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, 2023 and 2022. 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, 2023 and 2022. For the three months ended March 31, 2023, we generated revenues of $7,422,534 compared to $5,918,599 for the comparable prior-year period, representing an increase of $1,503,935, or 25.4%. Net revenues in our GG Core operating segment increased 35.2% from $3,825,989 to $5,171,880. This increase was attributable primarily to shipment of perpetual right to use gaming systems to a single customer. Net revenues in our GG Digital operating segment increased 7.6% from $2,092,610 to $2,250,654. Our online gaming revenues increased due to our online customers' growth in their traditional markets and their entry into new markets.
Selling, general and administrative expenses for the three months ended March 31, 2023 were $3,784,657 compared to $3,043,359 for the comparable prior-year period, representing an increase of $741,298, or 24.4%. This increase was due to higher cost of ancillary products and assembled components, internal labor and related expenses (base salary, commissions, payroll-related taxes, bonus accrual and travel), increased information technology expenses, and increased trade show expenses.
Research and development expenses for the three months ended March 31, 2023 were $206,760, compared to $199,070 for the comparable prior-year period, representing an increase of $7,690, or 3.9%.
Share-based compensation expenses for the three months ended March 31, 2023 were $244,923, as compared to $310,002 for the comparable prior-year period, representing a decrease of $65,079, or 20.6%. 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 2023 and lower share-based compensation for officers and consultants.
As a result of the changes described above, income from operations increased $668,726 or FALSE to $2,257,842 for the three months ended March 31, 2023, compared to income from operations of $1,589,116 for the comparable prior-year period.
Total interest expense increased $516,613, or 30.6%, to $(2,203,635) for the three months ended March 31, 2023, compared to $(1,687,022) for the comparable prior-year period. The increase was attributable to higher rates of interest on the current borrowings.
Income tax expense was $(5,575) for the three months ended March 31, 2023, compared to income tax benefit of $141,974 for the comparable prior-year period. The decrease in benefit is primarily the result of increased favorable discrete items related to excess tax benefits from stock-based compensation in the prior period that did not occur in the current period.
15
Adjusted EBITDA. Adjusted EBITDA includes adjustments to net income to exclude interest, income taxes, depreciation, amortization, share-based compensation, foreign currency exchange loss (gain) 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
Adjusted EBITDA Reconciliation: |
|
|
2023 |
|
|
2022 |
|
Net income (loss) |
|
|
$ |
110,694 |
|
|
$ |
(13,962 |
) |
Interest expense |
|
|
|
2,203,635 |
|
|
|
1,687,022 |
|
Interest income |
|
|
|
(84,750 |
) |
|
|
(2,233 |
) |
Depreciation and amortization |
|
|
|
576,342 |
|
|
|
724,462 |
|
Share-based compensation |
|
|
|
244,923 |
|
|
|
310,002 |
|
Foreign currency exchange loss (gain) |
|
|
|
22,688 |
|
|
|
60,263 |
|
Provision (benefit) for income taxes |
|
|
|
5,575 |
|
|
|
(141,974 |
) |
Severance expense |
|
|
|
— |
|
|
|
21,727 |
|
Special project expense (benefit) - Triangulum |
|
|
|
— |
|
|
|
(86,959 |
) |
Special project expense - Other |
|
|
|
5,321 |
|
|
|
115,083 |
|
Adjusted EBITDA |
|
|
$ |
3,084,428 |
|
|
$ |
2,673,431 |
|
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, 2023, we had total current assets of $24,270,413 and total assets of $41,841,064. This compares to $24,194,187 and $42,010,516, respectively, as of December 31, 2022. The increase in total current assets at March 31, 2023 was due primarily to payments of accrued royalties and debt principal payments in the 2023 period. The decrease in total assets was primarily due to the decrease in current assets and amortization of other intangibles.
Our total current liabilities as of March 31, 2023 decreased to $5,971,433 from $6,032,441 as of December 31, 2022, primarily due to the payment of accrued royalties, accrued bonuses, 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, 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 used cash of $(652,218) for the three months ended March 31, 2023, compared to $1,476,946 provided for the comparable prior period. The negative operating cash flow was primarily due to an increase in receivables, a decrease in payables, and higher interest expense.
Investing activities used cash of ($303,894) for the three months ended March 31, 2023, compared to cash used of ($176,457) for the comparable prior period. This increase in cash used was primarily due to the investment in internally developed software in the 2023 period, partially offset by a decrease in the acquisition of assemblies in process.
Cash used in financing activities during the three months ended March 31, 2023 was ($906,239). This compares to ($120,480) cash used by financing activities for the comparable prior period. The decrease was due to higher principal payments on our borrowings in the 2023 period.
Critical accounting policies. Our significant accounting policies are described in our 2022 10-K. There have been no material changes to those policies.
16
Off-balance sheet arrangements. As of March 31, 2023, 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.
17
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, 2023, 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.
18
