Galaxy Gaming, Inc.: Form 10-Q for the period ended Jun 30, 2025

The following is a discussion and analysis of our financial condition, results of operations and liquidity and capital resources as of and for the three and six months ended June 30, 2025 and 2024. 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 2024 Form 10-K.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995, as do other materials or oral statements we release to the public. Forward-looking statements are neither historical facts nor assurances of future performance, but instead are based only on our current beliefs, expectations, and assumptions regarding the future of our business, plans and strategies, projections, anticipated events and trends, the economy, and other future conditions, as of the date on which this report is filed. Forward-looking statements often, but do not always, contain words 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 to complete the Merger on the proposed terms or on the anticipated timeline, or at all, including risks and uncertainties related to securing the necessary gaming regulatory approvals and satisfaction of other closing conditions to consummate the proposed Merger; the occurrence of any event, change or other circumstance that could give rise to the termination of the Merger Agreement; risks that the proposed Merger disrupts the Company’s current plans and operations or diverts the attention of the Company’s management or employees from ongoing business operations; the risk that certain restrictions during the pendency of the Merger may impact the Company's ability to pursue certain business opportunities or strategic transactions; the risk of potential difficulties with the Company’s ability to retain and hire key personnel and maintain relationships with customers and other third parties as a result of the proposed Merger, including during the pendency of the Merger; the risk that the proposed Merger may involve unexpected costs and/or unknown or inestimable liabilities; the risk that the Company’s business may suffer as a result of uncertainty surrounding the proposed Merger; the risk that stockholder litigation in connection with the proposed Merger may affect the timing or occurrence of the proposed Merger or result in significant costs of defense, indemnification and liability; effects relating to the announcement of the proposed Merger or any further announcements or the consummation of the proposed Merger on the market price of the Company’s common stock or the Company’s operating results; the ability of Galaxy Gaming to enter and maintain strategic alliances, product placements or installations in land based casinos or grow its iGaming business, garner new market share, secure licenses in new jurisdictions or maintain existing licenses, successfully develop or acquire and sell proprietary products, comply with regulations, including changes in gaming related and non-gaming related statutes and regulations that affect the revenues of our customers in land-based casino and, online casino markets, have its games approved by relevant jurisdictions, unfavorable economic conditions in the US and worldwide, our level of indebtedness, restrictions and covenants in our loan agreement, dependence on major customers, protection of intellectual property and our ability to license the intellectual property rights of third parties, failure to maintain the integrity of our information technology systems, including without limitation, cyber-attacks or other failures in our telecommunications or information technology systems, or those of our collaborators, third-party logistics providers, distributors or other contractors or consultants, could result in information theft, data corruption and significant disruption of our business, and other factors. The events and circumstances reflected in our forward-looking statements may not be achieved or occur, and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

OVERVIEW

We develop, acquire, assemble and market technology and entertainment-based products and services for the gaming industry for placement on casino floors and on legal internet gaming sites. Our products and services primarily relate to licensed casino operators’ table games activities and focus on either increasing their profitability and productivity or expanding their gaming entertainment offerings in the form of proprietary table games, electronically enhanced table game platforms, fully-automated electronic tables and other ancillary equipment. In addition, we license intellectual property to legal internet gaming operators. Our products and services are offered in various highly regulated markets and certain non-regulated (where such is not illegal) 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.

Agreement and Plan of Merger with Evolution

On July 18, 2024, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Evolution Malta Holding Limited, a company registered in Malta (“Parent” or "Evolution"), and Galaga Merger Sub, Inc., a Nevada corporation and direct wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which, and subject to the terms and conditions thereof, Merger Sub would merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent.

Upon the closing of the Merger, each share of common stock, par value $0.001 per share of the Company issued and outstanding immediately prior to the effective time of the Merger, other than any Company common stock (i) owned by Company stockholders who are entitled to demand and have properly and validly demanded their appraisal rights under Nevada law or (ii) owned by Parent, Merger

Sub, the Company or by any of their respective subsidiaries, will be converted automatically into the right to receive $3.20 per share in cash, without interest and subject to any applicable withholding taxes.

Consummation of the Merger is subject to the satisfaction or waiver of certain closing conditions, including the receipt of certain gaming regulatory approvals. At the special meeting of the Company’s stockholders held on November 12, 2024, stockholders voted to approve the Merger. The Merger is expected to be completed in the second half of 2025, subject to satisfaction or waiver of the closing conditions. Upon completion of the Merger, the Company will become a privately held company and shares of Company’s common stock will no longer be listed on any public market.

Under the terms of the Merger Agreement, if the Merger has not been consummated by July 18, 2025 (the "Initial Outside Date"), either Galaxy or Evolution may terminate the Merger Agreement; provided that such date shall be automatically extended to October 18, 2025 (the "First Extended Outside Date") if, on the Initial Outside Date, all conditions to the Merger would have been satisfied or waived if the closing had taken place on the Initial Outside Date, other than the closing conditions to the absence of certain legal constraints, or the receipt of certain gaming regulatory approvals (the "Gaming Approval Closing Condition"). As of July 18, 2025, all conditions to the Merger would have been satisfied or waived if the closing occurred on such date, other than the Gaming Approval Closing Condition. In accordance with the foregoing terms, on July 18, 2025, the Initial Outside Date was automatically extended to October 18, 2025.

Results of operations for the three months ended June 30, 2025 and 2024.

Revenue

Recurring core revenue decreased $91,368, or 1.7% for the three months ended June 30, 2025, as compared to the same period in the prior year. This decrease was driven in part by the impact of recent casino closures and to a lesser extent, a decrease in revenue generated from licensed third-party intellectual property. Royalties netted against gross core revenue decreased $45,980 for the three months ended June 30, 2025, as compared to the same period in the prior year. This decrease was attributable to lower royalties paid to third-parties for licensed intellectual property. Perpetual license sales of our progressive gaming systems to customers of $256,421 were down 82.9% percent for the three months ended June 30, 2025, as compared to the same period in the prior year. This decline was primarily driven by a strategic decision by management to prioritize higher-margin, recurring revenue streams, as well as the timing of customer purchases. Gross digital revenues of $4,020,989, were up $492,524, or 14.0% for the three months ended June 30, 2025, as compared to the same period in the prior year. This favorable increase reflects the ongoing expansion of our digital content onto new customer sites and the continued success of offering competitive products with brand recognition. Net of royalties, digital revenues grew to $2,833,416, up 11.5% for the three months ended June 30, 2025, as compared to the same period in the prior year.

Costs and Expenses

Cost of ancillary products and assembled component expense decreased $410,685, or 68.6% for the three months ended June 30, 2025, as compared to the same period in the prior year. The activity in cost of ancillary products and assembled components reflects the component costs associated with the perpetual license sales of our progressive gaming systems.

Selling, general and administrative expenses decreased $200,263, or 4.5% for the three months ended June 30, 2025, as compared to the same period in the prior year. This decrease was primarily driven by a $431,362 reduction in costs associated with special projects, most notably legal expenses incurred related to the acquisition by Evolution. Normalized for the impact of special projects and excluding the related fees of $243,682 and $675,044 for the three months ended June 30, 2025 and June 30, 2024, respectively, selling, general, and administrative expenses increased $231,099 for the three months ended June 30, 2025, as compared to the same period in the prior year. This increase was driven primarily by higher compensation and related expenses.

Research and development expenses were down $26,317, or 9.8% for the three months ended June 30, 2025 compared to the comparable period in the prior year. The decrease was due to the decline of the total amount of outside services used for research and development in the period.

Depreciation and amortization increased $83,918, or 12.0% for the three months ended June 30, 2025, as compared to the same period in the prior year. This increase was primarily driven by amortization expense for certain intangible assets placed in service and to a lesser extent, an increase in depreciation expense associated with incremental placements of assets deployed at client locations.

Stock-based compensation expenses decreased $41,471, or 21.3% for the three months ended June 30, 2025, as compared to the same period in the prior year. The decrease was primarily due to lower compensation for our Board of Directors in 2025, driven by the vesting of a previously granted equity award and a reduction in the number of board members, both of which contributed to lower stock-based compensation during the current period.

Interest expense decreased $1,374,350, or 60.3% for the three months ended June 30, 2025, as compared to the same period in the prior year. The decrease was due to reduced interest rates and a reduced principal balance as a result of the recent refinancing of our debt. Interest income was down 92.4% compared to the prior year period, primarily due to lower cash balances.

Provision for income taxes was $93,912 for the three months ended June 30, 2025, compared to provision for income taxes of $28,293 for the comparable prior-year period. The increase in expense is primarily driven by the increased income before provision for income taxes.

Primarily as a result of the factors described above, we had net income of $950,357 for the three months ended June 30, 2025, as compared to net income of approximately $242,697 for the same period in the prior year.

Results of operations for the six months ended June 30, 2025 and 2024.

Revenue

Recurring core revenue decreased $236,835, or 2.2% for the six months ended June 30, 2025, as compared to the same period in the prior year. The decrease was primarily driven by the absence of a one-time payment of approximately $140,000 received in the prior year, the impact of recent casino closures and a decrease in revenue generated from licensed third-party intellectual property. Royalties netted against gross core revenue decreased $110,112 for the six months ended June 30, 2025, as compared to the same period in the prior year. This decrease was due to lower royalties paid to third-parties for licensed intellectual property. Perpetual license sales of our progressive gaming systems to customers of $761,541 were down 66.9% percent for the six months ended June 30, 2025, as compared to the same period in the prior year. This decline was primarily driven by a strategic decision by management to prioritize higher-margin, recurring revenue streams, as well as the timing of customer purchases. Gross digital revenues of $7,856,574 were up $872,156, or 12.5% for the six months ended June 30, 2025, as compared to the same period in the prior year. This favorable increase reflects the ongoing expansion of our digital content onto new customer sites and the continued success of offering competitive products with brand recognition. Net of royalties, digital revenues grew to $5,602,116, up 8.9% for the six months ended June 30, 2025, as compared to the same period in the prior year.

Costs and Expenses

Cost of ancillary products and assembled component expense decreased $629,063, or 62.6% for the six months ended June 30, 2025, as compared to the same period in the prior year. The activity in Cost of ancillary products and assembled components reflects the component costs associated with the perpetual license sales of our progressive gaming systems.

Selling, general and administrative expenses decreased $92,310, or 1.1% for the six months ended June 30, 2025, as compared to the same period in the prior year. This decrease was primarily driven by a $223,089 reduction in costs associated with special projects, most notably legal expenses incurred related to the acquisition by Evolution. Normalized for the impact of special projects and excluding the related fees of $451,955 and $675,044 for the six months ended June 30, 2025 and June 30, 2024, respectively, selling, general, and administrative expenses increased $130,779 for the six months ended June 30, 2025, as compared to the same period in the prior year. The increase was primarily driven by higher compensation and related expenses, partially offset by reductions in legal expenses unrelated to special projects, as well as lower taxes and licensing costs.

Research and development expenses were up $84,573, or 16.2% for the six months ended June 30, 2025, as compared to the same period in the prior year. This increase was driven by higher payroll costs due to increased headcount and the ongoing development of internal software placed in service.

Depreciation and amortization increased $177,542, or 12.8% for the six months ended June 30, 2025, as compared to the same period in the prior year. This increase was primarily driven by amortization expense for certain intangible assets placed in service and to a lesser extent, depreciation expense associated with incremental placements of assets deployed at client locations.

Stock-based compensation expenses decreased $16,452, or 4.9% for the six months ended June 30, 2025, as compared to the same period in the prior year. The decrease was primarily driven by lower compensation for our Board of Directors in 2025, resulting from the full vesting of a previously granted equity award and a reduction in the number of board members. These factors led to a decline in stock-based compensation during the current period, partially offset by an increase in stock-based compensation for employees.

Interest expense decreased $2,660,347, or 58.2% for the six months ended June 30, 2025, as compared to the same period in the prior year. The decrease was due to reduced interest rates and a reduced principal balance as a result of the recent refinancing of our debt. Interest income was down $371,628, or 90.6% compared to the prior year period, primarily due to lower cash balances.

The Company recognized a loss on extinguishment of debt of $2,969,585 for the six months ended June 30, 2025 related to the refinancing of our debt from Fortress to BMO.

Provision for income taxes was $130,333 for the six months ended June 30, 2025, compared to provision for income taxes of $54,618 for the comparable prior-year period. The increase was due to a higher adjusted pre-tax book income offset by discrete items, primarily the loss on extinguishment of debt.

Primarily as a result of the factors described above, we had net loss of $1,070,925 for the six months ended June 30, 2025, as compared to net income of approximately $451,605 for the same period in the prior year.

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA"). Adjusted EBITDA includes adjustments to U.S. GAAP net (loss) income to exclude interest, income taxes, depreciation, amortization, stock-based compensation, foreign currency exchange loss (gain), and severance and other expenses related to litigation, and other adjustments to reflect changes that occur in our business but do not represent ongoing operations, including loss on extinguishment of debt. Adjusted EBITDA is not a measure of performance defined in accordance with U.S. Generally Accepted Accounting Principles ("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 (loss) 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 (loss) income to Adjusted EBITDA is as follows:

(1) Represents the non-cash expense associated with the value of equity awards granted to employees, directors and consultants by the Company.

(2) Represents costs associated with the severance of employees.

(3) Represents Company reimbursed moving expenses incurred by the new President and CEO, Matthew Reback.

(4) Represents professional fees and transaction related fees incurred related to acquisitions, mergers and professional fees incurred for other projects not considered part of the normal course of business.

(5) Represents a non-cash charge related to the write off of certain fixed assets.

(6) Represents foreign exchange losses and gains associated with the fluctuations of foreign currency rates.

(7) Represents the loss on the extinguishment of debt associated with the refinancing of our debt from Fortress to BMO.

Liquidity and capital resources. We have generally been able to fund our continuing operations, our investments, and the obligations 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 operations or for acquisitions will depend on conditions in the capital markets and investors’ perceptions of our business prospects and such conditions and perceptions may not always favor us.

As of June 30, 2025, we had total current assets of $10,452,127 and total assets of $26,603,798. As of December 31, 2024, we had total current assets of $24,171,920 and total assets of $41,010,731. The decrease in current assets as of June 30, 2025 compared to December 31, 2024 was primarily due to the decreased cash and cash equivalents driven by cash used in the refinancing of our debt. The decrease in total assets as of June 30, 2025 compared to December 31, 2024 was primarily due to the decrease of current assets noted above.

Our total current liabilities as of June 30, 2025 compared to December 31, 2024 increased to $7,527,390 from $6,602,744. This increase was primarily due to an increase in the current portion of our long term debt as a result of the refinancing of our debt from Fortress to BMO.

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

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.

Our operating activities provided cash of $4,345,791 for the six months ended June 30, 2025, compared to $3,873,347 provided for the comparable prior year period. This change is mainly attributable to the net loss in the current period and a variance of $632,929 in use of assets and liabilities that relate to operations. Additionally, the Company recognized a loss on extinguishment of debt of $2,969,585 due to the refinancing of the Fortress loan to BMO, depreciation and amortization increased $177,542 primarily driven by amortization related to intangible assets placed in service and to a lesser extent, depreciation related to assets deployed at client locations, $16,452 decline in stock-based compensation and an increase in bad debt of $89,019.

Investing activities used cash of $1,161,744 for the six months ended June 30, 2025, compared to cash used of $676,315 for the six months ended June 30, 2024. This increase in cash used was primarily due to the decrease in the transfer of title of assets deployed at client locations to perpetual license customers and an increase in investment in internally developed software and acquisition of property and equipment.

Cash used in financing activities during the six months ended June 30, 2025, was $16,493,898. This compares to $465,317 cash used by financing activities for the six months ended June 30, 2024. The increase in cash used was due to the refinancing of our debt from Fortress to BMO and additional principal payments made on the debt in the current year.

Credit Facility. On January 6, 2025, we entered into a new credit agreement with BMO that provides for a $2,000,000 senior secured revolving credit facility and a $45,000,000 senior secured term loan. On January 6, 2025, we borrowed $45,000,000 under the new term loan and used this amount plus cash on hand to repay all amounts outstanding under the Fortress Credit Agreement, which was terminated.

Critical accounting policies and estimates. Our significant accounting policies and estimates are described in our 2024 Form 10-K. There have been no material changes to those policies.

Off-balance sheet arrangements. As of June 30, 2025, 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 June 30, 2025, 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.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risks and uncertainties set forth in our other filings with the SEC, including in our most recent Annual Report on Form 10-K.