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 and nine months ended September 30, 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, table game display products and other ancillary equipment. In addition, we license intellectual property to legal internet gaming operators. We refer to the licensure of our products in land-based casinos as “Galaxy Core” and to the licensure of our products in online casinos as “Galaxy Digital”. 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 September 30, 2022 and 2021. For the three months ended September 30, 2022, we generated revenues of $5,906,989 compared to $5,281,788 for the comparable prior-year period, representing an increase of $625,201, or 11.8%. 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. Our online gaming revenues increased due to increased revenue earned by our iGaming clients, reflecting continued growth in their non-U.S. markets and significantly increased revenue in existing or newly-opened U.S. markets. However, revenue in both Galaxy Core and Galaxy Digital were adversely affected by the strengthening of the U.S. Dollar versus the Euro and UK Pound. In local currency, revenues in Galaxy Core increased 10.3% and revenues in Galaxy Digital increased 31.3%.
Selling, general and administrative expenses for the three months ended September 30, 2022 were $3,340,691 compared to $2,740,328 for the comparable prior-year period, representing an increase of $600,363, or 21.9%. This increase was due to higher internal labor and related expenses due to both an increase in the number of employees and an increase in compensation for continuing employees. In addition, we experienced increases in travel expenses and increase in marketing expenses related to our attendance at trade shows that were not held in 2021. Finally, we incurred significant outside consulting expenses in the current quarter related to enhancing our financial reporting systems.
Research and development expenses for the three months ended September 30, 2022 were $127,774, compared to $156,768 for the comparable prior-year period, representing an decrease of $28,994, or 18.5%. This decrease was primarily due to higher internal labor and related expenses.
Share-based compensation expenses for the three months ended September 30, 2022 were $329,140, as compared to $449,564 for the comparable prior-year period, representing a decrease of $120,424, or 26.8%. The decrease was due primarily to a change in the level and the composition of fees paid to members of our Board in 2022.
As a result of the changes described above, income from operations increased $111,609 or 9.4% to $1,297,952 for the three months ended September 30, 2022, compared to income from operations of $1,186,343 for the comparable prior-year period.
Total interest expense increased $1,767,443 to $1,896,865 for the three months ended September 30, 2022, compared to $129,422 for the comparable prior-year period. The increase was attributable to a larger balance of debt outstanding in the current period as compared to the prior year, and higher rates of interest on the current borrowings.
No share redemption consideration for the three months ended September 30, 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 $154,944 for the three months ended September 30, 2022, compared to income tax benefit of $21,186 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 and changes in valuation allowance against deferred tax attributes because of changes in estimates of current-year ordinary income.
Results of operations for the nine months ended September 30, 2022 and 2021. For the nine months ended September 30, 2022, we
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generated revenues of $17,501,783 compared to $14,314,127 for the comparable prior-year period, representing an increase of $3,187,656, or 22.3%. This increase was attributable to the continued recovery of Galaxy Core from the effects of the COVID-19 crisis, particularly in the United Kingdom. Our online gaming revenues increased due to increased revenue earned by our iGaming clients, reflecting continued growth in their non-U.S. markets and significantly increased revenue in existing or newly-opened U.S. markets. However, revenue in both Galaxy Core and Galaxy Digital were adversely affected by the strengthening of the U.S. Dollar versus the Euro and UK Pound. In local currency, revenues in Galaxy Core increased 17.7% and revenues in Galaxy Digital increased 37.2%.
Selling, general and administrative expenses for the nine months ended September 30, 2022 were $9,867,968 compared to $7,984,035 for the comparable prior-year period, representing an increase of $1,883,933, or 23.6%. This increase was due to higher internal labor and related expenses due to both an increase in the number of employees and an increase in compensation for continuing employees. In addition, we experienced increases in travel expenses and increase in marketing expenses related to our attendance at trade shows that were not held in 2021. A decrease in legal fees related to the Triangulum litigation and settlement was almost entirely offset by legal and other expenses related to the contested proxy solicitation.
Research and development expenses for the nine months ended September 30, 2022 were $478,866, compared to $405,327 for the comparable prior-year period, representing an increase of $73,539, or 18.1%. 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 nine months ended September 30, 2022 were $954,550, as compared to $1,207,649 for the comparable prior-year period, representing a decrease of $253,099, or 21.0%. The decrease was due primarily to a change in the level and the composition of fees paid to members of our Board in 2022.
As a result of the changes described above, income from operations increased $1,339,531 or 53.7% to $3,836,218 for the nine months ended September 30, 2022, compared to income from operations of $2,496,687 for the comparable prior-year period.
Total interest expense increased $4,830,848 to $5,281,322 for the nine months ended September 30, 2022, compared to $450,474 for the comparable prior-year period. The increase was attributable to a larger balance of debt outstanding in the current period as compared to the prior year, and higher rates of interest on the current borrowings.
There was no share redemption consideration for the nine months ended September 30, 2022, compared to $586,446 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 $101,941 for the nine months ended September 30, 2022, compared to income tax expense of $7,000 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 and changes in valuation allowance against deferred tax attributes because of changes in estimates of current-year ordinary income.
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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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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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Adjusted EBITDA Reconciliation: |
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2022 |
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2021 |
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2022 |
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2021 |
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Net (loss) income |
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$ |
(698,690 |
) |
|
$ |
874,236 |
|
|
$ |
(1,828,293 |
) |
|
$ |
1,513,428 |
|
Interest expense |
|
|
1,896,865 |
|
|
|
129,422 |
|
|
|
5,281,322 |
|
|
|
450,474 |
|
Share redemption consideration |
|
|
— |
|
|
|
195,482 |
|
|
|
— |
|
|
|
586,446 |
|
Interest income |
|
|
(18,674 |
) |
|
|
(392 |
) |
|
|
(23,166 |
) |
|
|
(1,163 |
) |
Depreciation and amortization |
|
|
740,069 |
|
|
|
722,475 |
|
|
|
2,189,789 |
|
|
|
2,160,217 |
|
Share-based compensation |
|
|
329,140 |
|
|
|
449,564 |
|
|
|
954,550 |
|
|
|
1,207,649 |
|
Foreign currency exchange loss (gain) |
|
|
255,140 |
|
|
|
33,781 |
|
|
|
490,041 |
|
|
|
31,511 |
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Change in fair value of interest rate swap liability |
|
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— |
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|
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— |
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|
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— |
|
|
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(66,009 |
) |
Provision (benefit) for income taxes |
|
|
(154,944 |
) |
|
|
(21,186 |
) |
|
|
(101,941 |
) |
|
|
7,000 |
|
Other non-recurring income |
|
|
18,255 |
|
|
|
(25,000 |
) |
|
|
18,255 |
|
|
|
(25,000 |
) |
Severance expense |
|
|
— |
|
|
|
8,846 |
|
|
|
28,477 |
|
|
|
12,596 |
|
Special project expense (benefit) - Triangulum |
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|
— |
|
|
|
116,798 |
|
|
|
(86,959 |
) |
|
|
413,024 |
|
Special project expense - Other |
|
|
(17,000 |
) |
|
|
(20,904 |
) |
|
|
459,904 |
|
|
|
12,516 |
|
Adjusted EBITDA |
|
$ |
2,350,161 |
|
|
$ |
2,463,122 |
|
|
$ |
7,381,979 |
|
|
$ |
6,302,689 |
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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 September 30, 2022, we had total current assets of $25,425,442 and total assets of $42,482,202. This compares to $23,890,122 and $40,452,705, respectively, as of December 31, 2021. The increase in total current assets at September 30, 2022 was due primarily to higher revenues in the 2022 period. The increase in total assets was primarily due to the addition of $2,000,000 in intangibles through the exercise of an option in a contract pursuant to which we terminated the obligation to pay any consideration to a party from whom we acquired game assets in 2011.
Our total current liabilities as of September 30, 2022 increased to $7,268,976 from $4,401,071 as of December 31, 2021, primarily due to an increase in accrued royalties in our online gaming business and an increase in federal income tax payable.
Our business was cash-flow positive from operations as of September 30, 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 $4,502,477 for the nine months ended September 30, 2022, compared to cash provided of $3,220,319 in the prior period. The increase in operating cash flow was primarily due to higher income from operations, partially offset by higher interest expense.
Cash used in investing activities during the nine months ended September 30, 2022 was $434,576, compared to cash used of $84,969 in the prior period. This was primarily due to an increase in the acquisition of certain software tools in 2022.
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Cash used in financing activities during the nine months ended September 30, 2022 was $421,307, compared to cash used of $1,654,182 in the prior period. This was due to principal payments on our borrowings in 2022, offset by the proceeds from stock option exercised.
Critical accounting policies. Our significant accounting policies are described in our 2021 10-K. There have been no material changes to those policies.
Off-balance sheet arrangements. As of September 30, 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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