UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2019

OR

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

For the transition period from       to

Commission file number: 000-30653

 

Galaxy Gaming, Inc.

(Exact name of small business issuer as specified in its charter)

 

 

Nevada

 

20-8143439

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

 

 

6767 Spencer Street, Las Vegas, NV 89119

(Address of principal executive offices)

 

(702) 939-3254

(Issuer’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading symbol

 

Name of exchange on which registered

Common stock

 

GLXZ

 

OTCQB marketplace

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    No  

Indicate by check mark whether the issuer has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act.          

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 17,910,344 common shares as of November 10, 2019.

 



 

 

GALAXY GAMING, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019

TABLE OF CONTENTS

 

 

 

Page

 

PART I – FINANCIAL INFORMATION  

 

 

Item 1:

Financial Statements (unaudited)

4

Item 2:

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

18

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

21

Item 4:

Controls and Procedures

21

 

 

PART II – OTHER INFORMATION

 

 

Item 1:

Legal Proceedings

22

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

22

Item 6:

Exhibits

23

 

 

2


PART I - FINANCIAL INFORMATION

 

 

ITEM 1. FINANCIAL STATEMENTS

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

 

 

3


GALAXY GAMING, INC.

CONDENSED BALANCE SHEETS

 

ASSETS

 

September 30,

2019

 

 

December 31,

2018

 

Current assets:

 

(Unaudited)

 

 

 

 

 

Cash, cash equivalents and restricted cash

 

$

8,577,296

 

 

$

6,311,563

 

Accounts receivable, net of allowance of $82,936 and $54,136, respectively

 

 

3,225,242

 

 

 

2,849,861

 

Inventory, net

 

 

689,767

 

 

 

531,814

 

Income tax receivable

 

 

337,292

 

 

 

 

Prepaid expense

 

 

550,340

 

 

 

510,254

 

Other current assets

 

 

4,541

 

 

 

3,352

 

Total current assets

 

 

13,384,478

 

 

 

10,206,844

 

Property and equipment, net

 

 

137,349

 

 

 

199,585

 

Operating lease right-of-use assets

 

 

101,958

 

 

 

 

Assets deployed at client locations, net

 

 

419,035

 

 

 

471,562

 

Goodwill

 

 

1,091,000

 

 

 

1,091,000

 

Other intangible assets, net

 

 

7,782,892

 

 

 

8,890,252

 

Deferred tax assets, net

 

 

338,676

 

 

 

334,482

 

Total assets

 

$

23,255,388

 

 

$

21,193,725

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,014,502

 

 

$

681,936

 

Accrued expenses

 

 

1,285,310

 

 

 

1,295,570

 

Income taxes payable

 

 

 

 

 

82,091

 

Revenue contract liability

 

 

1,294,680

 

 

 

1,438,492

 

Deferred rent, current portion

 

 

 

 

 

14,025

 

Current portion of long-term debt

 

 

1,437,950

 

 

 

1,456,847

 

Current portion of operating lease liabilities

 

 

83,953

 

 

 

 

Other current liabilities

 

 

 

 

 

21,654

 

Total current liabilities

 

 

5,116,395

 

 

 

4,990,615

 

Long-term operating lease liabilities

 

 

23,074

 

 

 

 

Long-term debt, net

 

 

46,680,702

 

 

 

8,649,828

 

Interest rate swap liability

 

 

174,621

 

 

 

96,181

 

Total liabilities

 

 

51,994,792

 

 

 

13,736,624

 

Commitments and Contingencies (See Note 11)

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit)

 

 

 

 

 

 

 

 

Preferred stock, 10,000,000 shares authorized, $0.001 par value;

   0 shares issued and outstanding, respectively

 

 

 

 

 

 

Common stock, 65,000,000 shares authorized; $0.001 par value;

   17,910,344 and 39,921,591 shares issued and outstanding, respectively

 

 

17,910

 

 

 

39,922

 

Additional paid-in capital

 

 

5,536,497

 

 

 

4,733,701

 

Accumulated earnings (deficit)

 

 

(34,293,811

)

 

 

2,683,478

 

Total stockholders’ equity (deficit)

 

 

(28,739,404

)

 

 

7,457,101

 

Total liabilities and stockholders’ equity (deficit)

 

$

23,255,388

 

 

$

21,193,725

 

 

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

 

4


GALAXY GAMING, INC.

CONDENSED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2019

 

 

September 30, 2018

 

 

September 30, 2019

 

 

September 30, 2018

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product leases and royalties

 

$

5,371,450

 

 

$

4,775,754

 

 

$

16,116,533

 

 

$

13,672,459

 

Product sales and service

 

 

196

 

 

 

30

 

 

 

1,050

 

 

 

191

 

Total revenue

 

 

5,371,646

 

 

 

4,775,784

 

 

 

16,117,583

 

 

 

13,672,650

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of ancillary products and assembled components

 

 

37,674

 

 

 

47,828

 

 

 

167,009

 

 

 

107,215

 

Selling, general and administrative

 

 

3,460,319

 

 

 

2,559,056

 

 

 

9,941,029

 

 

 

7,741,213

 

Research and development

 

 

208,253

 

 

 

373,456

 

 

 

685,693

 

 

 

816,657

 

Depreciation and amortization

 

 

476,112

 

 

 

462,402

 

 

 

1,439,220

 

 

 

1,372,752

 

Share-based compensation

 

 

242,016

 

 

 

192,998

 

 

 

678,199

 

 

 

550,588

 

Total costs and expenses

 

 

4,424,374

 

 

 

3,635,740

 

 

 

12,911,150

 

 

 

10,588,425

 

Income from operations

 

 

947,272

 

 

 

1,140,044

 

 

 

3,206,433

 

 

 

3,084,225

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(361,188

)

 

 

(206,425

)

 

 

(818,555

)

 

 

(819,837

)

Foreign currency exchange loss

 

 

(69,470

)

 

 

(22,095

)

 

 

(57,299

)

 

 

(542

)

Change in estimated fair value of interest rate swap liability

 

 

13,162

 

 

 

48,528

 

 

 

(78,440

)

 

 

(28,707

)

Loss on extinguishment of debt

 

 

 

 

 

(1,765

)

 

 

 

 

 

(1,349,271

)

Non-recurring severance expense

 

 

(185,000

)

 

 

 

 

 

(185,000

)

 

 

 

Interest income

 

 

25,326

 

 

 

343

 

 

 

45,891

 

 

 

974

 

Total other expense

 

 

(577,170

)

 

 

(181,414

)

 

 

(1,093,403

)

 

 

(2,197,383

)

Income before benefit (provision) for income taxes

 

 

370,102

 

 

 

958,630

 

 

 

2,113,030

 

 

 

886,842

 

Benefit (provision) for income taxes

 

 

210,132

 

 

 

(166,662

)

 

 

(17,189

)

 

 

(154,799

)

Net income

 

$

580,234

 

 

$

791,968

 

 

$

2,095,841

 

 

$

732,043

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

 

$

0.02

 

 

$

0.07

 

 

$

0.02

 

Diluted

 

$

0.03

 

 

$

0.02

 

 

$

0.07

 

 

$

0.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

17,774,022

 

 

 

39,844,863

 

 

 

28,083,665

 

 

 

39,805,144

 

Diluted

 

 

19,102,709

 

 

 

41,184,368

 

 

 

29,672,645

 

 

 

41,059,384

 

 

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

 

5


GALAXY GAMING, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

 

 

 

 

Common Stock

 

 

Additional

Paid in

 

 

Accumulated Earnings

 

 

Total

Shareholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

(Deficit)

 

 

Equity (Deficit)

 

Beginning balance, December 31, 2018

 

 

39,921,591

 

 

$

39,922

 

 

$

4,733,701

 

 

$

2,683,478

 

 

$

7,457,101

 

Common stock redemption

 

 

(23,271,667

)

 

 

(23,271

)

 

 

 

 

 

(39,073,130

)

 

 

(39,096,401

)

Net income

 

 

 

 

 

 

 

 

 

 

 

1,515,607

 

 

 

1,515,607

 

Stock options exercised

 

 

556,220

 

 

 

556

 

 

 

96,051

 

 

 

 

 

 

96,607

 

Share based compensation expense

 

 

546,600

 

 

 

546

 

 

 

435,636

 

 

 

 

 

 

436,182

 

Balance, June 30, 2019

 

 

17,752,744

 

 

 

17,753

 

 

 

5,265,388

 

 

 

(34,874,045

)

 

 

(29,590,904

)

Net income

 

 

 

 

 

 

 

 

 

 

 

580,234

 

 

 

580,234

 

Stock options exercised

 

 

75,000

 

 

 

75

 

 

 

29,175

 

 

 

 

 

 

29,250

 

Share based compensation expense

 

 

82,600

 

 

 

82

 

 

 

241,934

 

 

 

 

 

 

242,016

 

Balance, September 30, 2019

 

 

17,910,344

 

 

$

17,910

 

 

$

5,536,497

 

 

$

(34,293,811

)

 

$

(28,739,404

)

 

 

 

 

Common Stock

 

 

Additional

Paid in

 

 

 

 

 

 

Total

Shareholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Accumulated Earnings

 

 

Equity

 

Beginning balance, December 31, 2017

 

 

39,565,591

 

 

$

39,566

 

 

$

3,957,703

 

 

$

1,465,599

 

 

$

5,462,868

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(59,595

)

 

 

(59,595

)

Share based compensation expense

 

 

278,000

 

 

 

278

 

 

 

357,312

 

 

 

 

 

 

357,590

 

Balance, June 30, 2018

 

 

39,843,591

 

 

 

39,844

 

 

 

4,315,015

 

 

 

1,406,004

 

 

 

5,760,863

 

Net income

 

 

 

 

 

 

 

 

 

 

 

791,968

 

 

 

791,968

 

Share based compensation expense

 

 

39,000

 

 

 

39

 

 

 

192,959

 

 

 

 

 

 

192,998

 

Balance, September 30, 2018

 

 

39,882,591

 

 

$

39,883

 

 

$

4,507,974

 

 

$

2,197,972

 

 

$

6,745,829

 

 

 

6


GALAXY GAMING, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30, 2019

 

 

September 30, 2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

2,095,841

 

 

$

732,043

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization of intangible assets

 

 

1,424,934

 

 

 

1,372,752

 

Amortization of lease right-of-use assets

 

 

203,205

 

 

 

 

Amortization of debt issuance costs and debt discount

 

 

25,584

 

 

 

119,809

 

Loss on extinguishment of debt

 

 

 

 

 

1,349,271

 

Bad debt expense

 

 

101,938

 

 

 

38,374

 

Change in estimated fair value of interest rate swap liability

 

 

78,440

 

 

 

28,707

 

Deferred income tax benefit

 

 

(4,194

)

 

 

 

Share-based compensation

 

 

678,199

 

 

 

550,588

 

Unrealized foreign exchange gains on cash, cash equivalents and restricted cash

 

 

33,291

 

 

 

(24,601

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(477,319

)

 

 

(187,445

)

Inventory

 

 

(315,155

)

 

 

(317,978

)

Prepaid expenses

 

 

(40,086

)

 

 

(74,165

)

Other current assets

 

 

 

 

 

20,156

 

Accounts payable

 

 

332,566

 

 

 

(524,503

)

Accrued expenses

 

 

(14,826

)

 

 

335,838

 

Income taxes receivable/payable

 

 

(414,817

)

 

 

(625,788

)

Revenue contract liability

 

 

(143,812

)

 

 

137,619

 

Operating lease liabilities

 

 

(197,875

)

 

 

 

Other current liabilities

 

 

(71,581

)

 

 

(107,054

)

Deferred rent

 

 

 

 

 

(16,666

)

Net cash provided by operating activities

 

 

3,294,333

 

 

 

2,806,957

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Investment in intangible assets

 

 

(27,400

)

 

 

(33,048

)

Acquisition of property and equipment

 

 

(32,495

)

 

 

(67,050

)

Net cash used in investing activities

 

 

(59,895

)

 

 

(100,098

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from debt issued

 

 

 

 

 

11,098,986

 

Proceeds from stock option exercises

 

 

189,981

 

 

 

 

Payments of debt issuance costs

 

 

(5,736

)

 

 

(136,162

)

Payment of warrant liability

 

 

 

 

 

(1,333,333

)

Principal payments on finance lease obligations

 

 

(14,198

)

 

 

(24,415

)

Principal payments on long-term debt

 

 

(1,105,461

)

 

 

(10,296,900

)

Payments of long-term debt redemption premium

 

 

 

 

 

(374,500

)

Net cash used in financing activities

 

 

(935,414

)

 

 

(1,066,324

)

Effect of exchange rate changes on cash

 

 

(33,291

)

 

 

24,601

 

Net increase in cash, cash equivalents and restricted cash

 

 

2,265,733

 

 

 

1,665,136

 

Cash, cash equivalents and restricted cash – beginning of period

 

 

6,311,563

 

 

 

3,581,209

 

Cash, cash equivalents and restricted cash – end of period

 

$

8,577,296

 

 

$

5,246,345

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

502,764

 

 

$

700,027

 

Cash paid for income taxes

 

$

436,200

 

 

$

795,818

 

Supplemental schedule of non-cash activities:

 

 

 

 

 

 

 

 

Common stock redemption in exchange for promissory note

 

$

39,096,401

 

 

$

 

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

 

$

305,163

 

 

$

 

Inventory transferred to assets deployed at client locations

 

$

157,202

 

 

$

147,434

 

 

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

7


GALAXY GAMING, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. NATURE OF OPERATIONS AND RECENT DEVELOPMENTS

Unless the context indicates otherwise, references to “Galaxy Gaming, Inc.,” “we,” “us,” “our,” or the “Company,” refer to Galaxy Gaming, Inc., a Nevada corporation (“Galaxy Gaming”).

We are an established global gaming company specializing in the design, development, assembly, marketing and acquisition of proprietary casino table games and associated technology, platforms and systems for the casino gaming industry. Casinos use our proprietary products and services to enhance their gaming floor operations and improve their profitability, productivity and security, as well as to offer popular cutting-edge gaming entertainment content and technology to their players.  We market our products and services to 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 of Incorporation (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.  We will oppose the appeal, but a briefing schedule has not yet been set by the 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 will file a Petition for a Writ of Mandamus challenging the ruling. 

 

On October 18, 2019, Saucier also filed counterclaims centered similarly on a theory of wrongful redemption, and also claims that for breach of contract and quantum meruit, alleging Galaxy Gaming was obligated to pay Saucier his year-end bonuses, despite his resignation. We will file a timely response, disputing these claims.

 

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.

 

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.

 

8


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”).

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. See 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.

9


 

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.  

 

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 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 geographic location for the following periods:

 

 

 

Three Months

Ended September 30,

 

 

Nine Months

Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

North America and Caribbean

 

$

3,891,875

 

 

$

3,622,729

 

 

$

11,644,353

 

 

$

10,568,129

 

Europe

 

 

1,479,771

 

 

 

1,153,055

 

 

 

4,473,230

 

 

 

3,104,521

 

Total revenue

 

$

5,371,646

 

 

$

4,775,784

 

 

$

16,117,583

 

 

$

13,672,650

 

Revenue contract liability  

 

For a portion of our business, we invoice our clients monthly in advance for unlimited use of our intellectual property licenses and recognize a revenue contract liability that represents such advanced billing to our clients for unsatisfied performance.  We reduce the revenue contract liability and recognize revenue when we transfer those goods or services and, therefore, satisfy our performance obligation.

The table below summarizes changes in the revenue contract liability during the nine months ended September 30, 2019:

 

Beginning balance – January 1, 2019

 

$

1,438,492

 

Increase (advanced billings)

 

 

11,547,925

 

Decrease (revenue recognition)

 

 

(11,691,737

)

Ending balance – September 30, 2019

 

$

1,294,680

 

 

Revenue recognized during the nine months ended September 30, 2019 that was included in the beginning balance of revenue contract liability above was $1,436,410.

 

NOTE 4. INVENTORY

Inventory, net consisted of the following at: 

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Raw materials and component parts

 

$

361,433

 

 

$

267,517

 

Finished goods

 

 

358,333

 

 

 

306,335

 

     Inventory, gross

 

 

719,766

 

 

 

573,852

 

Less: inventory reserve

 

 

(29,999

)

 

 

(42,038

)

     Inventory, net

 

$

689,767

 

 

$

531,814

 

10


 

NOTE 5. PROPERTY AND EQUIPMENT

Property and equipment, net consisted of the following at: 

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Furniture and fixtures

 

$

312,640

 

 

$

312,640

 

Automotive vehicles

 

 

215,127

 

 

 

215,127

 

Leasehold improvements

 

 

9,883

 

 

 

156,843

 

Computer equipment

 

 

189,294

 

 

 

159,838

 

Office equipment

 

 

53,483

 

 

 

53,484

 

Property and equipment, gross

 

 

780,427

 

 

 

897,932

 

Less: accumulated depreciation

 

 

(643,078

)

 

 

(698,347

)

Property and equipment, net

 

$

137,349

 

 

$

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 nine months ended September 30, 2019 and 2018, depreciation expense related to property and equipment was $80,445 and $99,944, respectively.

 

NOTE 6. ASSETS DEPLOYED AT CLIENT LOCATIONS

 

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Enhanced table systems

 

$

1,042,997

 

 

$

946,237

 

Less: accumulated depreciation

 

 

(623,962

)

 

 

(474,675

)

Assets deployed at client locations, net

 

$

419,035

 

 

$

471,562

 

 

For the nine months ended September 30, 2019 and 2018, depreciation expense related to assets deployed at client locations was $209,729 and $145,419, 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:

 

 

 

September 30,

 

 

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

 

 

153,415

 

 

 

126,015

 

Other intangible assets, gross

 

 

20,579,382

 

 

 

20,551,982

 

Less: accumulated amortization

 

 

(12,796,490

)

 

 

(11,661,730

)

Other intangible assets, net

 

$

7,782,892

 

 

$

8,890,252

 

 

For the nine months ended September 30, 2019 and 2018, amortization expense related to the other intangible assets was $1,134,760 and $1,127,388, respectively.

11


Estimated future amortization expense is as follows:

 

Twelve Months Ending September 30,

 

Total

 

2020

 

$

1,500,836

 

2021

 

 

1,410,341

 

2022

 

 

1,398,822

 

2023

 

 

253,507

 

2024

 

 

252,930

 

Thereafter

 

 

2,966,456

 

Total amortization

 

$

7,782,892

 

 

NOTE 8. ACCRUED EXPENSES

Accrued expenses consisted of the following at: 

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Payroll and related

 

$

889,137

 

 

$

1,136,808

 

Interest

 

 

322,249

 

 

 

 

Commissions and royalties

 

 

45,482

 

 

 

113,462

 

Other

 

 

28,442

 

 

 

45,300

 

Total accrued expenses

 

$

1,285,310

 

 

$

1,295,570

 

 

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). 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.

As of September 30, 2019, our leases have remaining lease terms ranging from three months to 33 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 $188,919, respectively.

12


Supplemental balance sheet information related to leases is as follows:

 

 

 

As of September 30, 2019

 

 

Amount

 

 

Classification

Operating leases:

 

 

 

 

 

 

Operating lease right-of-use lease assets

 

$

101,958

 

 

 

 

 

 

 

 

 

 

Operating lease current liabilities

 

$

83,953

 

 

Current portion of operating lease liabilities

 

 

 

 

 

 

 

Operating lease long-term liabilities

 

 

23,074

 

 

Long-term operating lease liabilities

 

 

 

 

 

 

 

Total operating lease liabilities

 

$

107,027

 

 

 

 

 

 

 

 

 

 

Weighted-average remaining lease

   term:

 

 

 

 

 

 

Operating leases

 

1.1 years