Galaxy Gaming Inc

Previous wording

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, 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.

Current wording

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 nine months ended September 30, 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.

Previous wording

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, risks related to the proposed Merger, including that the Merger may not be consummated at all or in the anticipated timeframe; restrictions on our business during the pendency of the Merger that could affect our ability to pursue business opportunities or strategic transactions; uncertainties relating to the pendency of the Merger relating to our relationships with our employees and our customers, vendors and partners; that the Merger Agreement may be terminated in circumstances that require us to pay a termination fee; significant transaction costs; and the risk of litigation and/or regulatory actions related to the proposed Merger; 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…

Excerpt shortened here; the source contains the full paragraph.

Current wording

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 to complete the Merger (as defined herein) on the proposed terms or on the anticipated timeline, or at all, including risks and uncertainties related to securing the necessary stockholder approval, 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 (as defined herein); 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 t…

Excerpt shortened here; the source contains the full paragraph.

Previous wording

On July 18, 2024, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Evolution Malta Holding Limited (“Parent”), and Galaga Merger Sub, Inc., a wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which the Company will become 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, except for shares (a) owned by Company stockholders who are entitled to demand and have properly and validly demanded their appraisal rights under Nevada law, and (b) held by the Parent, Merger Sub, the Company or by any of their respective subsidiaries, will automatically be cancelled and converted into the right to receive $3.20 in cash.

Current wording

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.

Previous wording

Recurring core revenue increased $2,982,282, or 39% for the six months ended June 30, 2024, as compared to the same period in the prior year. This change was driven primarily by favorable revenue from our EZ Baccarat distribution arrangement which commenced in September 2023 and the continued success of our side bets and progressive products. Royalties netted against gross core revenue increased $1,594,539 for the six months ended June 30, 2024, as compared to the same period in the prior year. This increase was attributable to royalties paid on our EZ Baccarat revenues. Perpetual license sales of our progressive gaming systems to customers of $2,302,493 were down 18% percent for the six months ended June 30, 2024, as compared to the same period in the prior year. We expect perpetual license sales of our progressive gaming systems to customers to decline in the second half of 2024 as compared to the first half of 2024. Gross digital revenues of $6,984,418 were up $1,151,875, or 20% for the six months ended June 30, 2024, as compared to the same period in the prior year. This favorable increase reflects the ongoing expansion of our digital content into new markets and the continued success of offering competitive products with brand recognition, most notable 21+3. Net of royalties, digital revenues grew to $5,145,385, up 16% for the six months ended June 30, 2024, as compared to the same period in the prior year

Current wording

Recurring core revenue increased $1,204,673, or 30% for the three months ended September 30, 2024, as compared to the same period in the prior year. This growth was primarily driven by favorable revenue from our EZ Baccarat distribution arrangement, which began in September 2023, along with the continued success of our side bets and progressive products. Royalties netted against gross core revenue increased $615,084 for the three months ended September 30, 2024, as compared to the same period in the prior year. This increase was attributable to royalties paid on our EZ Baccarat revenues. Perpetual license sales of our progressive gaming systems reached $705,000, representing a 54% percent increase for the three months ended September 30, 2024, as compared to the same period in the prior year. Gross digital revenues of $3,513,194, increased $968,367, or 38% for the three months ended September 30, 2024, as compared to the same period in the prior year. This favorable growth reflects the ongoing expansion of digital content into new markets and the continued success of our competitive branded products, particularly the well-known 21+3. Net of royalties, digital revenues increased to $2,516,738, representing growth of 39% for the three months ended September 30, 2024, as compared to the same period in the prior year.

Previous wording

Cost of ancillary products and assembled component expense increased $153,476, or 18% for the six months ended June 30, 2024, 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 to customers.

Current wording

Cost of ancillary products and assembled component expense increased $155,024, or 83% for the three months ended September 30, 2024, as compared to the same period in the prior year. This increase reflects the component costs associated with the rise in perpetual license sales of our progressive gaming systems compared to the same period in the prior year.

Previous wording

Selling, general and administrative expenses increased $779,555, or 21% for the three months ended June 30, 2024, as compared to the same period in the prior year. This change was due to expenses associated with special projects of $675,044, most notable legal expenses incurred related to the acquisition by Evolution and to a lesser extent, driven by higher internal labor and related expenses (base salary, commissions, payroll-related taxes, bonus accrual and travel), increased information technology costs and those royalties that are not netted against revenues. Normalized for the impact of the acquisition by Evolution and excluding the related transaction fees of $675,044, selling, general, and administrative expenses increased $104,511, or 3% for the three months ended June 30, 2024, as compared to the same period in the prior year.

Current wording

Selling, general and administrative expenses increased $2,074,390, or 50% for the three months ended September 30, 2024, as compared to the same period in the prior year. This change was due to expenses associated with special projects of $2,244,885, notably legal expenses incurred related to the acquisition by Evolution and to a lesser extent driven by higher internal labor and related expenses (base salary, commissions, payroll-related taxes, bonus accrual and travel), increased repair and maintenance costs of leased machines, and increased information technology costs. Without the costs associated with the acquisition by Evolution and excluding the related transaction fees of $2,244,885, selling, general, and administrative expenses decreased $170,495, or 4% for the three months ended September 30, 2024, as compared to the same period in the prior year.

Previous wording

Research and development expenses for the three months ended June 30, 2024, were $269,479 compared to $199,665 for the comparable prior-year period, representing an increase of $69,814, or 35%. The increase was due to higher payroll costs from higher headcount, employee bonuses, and higher consulting fees.

Current wording

Research and development expenses for the three months ended September 30, 2024, were $261,493 compared to $226,405 for the comparable prior-year period, representing an increase of $35,088, or 15%. This increase was driven by higher payroll costs due to increased headcount, employee bonuses, and the ongoing development of internal software placed in service.

Previous wording

Stock-based compensation expenses decreased 21% for the three months ended June 30, 2024, as compared to the same period in the prior year. 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.

Current wording

Stock-based compensation expenses decreased 10% for the three months ended September 30, 2024, as compared to the same period in the prior year. 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.

Previous wording

Interest expense was up $124,618, or 3% for the six months ended June 30, 2024, as compared to the same period in the prior year. The increase was due to higher interest rates on our variable debt. Interest income was up $186,628, or 83% compared to the prior year period, benefitting from higher cash balances and higher interest rates.

Current wording

Interest expense remained relatively flat, with a 0% change for the three months ended September 30, 2024, as compared to the same period in the prior year. Interest income increased 2% compared to the prior year period, benefitting from higher cash balances and rising interest rates.

Previous wording

Income tax provision was $28,293 for the three months ended June 30, 2024, compared to income tax provision of $16,677 for the comparable prior-year period. The increase in expense is primarily driven by the increased amount of permanent differences mainly attributable to the legal expenses incurred related to the acquisition by Evolution in the current period and offset by decreased income before provision for income taxes.

Current wording

Income tax provision was $7,197 for the three months ended September 30, 2024, compared to income tax provision of $41,642 for the comparable prior-year period. The decrease in expense is primarily driven by the increase in loss before provision for income taxes.

Previous wording

Primarily as a result of the factors described above, we had net income of $242,697 for the three months ended June 30, 2024, as compared to net income of approximately $356,769 for the same period in the prior year. Normalized for the impact of the acquisition by Evolution and excluding the related transactions fees of $675,044 from selling, general, and administrative expenses, net income increased $560,972, or 157% for the three months ended June 30, 2024, as compared to the same period in the prior year.

Current wording

Primarily as a result of the factors described above, we had a net loss of $2,197,914 for the three months ended September 30, 2024, as compared to a net loss of approximately $1,455,158 for the same period in the prior year. Without the professional fees, acquisition costs and other fees associated with the acquisition by Evolution, and excluding the related transactions fees of $2,244,885 from selling, general, and administrative expenses, we would have net income of $46,971, representing a $1,502,129 or 103% increase for the three months ended September 30, 2024, as compared to the same period in the prior year.

Previous wording

Results of operations for the six months ended June 30, 2024 and 2023.

Current wording

Results of operations for the nine months ended September 30, 2024 and 2023.

Previous wording

Recurring core revenue increased $1,487,184, or 39% for the three months ended June 30, 2024, as compared to the same period in the prior year. This change was driven primarily by favorable revenue from our EZ Baccarat distribution arrangement which commenced in September 2023 and the continued success of our side bets and progressive products. Royalties netted against gross core revenue increased $788,259 for the three months ended June 30, 2024, as compared to the same period in the prior year. This increase was attributable to royalties paid on our EZ Baccarat revenues. Perpetual license sales of our progressive gaming systems to customers of $1,497,300 were down 4% percent for the three months ended June 30, 2024, as compared to the same period in the prior year. Gross digital revenues of $3,528,465, were up $733,029, or 26% for the three months ended June 30, 2024, as compared to the same period in the prior year. This favorable increase reflects the ongoing expansion of our digital content into new markets and the continued success of offering competitive products with brand recognition, most notable 21+3. Net of royalties, digital revenues grew to $2,541,960, up 16% for the three months ended June 30, 2024, as compared to the same period in the prior year.

Current wording

Recurring core revenue increased $4,186,956, or 36% for the nine months ended September 30, 2024, as compared to the same period in the prior year. This growth was primarily driven by favorable revenue from our EZ Baccarat distribution arrangement, which began in September 2023, along with the continued success of our side bets and progressive products. Royalties netted against gross core revenue increased $2,209,623 for the nine months ended September 30, 2024, as compared to the same period in the prior year. This increase was attributable to royalties paid on our EZ Baccarat revenues. Perpetual license sales of our progressive gaming systems to customers of $3,007,493, were down 8% percent for the nine months ended September 30, 2024, as compared to the same period in the prior year. Gross digital revenues of $10,497,613 were up $2,120,243, or 25% for the nine months ended September 30, 2024, as compared to the same period in the prior year. This favorable increase reflects the ongoing expansion of our digital content into new markets and the continued success of offering competitive products with brand recognition, most notable 21+3. Net of royalties, digital revenues grew to $7,662,123, up 23% for the nine months ended September 30, 2024, as compared to the same period in the prior year

Previous wording

Cost of ancillary products and assembled component expense increased $99,106, or 20% for the three months ended June 30, 2024, 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 to customers.

Current wording

Cost of ancillary products and assembled component expense increased $308,500, or 30% for the nine months ended September 30, 2024, 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.

Previous wording

Selling, general and administrative expenses increased $1,199,726, or 16% for the six months ended June 30, 2024, as compared to the same period in the prior year. This change was due to expenses associated with special projects of $675,044, most notable legal expenses incurred related to the acquisition by Evolution and to a lesser extent, driven by higher internal labor and related expenses (base salary, commissions, payroll-related taxes, bonus accrual and travel), increased information technology costs, and those royalties that are not netted against revenues. Normalized for the impact of the acquisition by Evolution and excluding the related transaction fees of $675,044, selling, general, and administrative expenses increased $524,682, or 7% for six months ended June 30, 2024, as compared to the same period in the prior year.

Current wording

Selling, general and administrative expenses increased $3,274,115, or 28% for the nine months ended September 30, 2024, as compared to the same period in the prior year. This change was due to expenses associated with special projects of $2,919,929, notably legal expenses incurred related to the acquisition by Evolution and to a lesser extent driven by higher internal labor and related expenses (base salary, commissions, payroll-related taxes, bonus accrual and travel), increased repair and maintenance costs of leased machines, increased use tax, and increased information technology costs. Without the costs associated with the acquisition by Evolution and excluding the related transaction fees of $2,919,929, selling, general, and administrative expenses increased $354,186, or 3% for nine months ended September 30, 2024, as compared to the same period in the prior year.

Previous wording

Research and development expenses were up $114,940, or 28% for the six months ended June 30, 2024, as compared to the same period in the prior year. The increase was due to higher payroll costs from higher headcount, employee bonuses, option exercises in the period, and higher consulting fees.

Current wording

Research and development expenses were up $150,028, or 24% for the nine months ended September 30, 2024, 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.

Previous wording

Stock-based compensation expenses decreased $154,204, or 31% for the six months ended June 30, 2024, as compared to the same period in the prior year. 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.

Current wording

Stock-based compensation expenses decreased $175,707, or 25% for the nine months ended September 30, 2024, as compared to the same period in the prior year. 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, employees, and consultants.

Previous wording

Interest expense was up 2% for the three months ended June 30, 2024, as compared to the same period in the prior year. The increase was due to higher interest rates on our variable debt. Interest income was up 50% compared to the prior year period, benefitting from higher cash balances and higher interest rates.

Current wording

Interest expense was up $115,979, or 2% for the nine months ended September 30, 2024, as compared to the same period in the prior year. The increase was due to higher interest rates on our variable debt. Interest income was up $191,639, or 45% compared to the prior year period, benefitting from higher cash balances and higher interest rates.

Previous wording

Primarily as a result of the factors described above, we had net income of $451,605 for the six months ended June 30, 2024, as compared to net income of approximately $467,463 for the same period in the prior year. Normalized for the impact of the acquisition by Evolution and excluding the related transactions fees of $675,044 from selling, general, and administrative expenses, net income increased $659,186, or 141% for the six months ended June 30, 2024, as compared to the same period in the prior year.

Current wording

Primarily as a result of the factors described above, we had a net loss of $1,746,309 for the nine months ended September 30, 2024, as compared to a net loss of approximately $987,695 for the same period in the prior year. Without the professional fees, acquisition costs and other fees associated with the acquisition by Evolution, and excluding the related transactions fees of $2,919,929 from selling, general, and administrative expenses, we would have net income of $1,173,620, representing a $2,161,315 or 219% increase for the nine months ended September 30, 2024, as compared to the same period in the prior year.

Previous wording

As of June 30, 2024, we had total current assets of $24,041,400 and total assets of $41,470,750. This compares to $22,156,035 and $40,475,800, respectively, as of December 31, 2023. The increase in current assets as of June 30, 2024 compared to December 31, 2023 was due to the increased cash and cash equivalents driven by cash provided from operating activities, most notably increased collections of receivables. These increases were offset by a decrease in prepaid expenses for insurance, IT expenses, and deposits for trade shows. The increase in total assets as of June 30, 2024 compared to December 31, 2023 was primarily due to the increase of current assets noted above and offset by a decrease in other intangible assets and operating lease right-of-use assets as a result of amortization in the 2024 period.

Current wording

As of September 30, 2024, we had total current assets of $24,831,519 and total assets of $41,967,121. As of December 31, 2023, we had total current assets of $22,156,035 and total assets of $40,475,800. The increase in current assets as of September 30, 2024 compared to December 31, 2023 was due to the increased cash and cash equivalents driven by cash provided from operating activities and increased accounts receivable. The increase in total assets as of September 30, 2024 compared to December 31, 2023 was primarily due to the increase of current assets noted above and offset by a decrease in other intangible assets and operating lease right-of-use assets as a result of amortization in the 2024 period.

Previous wording

Our total current liabilities as of June 30, 2024 compared to December 31, 2023 decreased to $4,837,667 from $4,875,967. This decrease was primarily due to a decrease in accrued royalties, and offset by increased accounts payable.

Current wording

Our total current liabilities as of September 30, 2024 compared to December 31, 2023 increased to $7,065,564 from $4,875,967. This increase was primarily due to an increase in accounts payable related to professional fees in connection with the acquisition by Evolution.

Previous wording

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.

Current wording

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.

Previous wording

Our operating activities provided cash of $3,873,347 for the six months ended June 30, 2024, compared to $2,494,400 provided for the comparable prior period. This change is attributable to a favorable variance of $1,222,127 in use of assets and liabilities that relate to operations. Additionally, depreciation and amortization increased $316,714 related to increased capitalization of intangible assets and offset by a $154,204 decline in stock-based compensation from the vesting of stock options.

Current wording

Our operating activities provided cash of $3,027,456 for the nine months ended September 30, 2024, compared to $399,450 provided for the comparable prior year period. This change is attributable to a favorable variance of $3,244,234 in use of assets and liabilities that relate to operations. Additionally, depreciation and amortization increased $450,213 related to increased capitalization of intangible assets and offset by a $175,707 decline in stock-based compensation from the vesting of stock options and a $141,408 decrease in bad debt expense.

Previous wording

Investing activities used cash of $676,315 for the six months ended June 30, 2024, compared to cash used of $773,559 for the six months ended June 30, 2023. This decrease in cash used was primarily due to the acquisition of assets deployed at client locations and investment in internally developed software in the 2024 period.

Current wording

Investing activities used cash of $1,181,403 for the nine months ended September 30, 2024, compared to cash used of $1,290,340 for the nine months ended September 30, 2023. This decrease in cash used was primarily due to the increase in the transfer of title of assets deployed at client locations to perpetual license customers offset by the increase of cash used for the acquisition of assets deployed at client locations.

Previous wording

Cash used in financing activities during the six months ended June 30, 2024, was $465,317. This compares to $1,204,584 cash used by financing activities for the six months ended June 30, 2023. 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.

Current wording

Cash used in financing activities during the nine months ended September 30, 2024, was $648,038. This compares to $1,409,803 cash used by financing activities for the nine months ended September 30, 2023. 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.