NOTE 6. COMMITMENTS AND CONTINGENCIES

Concentration of risk. We are exposed to risks associated with customers who represent a significant portion of total revenues.

Legal proceedings. In the ordinary course of conducting our business, we are, from time to time, involved in various legal proceedings, administrative proceedings, regulatory government investigations and other matters, including those in which we are a plaintiff or defendant, that are complex in nature and have outcomes that are difficult to predict.

An unexpected adverse judgment in any pending litigation could cause a material impact on our business operations, intellectual property, results of operations or financial position. Unless otherwise expressly stated, we believe costs associated with litigation will not have a material impact on our financial position or liquidity but may be material to the results of operations in any given period and, accordingly, no provision for loss has been reflected in the accompanying financial statements related to those matters.

Beginning on September 11, 2024, seven purported stockholders of Galaxy have sent demands to the Company and two of which included draft complaints. On October 18, 2024, two purported stockholders filed complaints, relating to the Merger Agreement disclosures, captioned Finger v. Galaxy Gaming, Inc., et al., Index No. 655536/2024 (N.Y. Sup. Ct.) and Coffman v. Galaxy Gaming, Inc., et al., Index No. 655530/2024 (N.Y. Sup. Ct.). The demand letters and complaints allege that the definitive proxy statement on Schedule 14A filed by the Company on September 26, 2024 is materially incomplete and misleading because it omitted certain information related to the Merger (as defined herein), including but not limited to information about the Company’s financial projections and analyses performed by Galaxy’s financial advisor, Macquarie Capital (USA) Inc. While we believe that the disclosures set forth in the proxy statement comply fully with all applicable law and deny the allegations in the demand letters and the complaints, in order to moot plaintiffs’ disclosure claims, avoid nuisance and possible expense and business delays, and provide additional information to our stockholders, on November 1, 2024, we determined to voluntarily supplement certain disclosures in the proxy statement related to the purported stockholders’ claims.

Regulatory matters. The Company conducted a self-initiated review of its historical sales and use tax compliance as part of its ongoing internal control and process improvement initiatives. In connection with this review, the Company identified a potential compliance gap related to the application of sales and use tax in certain jurisdictions for prior periods.

The Company engaged third-party tax advisors to assist in evaluating the matter and participated in a self-initiated managed audit in a certain jurisdiction. As of June 30, 2026, the managed audit was substantially completed. Based on the preliminary audit findings, the Company recognized and paid $505,361 of state tax expense largely relating to sales and use tax not charged to customers, substantially all of which is attributable to periods prior to 2026. As part of the resolution of the managed audit, the taxing authority abated substantially all applicable penalties. The Company does not expect any additional material liabilities related to this certain jurisdiction.

The Company's review of its historical sales and use tax position is ongoing with respect to other jurisdictions in which it has conducted business. Several of the Company's customer agreements provide that the customer is responsible for determining, self-assessing, and remitting any applicable sales, use, or similar transaction taxes associated with the products and services provided by the Company. These contractual provisions do not necessarily relieve the Company of any statutory obligation to a taxing authority; however, to the extent the Company is ultimately required to remit tax in a jurisdiction, it may have contractual rights to recover such amounts from the applicable customers. Any such recoveries would be recognized only when realization becomes reasonably assured and, accordingly, no amounts have been recognized in the accompanying financial statements.

The Company does not believe its potential exposure in any individual remaining jurisdiction is material. However, the Company's evaluation of nexus, taxability, the availability of customer exemptions, the extent to which customers have directly assessed and remitted applicable taxes, the enforceability and collectibility of the customer tax-responsibility provisions in its agreements, and applicable lookback periods in these jurisdictions is not complete, and the manner of resolution in each jurisdiction — which may include managed audits, voluntary disclosure agreements, or similar programs — has not been determined. As a result, the Company is unable to estimate the aggregate amount of any additional liability at this time, and no accrual related to these remaining jurisdictions has been recorded as of June 30, 2026. It is reasonably possible that the Company will record additional liabilities as these matters are resolved in future periods.

Intellectual property agreements. From time to time, the Company purchases or licenses intellectual property from third-parties and the Company, in turn, utilizes that intellectual property in certain games licensed to customers. In these purchase or license agreements, the Company may agree to pay the seller of the intellectual property a fee, if and when, the Company receives revenue from games containing the intellectual property.