Galaxy Gaming, Inc.: Form 10-Q for the period ended Mar 31, 2024

The following is a discussion and analysis of our financial condition, results of operations and liquidity and capital resources as of and for the three months ended March 31, 2024 and 2023. This discussion should be read together with our audited consolidated financial statements and related notes included in Item 8. Financial Statements and Supplementary Financial Information included in our 2023 Form 10-K.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the information contained in this Quarterly Report includes forward-looking statements In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “might,” “expect,” “intend,” "target," “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other similar expressions. These forward-looking statements are only predictions. We have based these forward-looking statements on our current expectations, assumptions and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks and uncertainties. These risks and uncertainties include, but are not limited to, the ability of Galaxy Gaming to enter and maintain strategic alliances, product placements or installations in land based casinos or grow its iGaming business, garner new market share, secure licenses in new jurisdictions or maintain existing licenses, successfully develop or acquire and sell proprietary products, comply with regulations, including changes in gaming related and non-gaming related statutes and regulations that affect the revenues of our customers in land-based casino and, online casino markets, have its games approved by relevant jurisdictions, and adapt to changes resulting from the COVID-19 or other pandemics including without limitation, government imposed shut downs, travel restrictions and supply chain interruptions, unfavorable economic conditions in the US and worldwide, our level of indebtedness, restrictions and covenants in our loan agreement, dependence on major customers, protection of intellectual property and our ability to license the intellectual property rights of third parties, failure to maintain the integrity of our information technology systems, including without limitation, cyber-attacks or other failures in our telecommunications or information technology systems, or those of our collaborators, third-party logistics providers, distributors or other contractors or consultants, could result in information theft, data corruption and significant disruption of our business, and other factors. The events and circumstances reflected in our forward-looking statements may not be achieved or occur, and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

OVERVIEW

We develop, acquire, assemble and market technology and entertainment-based products and services for the gaming industry for placement on casino floors and on legal internet gaming sites. Our products and services primarily relate to licensed casino operators’ table games activities and focus on either increasing their profitability and productivity or expanding their gaming entertainment offerings in the form of proprietary table games, electronically enhanced table game platforms, fully-automated electronic tables and other ancillary equipment. In addition, we license intellectual property to legal internet gaming operators. Our products and services are offered in highly regulated markets throughout the world. Our products are assembled at our headquarters in Las Vegas, Nevada, as well as outsourced for certain sub-assemblies in the United States.

Results of operations for the three months ended March 31, 2024 and 2023.

Our net revenue consists of the following components:

For the three months ended March 31, 2024, we generated net revenues of $8,001,066 compared to $7,422,534 for the comparable prior-year period, representing an increase of $578,532, or 7.8%. Net revenues for the three months ended March 31, 2024, and 2023 consist of $9,659,874 and $8,208,986 in gross billings respectively, net of $1,658,808 and $786,452 in license royalty payments for the three months ended March 31, 2024, and 2023, respectively. Net revenues in our GG Core operating segment increased 4.4% from $5,171,880 to $5,397,641. This increase was attributable primarily to an increase in recurring license revenue from our EZ Baccarat distribution arrangement, offset by 1) decreased sales of perpetual licenses and 2) an increase in royalties on our EZ Baccarat revenues which are netted against such revenue. Net revenues in our GG Digital operating segment increased 15.7% from $2,250,654 to $2,603,425. Our online gaming revenues for the three months ended March 31, 2024, and 2023 consist of $3,455,953 and $3,037,106 in gross billings, respectively, offset by $852,528and $786,452, respectively.

Selling, general and administrative expenses for the three months ended March 31, 2024, were $4,204,828 compared to $3,784,657 for the comparable prior-year period, representing an increase of $420,170, or 11.1%. The increase was due to higher internal labor and related expenses (base salary, commissions, payroll-related taxes, bonus accrual and travel), and increased information technology costs, trade show costs, legal fees, and those royalties that are not netted against revenues.

Research and development expenses for the three months ended March 31, 2024, were $251,886 compared to $206,760 for the comparable prior-year period, representing an increase of $45,126, or 21.8%. The increase was due to higher payroll costs from higher headcount, employee bonuses, option exercises in the period, and higher consulting fees.

Stock-based compensation expenses for the three months ended March 31, 2024, were $141,242, as compared to $244,923 for the comparable prior-year period, representing an decrease of $103,680, or 42.3%. The decrease was due primarily to a change in the level and the composition of fees paid to members of our Board of Directors in 2024 and lower stock-based compensation for officers and consultants.

As a result of the changes described above, income from operations increased $52,695 to $2,310,537 for the three months ended March 31, 2024, compared to income from operations of $2,257,842 for the comparable prior-year period.

Total interest expense increased $85,712, or 3.9%, to $2,289,347 for the three months ended March 31, 2024, compared to $2,203,635 for the comparable prior-year period. The increase was attributable to higher rates of interest on the current borrowings.

Income tax provision was $26,325 for the three months ended March 31, 2024, compared to income tax provision of $5,575 for the comparable prior-year period. The increase in expense is primarily the result of changes in the deferred tax balances and discrete excess benefits from stock-based compensation in the current period that did not occur in the prior period.

Adjusted EBITDA. Adjusted EBITDA includes adjustments to net income to exclude interest, income taxes, depreciation, amortization, stock-based compensation, foreign currency exchange (gain) loss and severance and other expenses related to litigation. Adjusted EBITDA is not a measure of performance defined in accordance with U.S. GAAP. However, Adjusted EBITDA is used by management to evaluate our operating performance. Management believes that disclosure of the Adjusted EBITDA metric offers investors, regulators and other stakeholders a view of our operations in the same manner management evaluates our performance. When combined with U.S. GAAP results, management believes Adjusted EBITDA provides a comprehensive understanding of our financial results. Adjusted EBITDA should not be considered as an alternative to net income or to net cash provided by operating activities as a measure of operating results or of liquidity. It may not be comparable to similarly titled measures used by other companies, and it excludes financial information that some may consider important in evaluating our performance. A reconciliation of U.S. GAAP net income to Adjusted EBITDA is as follows:

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(1) Represents non-cash expenses for stock option and restricted stock vesting of directors, officers, employees and consultants.

(2) Represents realized and unrealized gains and losses due to fluctuations in foreign currency rates.

(3) Represents severance expense relating to a terminated employee.

(4) Represents moving expenses incurred by the new CEO, Matt Reback, and reimbursed by the Company.

(5) Represents legal fees paid in relation to miscellaneous shareholder matters.

Liquidity and capital resources. We have generally been able to fund our continuing operations, our investments, and the interest expense and principal amortization under our existing borrowings through cash flow from operations. We may require additional capital to undertake acquisitions or to repay in full our indebtedness. Our ability to access capital for these activities will depend on conditions in the capital markets and investors’ perceptions of our business prospects and such conditions and perceptions may not always favor us.

As of March 31, 2024, we had total current assets of $22,556,520 and total assets of $40,457,210. This compares to $22,156,035 and $40,475,800, respectively, as of December 31, 2023. The increase in current assets at March 31, 2024 was primarily due to the ramped up collection of receivables and a decrease in prepaid expenses for insurance, regulatory licenses, and deposits for trade shows. The decrease in total assets at March 31, 2024 was primarily due to the changes in receivables and amortization of leases and intangibles in the 2024 period.

Our total current liabilities as of March 31, 2024, decreased to $4,359,975 from $4,875,967 as of December 31, 2023, primarily due to an increase in accrued royalties, offset by a decrease in accrued bonuses, recognition of deferred revenue, and payments against D&O insurance liabilities.

Based on our current forecast of operations, we believe we will have sufficient liquidity to fund our operations for at least the next 12 months and to meet the obligations under our financing arrangements as they come due.

We continue to file applications for new or enhanced licenses in several jurisdictions, which may result in significant future legal and regulatory expenses. A significant increase in such expenses may require us to postpone growth initiatives or investments in personnel, assemblies in process and research and development of our products. It is our intention to continue such initiatives and investments. However, to the extent we are not able to achieve our growth objectives or raise additional capital, we will need to evaluate the reduction of operating expenses.

Our operating activities provided cash of $1,366,629 for the three months ended March 31, 2024, compared to $652,218 used for the comparable prior period. The change to positive operating cash flow in the current period compared to negative operating cash flow in the prior period is mainly due to a decline in significant payments on accounts payable and an increase in collections of accounts receivable paired with the recovery of bad debt expense. In addition, stock-based compensation decreased due to the vesting of stock options and depreciation and amortization increased due to lower capitalization of intangible assets.

Investing activities used cash of $351,334 for the three months ended March 31, 2024, compared to cash used of $303,894 for the comparable prior period. This increase in cash used was primarily due to the investment in internally developed software, and acquisition of assets deployed at client locations in the 2024 period.

Cash used in financing activities during the three months ended March 31, 2024, was $219,761. This compares to $906,239 cash used by financing activities for the comparable prior period. The decrease in cash used was due to the absence of principal payments on our borrowings based on the "Excess Cash Flow" calculation as defined by the terms in the Fortress Credit Agreement (Note 6), in the 2024 period.

Critical accounting policies and estimates. Our significant accounting policies and estimates are described in our 2023 Form 10-K. There have been no material changes to those policies.

Off-balance sheet arrangements. As of March 31, 2024, there were no off-balance sheet arrangements.

Recently issued accounting pronouncements. We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.

Disclosure controls and procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed submitted under the Exchange Act is accumulated and communicated to management including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2024, our disclosure controls and procedures were effective.

Changes in internal control over financial reporting

No change in our internal control over financial reporting occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the effectiveness of control and procedures and internal controls

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives, and our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.