenue recognition. In May 2014, the FASB issued ASU No. 2014-09 (Topic 606), Revenue from Contracts with Customers (“ASC 606”), which is a comprehensive new revenue recognition standard that superseded virtually all existing revenue guidance, including industry-specific guidance. We adopted ASC 606 on January 1, 2018 (Note 3).
Costs of ancillary products and assembled components. Ancillary products include pay tables (display of payouts), bases, layouts, signage and other items as they relate to support specific proprietary games in connection with the licensing of our games. Assembled components represent the cost of the equipment, devices and incorporated software used to support our Enhanced Table Systems.
Research and development. We incur research and development (“R&D”) costs to develop our new and next-generation products. Our products reach commercial feasibility shortly before the products are released, and therefore R&D costs are expensed as incurred. Employee related costs associated with product development are included in R&D costs.
Foreign currency transactions. We record foreign currency transactions at the exchange rate prevailing at the date of the transaction. Subsequent exchange gains and losses from foreign currency remeasurements are included in other income (expense) of our statements of income.
Income taxes. We are subject to income taxes in both the United States and in certain non-U.S. jurisdictions. We account for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”) using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry-forwards. These temporary differences will result in deductible or taxable amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some or all of the deferred tax assets may not be realized. Adjustments to the valuation allowance increase or decrease our income tax provision or benefit. To the extent we believe that recovery is more likely than not, we establish a valuation allowance against these deferred tax assets. Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. As of December 31, 2019 and 2018, we did not record a valuation allowance.
In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, our tax returns are subject to audit by various tax authorities. Although we believe that our estimates are reasonable, actual results could differ from these estimates. We recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on an evaluation of the technical merits of the position, which requires a significant degree of judgment (Note 13).
Net income per share. Basic net income per share is calculated by dividing net income by the weighted-average number of common shares issued and outstanding during the year. Diluted net income per share is similar to basic, except that the weighted-average number of shares outstanding is increased by the potentially dilutive effect of outstanding stock options and restricted stock, if applicable, during the year, using the treasury stock method.
Share-based compensation. We recognize compensation expense for all restricted stock and stock option awards made to employees, directors and independent contractors. The fair value of restricted stock is measured using the grant date trading price of our stock. The fair value of stock option awards (Note 14) is estimated at the grant date using the Black-Scholes option-pricing model, and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period. We have elected to recognize compensation expense for all options with graded vesting on a straight-line basis over the vesting period of the entire option. The determination of fair value using the Black-Scholes pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables, including expected stock price volatility, risk-free interest rate,
22
expected dividends and projected employee stock option exercise behaviors. We estimate volatility based on historical volatility of our common stock, and estimate the expected term based on several criteria, including the vesting period of the grant and the term of the award. We estimate employee stock option exercise behavior based on actual historical exercise activity and assumptions regarding future exercise activity of unexercised, outstanding options.
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.
Recently adopted accounting standards
Leases. In February 2016, the 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 (Note 9).
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. 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 have adopted the new standard effective October 1, 2019.
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.
Financial Instruments – Credit Losses. In February 2020, the FASB issued ASU No. 2020-02, Financial Instruments – Credit Losses (Topic 326). ASU 2020-02 provides updated guidance on how an entity should measure credit losses on financial instruments and delayed the effective date of Topic 326 for certain small public companies and other private companies until fiscal years beginning after December 5, 2022. Early adoption is permitted. We do not believe the adoption of this guidance will have a material impact on our financial statements.
NOTE 3. 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 license fee 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.
Some of our intellectual property requires the installation of certain equipment and both the intellectual property, and the related equipment are licensed in one bundled package. We have determined that the equipment is not distinct from the intellectual property and, therefore, we have only one performance obligation. 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.
23
Disaggregation of revenue
The following table disaggregates our revenue by geographic location for the year ended December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
North America and Caribbean
|
|
$
|
15,387,519
|
|
|
$
|
14,275,967
|
|
Europe
|
|
|
5,913,478
|
|
|
|
4,284,701
|
|
Total revenue
|
|
$
|
21,300,996
|
|
|
$
|
18,560,668
|
|
Revenue contract liability
For a portion of our business, we invoice our clients monthly in advance for unlimited use of our intellectual property licenses and recognize a revenue contract liability that represents such advanced billing to our clients for unsatisfied performance. We reduce the revenue contract liability and recognize revenue when we transfer those goods or services and, therefore, satisfy our performance obligation.
The table below summarizes changes in the revenue contract liability during year ended December 31, 2019:
Beginning balance – January 1, 2019
|
|
$
|
1,438,492
|
|
Increase (advanced billings)
|
|
|
15,333,034
|
|
Decrease (revenue recognition)
|
|
|
(15,477,261
|
)
|
Ending balance – December 31, 2019
|
|
$
|
1,294,265
|
|
Revenue recognized during the year ended December 31, 2019 that was included in the beginning balance of revenue contract liability above was $1,438,492.
NOTE 4. INVENTORY
Inventory, net consisted of the following as of December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Raw materials and component parts
|
|
$
|
359,349
|
|
|
$
|
267,517
|
|
Finished goods
|
|
|
343,305
|
|
|
|
306,335
|
|
Inventory, gross
|
|
|
702,654
|
|
|
|
573,852
|
|
Less: inventory reserve
|
|
|
(37,000
|
)
|
|
|
(42,038
|
)
|
Inventory, net
|
|
$
|
665,654
|
|
|
$
|
531,814
|
|
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following at December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Furniture and fixtures
|
|
$
|
312,639
|
|
|
$
|
312,640
|
|
Automotive vehicles
|
|
|
215,127
|
|
|
|
215,127
|
|
Office and computer equipment
|
|
|
302,296
|
|
|
|
213,322
|
|
Leasehold improvements
|
|
|
6,843
|
|
|
|
156,843
|
|
Property and equipment, gross
|
|
|
836,905
|
|
|
|
897,932
|
|
Less: accumulated depreciation
|
|
|
(691,996
|
)
|
|
|
(698,347
|
)
|
Property and equipment, net
|
|
$
|
144,909
|
|
|
$
|
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 twelve months ended December 31, 2019 and 2018, depreciation expense related to property and equipment was $146,331 and $134,075, respectively.
24
NOTE 6. Assets deployed at client locations
Assets deployed at client locations, net consisted of the following at December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Enhanced table systems
|
|
$
|
993,127
|
|
|
$
|
946,237
|
|
Less: accumulated depreciation
|
|
|
(587,605
|
)
|
|
|
(474,675
|
)
|
Assets deployed at client location, net
|
|
$
|
405,522
|
|
|
$
|
471,562
|
|
For the twelve months ended December 31, 2019 and 2018, depreciation expense related to assets deployed at client locations was $275,924 and $200,914 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 December 31,:
|
|
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
|
|
|
183,415
|
|
|
|
126,015
|
|
Other intangible assets, gross
|
|
|
20,609,382
|
|
|
|
20,551,982
|
|
Less: accumulated amortization
|
|
|
(13,178,739
|
)
|
|
|
(11,661,730
|
)
|
Other intangible assets, net
|
|
$
|
7,430,643
|
|
|
$
|
8,890,252
|
|
For the years ended December 31, 2019 and 2018, amortization expense related to the finite-lived intangible assets was $1,517,009 and $1,504,605 respectively.
Estimated future amortization expense is as follows:
December 31,
|
|
Total
|
|
2020
|
|
$
|
1,484,922
|
|
2021
|
|
|
1,417,422
|
|
2022
|
|
|
1,119,217
|
|
2023
|
|
|
252,930
|
|
2024
|
|
|
252,930
|
|
Thereafter
|
|
|
2,903,222
|
|
Total amortization
|
|
$
|
7,430,643
|
|
NOTE 8. ACCRUED EXPENSES
Accrued expenses consisted of the following at December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Payroll and related
|
|
$
|
747,458
|
|
|
$
|
1,136,808
|
|
Interest
|
|
|
520,671
|
|
|
|
—
|
|
Commissions and royalties
|
|
|
78,528
|
|
|
|
113,462
|
|
Income tax payable
|
|
|
64,832
|
|
|
|
82,091
|
|
Other
|
|
|
39,390
|
|
|
|
45,300
|
|
Total accrued expenses
|
|
$
|
1,450,879
|
|
|
$
|
1,377,661
|
|
25
NOTE 9. LEASES
Lessee
We have operating leases for our corporate office, two satellite facilities in the state of Washington and for certain equipment. We account for lease components (such as rent payments) separately from the non-lease components (such as common-area maintenance 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.
On January 28, 2019, we executed a first amendment to the corporate office lease to amend the lease expiration date from September 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 assets and operating lease liabilities. In connection with negotiating the original corporate office lease in 2014, the landlord agreed to finance tenant improvements of $150,000. Upon adoption of ASC 842 (effective January 1, 2019), the remaining amount was classified as a finance lease on the condensed balance sheet, which was paid in full by June 30, 2019.
On September 24, 2019, we executed a second amendment to one of the Washington facility leases to amend the lease expiration date from December 31, 2019 to December 31, 2021, with monthly base rents of $975 beginning in January 1, 2020. The related operating lease right-of-use asset and operating lease liability for this amendment ($22,173) will be recorded in January 2020, pursuant to the guidance in ASC 842.
On December 31, 2019, we executed a second amendment to the corporate office lease to amend the lease expiration date from December 31, 2019 to December 31, 2020, with monthly base rents of $21,123 beginning in January 1, 2020. The related operating lease right-of-use asset and operating lease liability for this amendment ($246,998) will be recorded in January 2020, pursuant to the guidance in ASC 842.
As of December 31, 2019, our leases have remaining lease terms ranging from zero months to 30 months. Gross right-of-use assets recorded under finance leases and operating leases were $14,286 and $290,877, respectively, and the related accumulated amortization was $14,286 and $253,188, respectively.
Supplemental balance sheet information related to leases is as follows:
|
|
As of December 31, 2019
|
|
|
Amount
|
|
|
Classification
|
Operating leases:
|
|
|
|
|
|
|
Operating lease right-of-use lease assets
|
|
$
|
37,689
|
|
|
|
|
|
|
|
|
|
|
Operating lease current liabilities
|
|
$
|
19,140
|
|
|
Current portion of operating lease liabilities
|
|
|
|
|
|
|
|
Operating lease long-term liabilities
|
|
|
18,978
|
|
|
Long-term operating lease liabilities
|
|
|
|
|
|
|
|
Total operating lease liabilities
|
|
$
|
38,118
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term:
|
|
|
|
|
|
|
Operating leases
|
|
2.1 years
|
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate:
|
|
|
|
|
|
|
Operating leases
|
|
|
5.4
|
%
|
|
|
26
The components of lease expense are as follows:
|
|
Twelve Months Ended December 31, 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
|
|
$
|
260,613
|
|
|
Selling, general and administrative expense
|
Supplemental cash flow information related to leases is as follows:
|
|
Twelve Months Ended December 31, 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
|
|
$
|
260,613
|
|
|
Net income
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange
for lease liabilities:
|
|
|
|
|
|
|
Finance leases
|
|
$
|
14,286
|
|
|
Supplemental cash flow information
|
Operating leases
|
|
$
|
290,877
|
|
|
Supplemental cash flow information
|
As of December 31, 2019, future maturities of our operating lease liabilities are as follows:
Twelve Months Ending December 31,
|
|
Amount
|
|
2020
|
|
$
|
19,140
|
|
2021
|
|
|
14,235
|
|
2022
|
|
|
4,743
|
|
Total lease liabilities
|
|
$
|
38,118
|
|
Lessor
Our agreements with 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 property.
Our BJS agreements with casino clients convey to them the rights to use equipment. 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.
27
NOTE 10. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Nevada State Bank credit agreement
|
|
$
|
8,699,900
|
|
|
$
|
10,042,400
|
|
Triangulum Promissory Note
|
|
|
39,096,401
|
|
|
|
—
|
|
Vehicle notes payable
|
|
|
44,490
|
|
|
|
85,043
|
|
Insurance notes payable
|
|
|
177,894
|
|
|
|
73,794
|
|
Long-term debt, gross
|
|
|
48,018,685
|
|
|
|
10,201,237
|
|
Less: Unamortized debt issuance costs
|
|
|
(93,144
|
)
|
|
|
(94,562
|
)
|
Long-term debt, net
|
|
|
47,925,541
|
|
|
|
10,106,675
|
|
Less: Current portion
|
|
|
(1,634,527
|
)
|
|
|
(1,456,847
|
)
|
Long-term debt, net
|
|
$
|
46,291,014
|
|
|
$
|
8,649,828
|
|
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, is scheduled to mature on May 5, 2029, and bears interest at 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.
Amendments to the Nevada State Bank (“NSB”) Credit Agreement. On May 6, 2019, in connection with the issuance of the Triangulum Promissory Note, we entered into a Second Amendment to the Nevada State Bank (“NSB”) Credit Agreement to (i) provide an additional $10 million Term Loan B availability under the Term Loan; and (ii) waive for a period of 180 days the breach of any covenant in the Credit Agreement resulting of the redemption of common stock held by Triangulum.
On August 16, 2019, we entered into a Third Amendment to the NSB Credit Agreement, pursuant to which we agreed to pay a fee on the unused amounts under the $1.0 million revolving portion of the credit agreement at a rate of 0.25% per annum, retroactive to April 22, 2019.
On October 14, 2019, we entered into a Fourth Amendment to the NSB Credit Agreement, which established a Senior Leverage Ratio (as defined in the amended Credit Agreement) of 2.0x for the remaining term of the NSB Credit Agreement. In addition, the Total Leverage Ratio (as defined in the amended Credit Agreement) was set at 7.25x, with semi-annual step-downs of 0.25x every six months, commencing June 30, 2020 through December 31, 2022. Lastly, the $10 million additional Term Loan B availability that was provided in the Second Amendment was eliminated.
Outstanding balances under amended NSB Credit Agreement 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 Total Leverage Ratio (as defined in the amended Credit Agreement). Effective December 31, 2021, LIBOR will no longer serve as a reference rate for bank loans, among other investment classes. The Fourth Amendment to the NSB Credit Agreement stipulates that an alternative reference rate will be selected and used in lieu of LIBOR.
As of December 31, 2019, future maturities of our long-term debt obligations are as follows:
December 31,
|
|
Total
|
|
2020
|
|
$
|
1,634,527
|
|
2021
|
|
|
1,555,157
|
|
2022
|
|
|
1,637,700
|
|
2023
|
|
|
4,094,900
|
|
2024
|
|
|
—
|
|
Thereafter
|
|
|
39,096,401
|
|
Total long-term debt, gross
|
|
|
48,018,685
|
|
Less: Unamortized debt issuance costs
|
|
|
(93,144
|
)
|
Long-term debt, net
|
|
$
|
47,925,541
|
|
28
NOTE 11. COMMITMENTS AND CONTINGENCIES
Concentration of risk. We are exposed to risks associated with clients who represent a significant portion of total revenues and accounts receivable. For the twelve months ended December 31, 2019 and 2018, respectively, we had the following client revenue concentrations:
|
|
Location
|
|
2019
Revenue
|
|
|
2018
Revenue
|
|
|
Accounts
Receivable
December 31,
2019
|
|
|
Accounts
Receivable
December 31,
2018
|
|
Client A
|
|
North America
|
|
9.2%
|
|
|
10.8%
|
|
|
$
|
131,911
|
|
|
$
|
207,373
|
|
Client B
|
|
Europe
|
|
10.0%
|
|
|
10.2%
|
|
|
$
|
176,237
|
|
|
$
|
156,478
|
|
Legal proceedings (also see discussion of Triangulum/Saucier litigation in Note 1). 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 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. 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. The Annual Meeting took place on August 28, 2019. On October 17, 2019, the Court dismissed the case as a result of a stipulation of the parties. The Company considers the matter closed.
We were served in September 2018 with a complaint by TMAX regarding an Operation and License Agreement executed between TMAX and Galaxy in February 2011. The complaint, filed in the Eighth Judicial District Court in Clark County, Nevada, alleges that Galaxy breached the TMAX Agreement, among other allegations. We filed an answer denying the allegations and counterclaimed for breach of contract, Abuse of Process and Fraud in the Inducement, among other counterclaims. We also filed a Partial Motion for Summary Judgment seeking dismissal of the Plaintiff's claims. Pursuant to a Motion to Dismiss brought by the Co-defendant and former CEO of TMAX, the suit was dismissed, subject to the right of the Plaintiff to file an amended complaint within 15 days of entry of the Order granting dismissal. Notice of Entry of the Order was given on March 5, 2019. The March 20, 2019 deadline lapsed without an Amended Complaint from TMAX. On September 10, 2019, the Court entered an order statistically closing the case.
On November 4, 2019, TMAX filed a Motion to Amend its Complaint. The only claim asserted against Galaxy in the proposed Amended Complaint is for conversion of property related to a TMAX games remaining in Galaxy’s possession; all other claims that were asserted in the initial Complaint were omitted. Galaxy has not released the games at issue because TMAX does not appear to have the appropriate licensure to possess or operate the game. All Defendants jointly opposed the Motion to Amend on November 14, 2019. On February 4, 2020, the Court entered an order granting the Motion for Leave to Amend. Galaxy will respond as necessary.
NOTE 12. STOCKHOLDERS’ EQUITY (DEFICIT)
During the twelve months ended December 31, 2019, we issued an aggregate of 311,800 restricted shares of our common stock valued at $534,708, to our board members in consideration of their service on the Board. 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.
29
NOTE 13. INCOME TAXES
The components of the provision consist of the following for the years ended December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
55,269
|
|
|
$
|
258,617
|
|
State
|
|
|
19,550
|
|
|
|
42,015
|
|
Total current
|
|
|
74,819
|
|
|
|
300,632
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(67,299
|
)
|
|
|
(89,983
|
)
|
State
|
|
|
2,498
|
|
|
|
(13,851
|
)
|
Total deferred
|
|
|
(64,801
|
)
|
|
|
(103,834
|
)
|
Provision for income taxes
|
|
$
|
10,018
|
|
|
$
|
196,798
|
|
The income tax provision differs from that computed at the federal statutory corporate income tax rate as follows for the years ended December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Tax provision computed at the federal statutory rate
|
|
$
|
620,210
|
|
|
$
|
297,082
|
|
State income tax, net of federal benefit
|
|
|
18,823
|
|
|
|
24,981
|
|
Permanent items
|
|
|
(287,480
|
)
|
|
|
34,084
|
|
Credits
|
|
|
(168,299
|
)
|
|
|
(103,572
|
)
|
True ups and rounding
|
|
|
(149,935
|
)
|
|
|
4,624
|
|
Change in federal statutory rate, net of benefit
|
|
|
5,823
|
|
|
|
(45,037
|
)
|
Uncertain tax positions
|
|
|
(29,124
|
)
|
|
|
(15,364
|
)
|
Provision for income taxes
|
|
$
|
10,018
|
|
|
$
|
196,798
|
|
The tax effects of significant temporary differences representing net deferred tax assets and liabilities consisted of the following at December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
158,426
|
|
|
$
|
143,332
|
|
Accruals and reserves
|
|
|
68,501
|
|
|
|
53,802
|
|
Other
|
|
|
414,476
|
|
|
|
307,687
|
|
Total deferred tax assets
|
|
|
641,403
|
|
|
|
504,821
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Basis difference in fixed assets
|
|
|
(76,929
|
)
|
|
|
(128,723
|
)
|
Other
|
|
|
(165,191
|
)
|
|
|
(41,616
|
)
|
Total deferred tax liabilities
|
|
|
(242,120
|
)
|
|
|
(170,339
|
)
|
Net deferred tax assets
|
|
$
|
399,283
|
|
|
$
|
334,482
|
|
In accordance with ASC 740, we considered the need for a valuation allowance against the net deferred tax assets at December 31, 2019 and determined that, based upon available evidence, it is more likely than not that our deferred tax assets will be realized and, as such, have not recorded any valuation allowance.
The aggregate changes in the balance of gross unrecognized tax benefits (included as part of accrued expenses in the accompanying financial statements), which excludes interest and penalties, are as follows as of and for the years ended December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Beginning balance:
|
|
$
|
29,124
|
|
|
$
|
44,488
|
|
Increases related to tax positions taken during the current year
|
|
|
4,565
|
|
|
|
19,765
|
|
Decreases related to expiration of statute of limitations
|
|
|
—
|
|
|
|
(35,129
|
)
|
Other adjustments
|
|
|
(33,689
|
)
|
|
|
—
|
|
Ending balance:
|
|
$
|
—
|
|
|
$
|
29,124
|
|
30
Our total liability for unrecognized gross tax benefits was $0 as of December 31, 2019, which, if ultimately recognized, would impact the annual estimated effective tax rate in future periods. We are subject to examination by the Internal Revenue Service for fiscal years 2016 and thereafter. For states within the U.S. in which we conduct significant business, we generally remain subject to examination for fiscal years 2016 and thereafter, unless extended for longer periods under state laws. We have no accrual for interest or penalties related to uncertain tax positions at December 31, 2019 and 2018, and did not recognize interest or penalties in the statements of operations during the years ended December 31, 2019 and 2018 as such amounts would be immaterial, if any.
As of December 31, 2019, we expected to use our foreign tax credits of $120,209 to offset federal income tax owed in 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 were 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.
On October 10, 2019, the Board of Directors authorized a one million share increase in the number of shares available under the 2014 Plan.
As of December 31, 2019, 895,034 shares remained available for issuance as new awards under the 2014 Plan.
Stock options. During the twelve months ended December 31, 2019 and 2018, we issued 520,000 and 745,000 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 twelve months ended December 31, 2019 and 2018 was determined to be $958,850 and $517,922, respectively, using the Black-Scholes option pricing model with the following assumptions:
|
|
Options issued 2019
|
|
|
Options issued 2018
|
|
Dividend yield
|
|
0%
|
|
|
0%
|
|
Expected volatility
|
|
70.88% - 72.11%
|
|
|
73.23% - 78.08%
|
|
Risk free interest rate
|
|
1.37% - 2.51%
|
|
|
2.46% - 3.00%
|
|
Expected life (years)
|
|
|
5.00
|
|
|
|
5.00
|
|
On February 21, 2019, we amended the employment agreement between the Company and Todd Cravens, our President and Chief Executive Officer. Among other things, this amendment grants Mr. Cravens an option to purchase 150,000 shares of our common stock (the “2020 Option”). The 2020 Option, which vests on August 1, 2020 so long as Mr. Cravens remains a full-time employee of the Company on August 1, 2020, has an exercise 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). If Mr. Cravens is terminated as a result of a change of control of the Company prior to August 1, 2020, the 2020 Option vests in full upon his termination at an exercise price of $1.90 per share (our common stock closing price on February 21, 2019).
On October 22, 2019 we entered into Amendment #3 to the employment agreement with our Chief Financial Officer (“Mr. Hagerty”). Among other things, Amendment #3 provides Hagerty’s base salary will remain at the annual rate of $200,000.00; (ii) that Mr. Hagerty receive a grant of 200,000 options at a strike price of $1.972, vest as follows: 66,666 shares on October 22, 2020, 66,666 shares on October 22, 2021, and 66,668 shares on April 30, 2022; (iii) that the end date of the term of employment be extended from April 30, 2020 to April 30, 2022.
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
|
|
|
520,000
|
|
|
$
|
1.84
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(737,916
|
)
|
|
$
|
0.37
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
(103,334
|
)
|
|
$
|
0.94
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding – December 31, 2019
|
|
|
3,175,000
|
|
|
$
|
0.92
|
|
|
$
|
2,692,025
|
|
|
|
2.79
|
|
Exercisable – December 31, 2019
|
|
|
2,121,667
|
|
|
$
|
0.66
|
|
|
$
|
2,334,292
|
|
|
|
2.22
|
|
31
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
|
|
|
520,000
|
|
|
$
|
1.84
|
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(531,667
|
)
|
|
$
|
0.88
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
(96,666
|
)
|
|
$
|
0.93
|
|
|
|
—
|
|
|
|
—
|
|
Unvested – December 31, 2019
|
|
|
1,053,333
|
|
|
$
|
1.43
|
|
|
$
|
357,734
|
|
|
|
3.92
|
|
As of December 31, 2019, our unrecognized share-based compensation expense associated with the stock options issued was $646,254, which is expected to be amortized over a weighted-average of 2.18 years.
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 approximates its carrying value based upon our expected borrowing rate for debt with similar remaining maturities and comparable risk. As of December 31, 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 December 31, 2019 except as follows as disclosed in Note 1 and as follows:
On February 17, 2020 we entered into Amendment #2 to the employment agreement with our Chief Executive Officer (“Mr. Craven”). Among other things, Amendment #2 provides (i) that Mr. Craven’s base salary will increase to $275,000, effective January 1, 2020; (ii) that Mr. Craven receive a grant of 225,000 options at a strike price of $1.93, vest as follows: 88,000 shares on July 26, 2021, 87,000 shares on July 26, 2022 and 50,000 shares on July 26, 2023; (iii) that the end date of the term of employment be extended from July 27, 2020 to July 26, 2022.
On February 25, 2020, Galaxy Gaming entered into a Membership Interest Purchase Agreement, dated February 25, 2020 (the “Purchase Agreement”), between the Company and the membership interest holders of Progressive Games Partners LLC (“PGP”). Pursuant to the Purchase Agreement, the Company will pay $12.425 million to acquire all of the issued equity interest of PGP. Of the consideration, at least $6.425 million, but no more than $10.425 million will be paid in cash, with the balance of the consideration being paid in newly issued shares of the Company’s common stock valued at $1.91 per share. Completion of the purchase is subject to various customary closing conditions, including but not limited to (i) further due diligence by Galaxy, (ii) any necessary gaming approvals having been obtained from the relevant gaming authorities, (iii) no material adverse effect or other specified adverse events occurring with respect to Galaxy or PGP, (iv) subject to certain exceptions, the accuracy of the representations and warranties of the parties, and (v) performance and compliance in all material respects with agreements and covenants contained in the Purchase Agreement.
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Coronavirus. On March 11, 2020, the World Health Organization declared a pandemic related to the rapidly spreading coronavirus (COVID-19) outbreak, which has led to a global health emergency. The public-health impact of the outbreak is currently unknown and rapidly evolving, and the related health crisis could adversely affect the global economy, resulting in an economic downturn that could impact demand for our products.
As of the date of this filing, almost all our casinos clients have closed or will shortly close. It is not known for how long they will remain closed. On March 17, 2020, the Company announced that it would suspend billing to customers who had closed their doors due to the COVID-19 outbreak. As a result, we do not expect to earn revenue for the use of our games by our casino customers until they reopen. And once they reopen, it may take an additional period of time for their operations to return to pre-crisis levels. We have receivables for products and services outstanding prior to the shutdown related to COVID-19. Because of COVID-19 related shutdowns, there can be no assurance that we will be paid timely or at all. Finally, our casino clients may defer paying vendors for a period of time after reopening as they attempt to replenish their own liquidity. For this reason, we may not receive payments from our clients for an extended period of time even after they reopen.
In general, the online gaming customers who license our games through our distributor remain in operation in spite of the COVID-19 crisis. We expect to continue to earn revenue from them during the crisis, but at levels that may be lower than we previously received.
We rely on third-party suppliers and manufacturers in China, many of whom have been shut down or have severely cut back production. This may have an effect on our supply chain depending upon how long they remain closed and when they re-open, especially in relation to post-pandemic demand by our customers. Any disruption of our suppliers and their contract manufacturers may impact our sales and operating results.
Because of the uncertainties and potential material adverse impact of COVID-19, the Company drew on its revolving loan in the amount of $1.0 million on March 12, 2020. As of the date of this filing, the Company believes that it has adequate liquidity to meet its near-term obligations even in the absence of receiving payments from customers. Further, we do not anticipate that the current casino closures will result in an impairment of our assets or a default under our loan agreements. If the casino closures last more than a few months, we may be required to reassess our obligations, including our ability to pay employee compensation and benefits.
The COVID-19 crisis may change the behavior of gaming patrons. Most of our clients operate places of public accommodation, and their patrons may reduce visitation and play as a precaution. Further, governmental authorities may impose reduced hours of operation or even outright closure of such places of public accommodation. A long-term reduction in play at or closure of one or more of our clients’ facilities could have a material adverse impact on our results of operations. Depending on the length and severity of any such adverse impact, we may fail to comply with our obligations, including covenants in our credit agreement, and we may need to reassess the carrying value of our assets.
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