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 endedSeptember 30, 2021 and 2020. 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 2020 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, productivity and security 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 inLas Vegas, Nevada , as well as outsourced for certain sub-assemblies inthe United States . Results of operations for the three months endedSeptember 30, 2021 and 2020. For the three months endedSeptember 30, 2021 , we generated gross revenues of$5,281,788 compared to$1,797,833 for the comparable prior-year period, representing an increase of$3,483,955 , or 193.8%. This increase was directly attributable to the re-opening of a significant portion of our land-based customers after the restrictions due to the COVID-19 crisis were lifted. Also, our online gaming revenues increased significantly due primarily to the acquisition of PGP in August of 2020 as well as to the opening of new markets in theU.S. Selling, general and administrative expenses for the three months endedSeptember 30, 2021 were$2,740,328 compared to$1,833,723 for the comparable prior-year period, representing an increase of$906,605 , or 49.4%. This increase was due to higher internal labor and related expenses (base salary, payroll-related taxes, bonus accrual and travel). Also, higher insurance payments related to the financed D&O policy contributed to the higher current period expenses. This increase was offset by a decrease in legal fees related to the Triangulum Lawsuit and overall general business. In Q3 2021, the Company incurred$95,894 in legal expenses associated with the Triangulum Lawsuit as compared to$183,059 for the comparable prior-year period. Research and development expenses for the three months endedSeptember 30, 2021 were$156,768 , compared to$97,081 for the comparable prior-year period, representing an increase of$59,687 , or 61.5%. 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 endedSeptember 30, 2021 were$449,564 , as compared to$178,553 for the comparable prior-year period, representing an increase of$271,011 , or 151.8%. This increase was due to the quarterly restricted shares granted to our Board members being issued at a higher stock price than the comparable prior-year period. The increase was also due to increased amortization related to restricted shares being issued to two employees and a contractor of the Company inNovember 2020 andFebruary 2021 .
As a result of the changes described above, income from operations increased
Total interest expense decreased
Share redemption consideration was
Income tax benefit was ($21,186 ) for the three months endedSeptember 30, 2021 , compared to income tax expense of$133,708 for the comparable prior-year period. The decrease in expense is primarily a result of favorable discrete items related to excess tax benefits from stock-based compensation. Results of operations for the nine months endedSeptember 30, 2021 and 2020. For the nine months endedSeptember 30, 2021 , we generated gross revenues of$14,314,127 compared to$6,956,122 for the comparable prior-year period, representing an increase of$7,358,005 , or 105.8%. This increase was directly attributable to the re-opening of a significant portion of our land-based customers 21 -------------------------------------------------------------------------------- after the restrictions due to the COVID-19 crisis were lifted. Also, our online gaming revenues increased significantly due primarily to the acquisition of PGP in August of 2020 as well as to the opening of new markets in theU.S. Selling, general and administrative expenses for the nine months endedSeptember 30, 2021 were$7,984,035 compared to$7,264,410 for the comparable prior-year period, representing an increase of$719,625 , or 9.9%. This increase was due to higher insurance payments related to the financed D&O policy and higher accounting and consulting fees. These increases were offset by a decrease in legal fees related to the Triangulum Lawsuit and overall general business. For the nine months endedSeptember 30, 2021 , the Company incurred$425,540 in legal expenses associated with the Triangulum Lawsuit as compared to$836,415 for the nine months endedSeptember 30, 2020 . Research and development expenses for the nine months endedSeptember 30, 2021 were$405,327 , compared to$391,333 for the comparable prior-year period, representing an increase of$13,994 , or 3.6%. This increase was primarily due to higher internal labor and related expenses (base salary, payroll-related taxes and bonus expense). Share-based compensation expenses for the nine months endedSeptember 30, 2021 were$1,207,649 , as compared to$512,818 for the comparable prior-year period, representing an increase of$694,831 , or 135.5%. This increase was due to the quarterly restricted shares granted to our Board members being issued at a higher stock price than the comparable prior-year period. The increase was also due to increased amortization related to restricted shares being issued to two employees and a contractor of the Company inNovember 2020 andFebruary 2021 . As a result of the changes described above, income from operations increased$5,249,908 or 190.7% to$2,496,687 for the nine months endedSeptember 30, 2021 , compared to a loss of$2,753,221 for the comparable prior-year period.
Total interest expense decreased
Share redemption consideration was
Income tax expense was
Adjusted EBITDA. Adjusted EBITDA includes adjustments to net income to exclude interest, income taxes, depreciation, amortization, share-based compensation, foreign currency exchange loss (gain), change in fair value of interest rate swap liability and severance and other expenses related to litigation. Adjusted EBITDA is not a measure of performance defined in accordance withU.S. GAAP. However, Adjusted EBITDA is used by management to evaluate our operating performance. Management believes that disclosure of the Adjusted EBITDA metric offers investors, regulators and other stakeholders a view of our operations in the same manner management evaluates our performance. When combined withU.S. GAAP results, management believes Adjusted EBITDA provides a comprehensive understanding of our financial results. Adjusted EBITDA should not be considered as an alternative to net income or to net cash provided by operating activities as a measure of operating results or of liquidity. It may not be comparable to similarly titled measures used by other companies, and it excludes financial information that some may consider important in evaluating our performance. A reconciliation ofU.S. GAAP net income to Adjusted EBITDA is as follows: Three Months Ended September 30, Nine Months Ended September 30, Adjusted EBITDA Reconciliation: 2021 2020 2021 2020 Net income (loss)$ 874,236 $ (1,297,499 ) $ 1,513,428 $ (3,387,475 ) Interest expense 129,422 162,082 450,474 506,922 Share redemption consideration 195,482 195,482 586,446 586,446 Interest income (392 ) (1,412 ) (1,163 ) (25,313 ) Depreciation and amortization 722,475 575,637 2,160,217 1,499,927 Share-based compensation 449,564 178,553 1,207,649 512,818 Foreign currency exchange loss (gain) 33,781 (20,014 ) 31,511 95,976
Change in fair value of interest rate
swap liability - (55,330 ) (66,009 ) (21,650 ) (Benefit) provision for income taxes (21,186 ) 133,708 7,000 (492,807 ) Other non-recurring income (25,000 ) (15,320 ) (25,000 ) (15,320 ) Severance expense 8,846 (3,243 ) 12,596 20,058 Special project expense(1) 95,894 183,059 425,540 836,415 Adjusted EBITDA$ 2,463,122 $ 35,703$ 6,302,689 $ 115,997 22
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(1) Includes expenses associated with the Triangulum lawsuit.
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. In 2020, as a result of COVID, we were required to raise funds from financing sources in order to maintain operations. In addition to our normal operations, we may make acquisitions of products, technologies or entire businesses. 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 ofSeptember 30, 2021 , we had total current assets of$15,239,020 and total assets of$32,384,680 . This compares to$11,562,833 and$30,574,594 , respectively, as ofDecember 31, 2020 . The increase in total current assets and total assets as ofSeptember 30, 2021 was primarily due to an increase in the accounts receivable balance, resulting from higher billings and lower collections directly related to the COVID-19 crisis. The increase in total assets was offset by monthly amortization on the Company's long-term other intangible assets. Our total current liabilities as ofSeptember 30, 2021 increased to$5,781,504 from$4,247,794 as ofDecember 31, 2020 , primarily due to the Company accruing for 2021 employee bonuses and an increase in accrued royalties in our online gaming business. Also, the Revolving Loan was reclassed from long-term to short-term inApril 2021 . These increases were offset by a decrease in the notes payable balance, as the final payment on the financed D&O insurance policy was made inSeptember 2021 . Despite the continuing effects of the COVID-19 crisis, our business was profitable and cash-flow positive in Q3 2021. 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 the 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$3,220,319 for the nine months endedSeptember 30, 2021 , compared to cash used of ($1,261,133 ) for the comparable prior period. The increase in operating cash flow was primarily due to higher net income for the period as a result of the re-opening of a significant portion of our land-based customers after the restrictions due to the COVID-19 crisis were lifted. Also, higher depreciation and amortization and share-based compensation contributed to the higher operating cash flow. These increases were partially offset by changes in operating assets and liabilities such as Accounts Receivable, Accounts Payable, Accrued Expenses and Revenue Contract Liability.
Investing activities used cash of (
Cash used in financing activities during the nine months endedSeptember 30, 2021 was ($1,654,182 ). This compares to$620,728 cash provided by financing activities for the comparable prior period. This was due to a$1,000,000 draw on our Revolving Loan inMarch 2020 and$835,300 from the Paycheck Protection Program Loan inApril 2020 , both being included in prior year numbers. Also, principal payments in the current year were higher than prior year due to an increase in the financed payments on the Company's D&O insurance policy. Critical accounting policies. Our consolidated financial statements have been prepared in accordance withU.S. GAAP. We consider the following accounting policies to be the most important to understanding and evaluating our financial results: Revenue recognition. We account for our revenue in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. We generate revenue primarily from the licensing of our intellectual property. We recognize revenue under recurring fee license contracts monthly as we satisfy our performance obligation, which consists of granting the customer the right to use our intellectual property. Amounts billed are determined based on flat rates or usage rates stipulated in the customer contract.Goodwill and other intangible assets.Goodwill and other intangible assets are assessed for impairment at least annually or at other times during the year if events or circumstances indicate that it is more likely than not that the fair value of a reporting asset is below the carrying amount. If found to be impaired, the carrying amounts will be reduced, and an impairment loss will be recognized. Long-term liabilities. The Company issued a promissory note in the face amount of$39,096,401 to Triangulum onMay 6, 2019 in connection with the share redemption disclosed in Note 1. The promissory note has not been given accounting effect in the Company's financial statements. The Company has instead recorded a long-term obligation payable to Triangulum, based on the redemption value specified in our Articles of Incorporation. The obligation is classified as long-term. The Company has the ability but is not required to refinance and settle the litigation. 23
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Off-balance sheet arrangements. As of
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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