ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
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, 2022 and 2021. 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 2021 10-K. Some of the information contained in this discussion includes forward-looking statements that involve risks and uncertainties; therefore our “Special Note Regarding Forward-Looking Statements” should be reviewed for a discussion of important factors that could cause actual results to differ materially from the results described in, or implied by, such forward-looking statements.
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, 2022 and 2021. For the three months ended March 31, 2022, we generated revenues of $5,918,599 compared to $4,282,901 for the comparable prior-year period, representing an increase of $1,635,698, or 38.2%. This increase was attributable to the continued recovery of our land-based customers from the effects of the COVID-19 crisis, particularly in the United Kingdom. Also, our online gaming revenues increased due to increased revenue earned by our iGaming clients, reflecting continued growth in their non-US markets and significantly increased revenue in existing or newly-opened US markets.
Selling, general and administrative expenses for the three months ended March 31, 2022 were $3,043,359 compared to $2,711,052 for the comparable prior-year period, representing an increase of $332,307, or 12.3%. This increase was due to higher internal labor and related expenses (base salary, payroll-related taxes, bonus accrual and travel). These increases were offset by a decrease in legal fees related to the Triangulum lawsuit.
Research and development expenses for the three months ended March 31, 2022 were $199,070, compared to $118,701 for the comparable prior-year period, representing an increase of $80,369, or 67.7%. This increase was primarily due to higher internal labor and related expenses (base salary, payroll-related taxes, commissions and bonus accrual).
Share-based compensation expenses for the three months ended March 31, 2022 were $310,002, as compared to $316,640 for the comparable prior-year period, representing a decrease of $6,638, or 2.1%. 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 2022.
As a result of the changes described above, income from operations increased $1,184,166 or 292.4% to $1,589,116 for the three months ended March 31, 2022, compared to income from operations of $404,950 for the comparable prior-year period.
Total interest expense increased $1,506,112, or 832.5%, to $1,687,022 for the three months ended March 31, 2022, compared to $180,910 for the comparable prior-year period. The increase was attributable to 1) a larger balance of debt outstanding in the current period as compared to the prior year, and 2) higher rates of interest on the current borrowings.
Share redemption consideration was $0 in the three months ended March 31,2022, compared to $195,482 in the comparable prior-year period. The reduction is due to the payment in full of the Triangulum Redemption Consideration Obligation in November 2021.
Income tax benefit was ($141,974) for the three months ended March 31, 2022, compared to income tax benefit of ($18,950) for the comparable prior-year period. The increase in benefit is primarily the result of increased favorable discrete items related to excess tax benefits from stock-based compensation.
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Adjusted EBITDA. Adjusted EBITDA includes adjustments to net income to exclude interest, income taxes, depreciation, amortization, share-based compensation, foreign currency exchange loss (gain), change in fair value of interest rate swap liability 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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|
|
|
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|
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Three Months Ended March 31, |
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Adjusted EBITDA Reconciliation: |
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2022 |
|
|
2021 |
|
|
Net (loss) income |
|
$ |
(13,962 |
) |
|
$ |
88,737 |
|
|
Interest expense |
|
|
1,687,022 |
|
|
|
180,910 |
|
|
Share redemption consideration |
|
|
— |
|
|
|
195,482 |
|
|
Interest income |
|
|
(2,233 |
) |
|
|
(382 |
) |
|
Depreciation and amortization |
|
|
724,462 |
|
|
|
717,254 |
|
|
Share-based compensation |
|
|
310,002 |
|
|
|
316,640 |
|
|
Foreign currency exchange loss/(gain) |
|
|
60,263 |
|
|
|
8,975 |
|
|
Change in fair value of interest rate swap liability |
|
|
— |
|
|
|
(49,822 |
) |
|
(Benefit) provision for income taxes |
|
|
(141,974 |
) |
|
|
(18,950 |
) |
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Severance expense |
|
|
21,727 |
|
|
|
3,750 |
|
|
Special project expense |
|
|
28,124 |
|
|
|
249,436 |
|
|
Adjusted EBITDA |
|
$ |
2,673,431 |
|
|
$ |
1,692,030 |
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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, 2022, we had total current assets of $24,204,981 and total assets of $40,152,056. This compares to $23,890,122 and $40,452,705, respectively, as of December 31, 2021. The increase in total current assets at March 31, 2022 was due primarily to higher revenues in the 2022 period. The decrease in total assets was primarily due to amortization of other intangibles.
Our total current liabilities as of March 31, 2022 decreased to $3,656,939 from $4,401,071 as of December 31, 2021, primarily due to the payment of accrued bonuses in March 2022.
Our business was profitable and cash-flow positive from operations in Q1 2022. 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.
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, inventory 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 $1,426,499 for the three months ended March 31, 2022, compared to $767,829 for the comparable prior period. The increase in operating cash flow was primarily due to higher income from operations, partially offset by higher interest expense.
Investing activities used cash of ($65,747) for the three months ended March 31, 2022, compared to cash used of ($81,792) for the comparable prior period. This decrease was primarily due to the acquisition of certain software tools in the 2021 period which did not recur in the 2022 period.
Cash used in financing activities during the three months ended March 31, 2022 was ($120,480). This compares to ($557,639) cash used by financing activities for the comparable prior period. The decreased was due to lower amortization of principal on our borrowings in the 2022 period and to higher proceeds from stock option exercises.
Critical accounting policies. Our significant accounting policies are described in our 2021 10-K. There have been no material changes to those policies.
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Off-balance sheet arrangements. As of March 31, 2022, 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.
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ITEM 4. CONTROLS AND PROCEDURES
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, 2022, our disclosure controls and procedures were effective.
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 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.
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