Notes to Financial Statements
NOTE 1. NATURE OF OPERATIONS
Unless the context indicates otherwise, references to “Galaxy Gaming, Inc.,” “we,” “us,” “our,” or the “Company,” refer to Galaxy Gaming, Inc., a publicly reporting Nevada corporation (“Galaxy Gaming”). “GGLLC” refers to Galaxy Gaming, LLC, a Nevada limited liability company that was a predecessor of our business but is not directly associated with Galaxy Gaming, Inc.
History of business entities.
A prior corporation, also named Galaxy Gaming, Inc. (“GGINC”) was incorporated in the State of Nevada on December 29, 2006, and acquired the business operations of several companies using the “
Galaxy Gaming
” moniker. Pursuant to these agreements, GGLLC sold selected assets, such as inventory and fixed assets, to GGINC. On January 1, 2007, GGLLC entered into several agreements with GGINC. On December 31, 2007, GGINC acquired, through an asset purchase agreement, GGLLC’s remaining intellectual property including patents, patent applications, trademarks, trademark applications, copyrights, know-how and trade secrets related to the casino gaming services including but not limited to games, side bets, inventions and ideas. GGINC also acquired the existing client base from GGLLC.
Secured Diversified Investment, Ltd.
Secured Diversified Investment, Ltd., a publicly held Nevada corporation (“SDI”), was served with an involuntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Nevada, Case No. 08-16332. The Bankruptcy Court’s Order for Relief was entered on July 30, 2008. By order entered January 27, 2009, the Bankruptcy Court confirmed SDI’s Plan of Reorganization (“Plan”). On February 10, 2009, SDI entered into a share exchange agreement with GGINC (the “Reverse Merger”). In connection with the Reverse Merger, SDI obtained 100% of the issued and outstanding shares of GGINC and simultaneously GGINC became a wholly owned subsidiary of SDI. Pursuant to the terms and conditions of the Reverse Merger and the terms of the Plan, SDI issued 25,000,000 shares of common stock pro-rata to the former shareholders of GGINC in exchange for obtaining ownership of 100% of the issued and outstanding shares of GGINC”). SDI also issued 4,000,006 shares of new common stock on a pro rata basis to its creditors in exchange for the discharge of its outstanding debts under Chapter 11 of the U.S. Bankruptcy Code. All of SDI’s issued and outstanding equity interests existing prior to the Reverse Merger were extinguished and rendered null and void. Immediately following these events there were 29,000,006 shares of common stock issued and outstanding. Following the closing of the share exchange agreement, SDI discontinued all prior operations and focused exclusively on the business and operations of its wholly owned subsidiary, GGINC. On September 1, 2009, our Board approved a merger of SDI with its subsidiary, GGINC, pursuant to Nevada Revised Statute. §92A.180 (“Short Form Merger”) and the surviving merged company was named “Galaxy Gaming, Inc.”
In October 2011, we executed an asset purchase agreement (“PTG Agreement”) with Prime Table Games LLC and Prime Table Games UK (collectively “Prime Table Games” or “PTG”). Under the terms of the PTG Agreement, we acquired over 20 different table games, including
21+3, Two-way Hold’em
and
Three Card Poker
, which are currently played in over 250 casinos in the United States, the United Kingdom and in the Caribbean (
Three Card Poker
rights are limited to the British Isles). The intellectual property portfolio includes 36 patents and 11 patents pending, 96 worldwide trademark and design registrations and 47 domain name registrations. We continue to develop products using the intellectual property acquired as a result of this transaction. See Note 17.
Description of business.
We are engaged in the business of designing, developing, manufacturing and/or acquiring proprietary casino table games and associated technology, platforms and systems for the global gaming industry. In 2011, we expanded our product line with the addition of fully automated table games, known as e-Tables and separately, we entered into agreements to license our content for use by internet gaming operators. In 2015, we began offering SpectrumVision, a security product which assists in the detection of illegal card markings normally invisible to the naked eye. Casinos use our proprietary products to enhance their gaming floor operations and improve their profitability, productivity and security, as well as offer popular cutting-edge gaming entertainment content and technology to their players. We market our products to land-based, riverboat and cruise ship gaming establishments and to internet gaming companies. The game concepts and the intellectual property associated with these games are typically protected by patents, trademarks and/or copyrights. We market our products primarily via our internal sales force to casinos throughout North America, the Caribbean, the British Isles, Europe, Australia, Africa and to cruise ships and internet gaming sites worldwide. We currently have an installed base of our products on over 5,000 gaming tables located in about 600 casinos, which positions us as the second largest provider of proprietary table games in the world.
Revenues consist of primarily recurring royalties received from our clients for the licensing of our game content and other products. These recurring revenues generally have few direct costs thereby generating high gross profit margins. In lieu of reporting as
gross profit
, this amount would be comparable to
revenues less cost of ancillary products and assembled components
on our financial statements. Additionally, we receive non-recurring revenue from the sale of associated products.
We group our products into four product categories we classify as “Proprietary Table Games,” “Enhanced Table Systems,” “e-Tables,” and “Ancillary Equipment.” Our product categories are summarized below. Additional information regarding our products may be found on our web site, www.galaxygaming.com. Information found on the web site should not be considered part of this report.
25
Proprietary Table Games.
We design, develop and deliver our Proprietary Table Games to enhance our casino clients’ table game operations. Casinos use our Proprietary Table Games in lieu of those games in the
public domain (e.g. Blackjack, Craps, Roulette, etc.) because of their popularity with players and to increase profitability. Our Proprietary Table Games are grouped into two product types we call “Side Bets” and “Premium Games.” Side Bets are proprietary
features and wagering schemes typically added to public domain games such as poker, baccarat, pai gow poker, craps and blackjack table games. Examples of side bets include such popular titles as
Lucky Ladies
,
21+3
and
Bonus Craps
. Premium Games are unique
stand-alone games with their own unique set of rules and strategies. Examples of Premium Games include such popular titles
as High Card Flush, World Poker Tour Heads Up Hold’em
,
Three Card Poker
, Three Card Prime
and
Emperor’s Challenge
. Typically, Premiu
m Games command a higher price point per unit than Side Bets.
Enhanced Table Systems.
Enhanced Table Systems are electronic enhancements used on casino table games to add to player appeal and enhance game security. We include in this product category our
Bonus Jackpot System
, our
Inter-Casino Jackpot System
and our
MEGA-Share
.
Our
Bonus Jackpot System
is designed to compete with our competitors’ progressive jackpot systems and contains special features designed to further enhance the table game player’s experience and in turn, the casino’s profit. The
Bonus Jackpot System
consists of two independent components known as the
Bet Tabulator System
, which is used to detect players’ wagers and
TableVision
, which is an electronic display attached to a gaming table. Our current version of the
Bonus Jackpot System
is known as the “
Andromeda Series
.” Advancements in the
Andromeda Series
includes the ability for two-way communication between gaming tables located anywhere in the world and one or more data processing centers. Currently known as our
Inter-Casino Jackpot System
, we believe this achievement for casino table games was the first of its kind in the world. The availability of the data processing centers is the result of an agreement we entered into with Amazon Web Services, a unit of Amazon.com. In addition, our clients may use our
Andromeda Series
to communicate with their data center or internal server using their private network. The
Andromeda Series
allows up to 16 player positions and 6 betting positions per player. The
Andromeda Series
was the first of its kind, allowing for the most sensors to be placed on a single gaming gable. Through the
TableVision
component, the
Andromeda Series
includes the ability to keep track of and display more than one jackpot.
Our
Inter-Casino Jackpot System
leverages the capabilities of our
Bonus Jackpot System
to connect and/or aggregate bonus or progressive jackpots from multiple casinos into a common network. This methodology often referred to as a “wide area progressive” has long been practiced in the slot machine industry, but was first introduced to table games in Nevada by us in April 2011.
MEGA-Share
is a game-play methodology invented by us that allows a player of one of our table games to share in the winnings of a jackpot together with other players. An example of this concept would be when multiple table game players are playing in a casino and one player obtains a winning hand entitling him or her to a jackpot, the event also triggers a second
MEGA-Share
jackpot that is divided among all players who placed a
MEGA-Share
qualifying wager.
MEGA-Share
rewards other players playing on other tables, other games, or even in other casinos with a share of a second jackpot simply for having a wager placed at the time another player won the main jackpot.
e-Tables.
In February 2011, we entered into a definitive agreement to license the worldwide rights, excluding Oklahoma, Kentucky and the Caribbean, to the
TableMAX
e-Table system and simultaneously obtained the e-Table rights to the casino table games
Caribbean Stud
,
Caribbean Draw
,
Progressive Blackjack
,
Texas Hold’em Bonus
and
Blackjack Bullets
. See Note 17. The
TableMAX
e-Table system is a fully automated, multi-player electronic table game platform which does not need a human dealer. These platforms allow us to offer our Proprietary Table Game content in markets where live table games are not permitted. The e-Table product enables automation of certain components of traditional table games such as data collection, placement of bets, collection of losing bets and payment of winning bets. This automation provides benefits to both casino operators and players, including greater security and faster speed of play, reduced labor and other game related costs and increased profitability. As of December 2013, the TableMAX system offers several of our Proprietary Side Bets including
Lucky Ladies
and
21+3,
and Premium Games
Three Card Prime
and
World Poker Tour Heads Up Hold’em.
Ancillary Equipment
. In mid-2014, we entered into an exclusive licensing agreement with an independent inventor for worldwide rights to a proprietary technology which detects card markings. With this technology, we developed
SpectrumVision
, one unit which can detect most known card markings normally invisible to the naked eye.
SpectrumVision
will be available for a monthly lease fee or one-time purchase price. We began shipping the first units in 2015.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
This summary of our significant accounting policies is presented to assist in understanding our financial statements. The financial statements and notes are representations of our management team, who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently applied to the preparation of the financial statements.
26
Basis of presentation.
The accompanying financial statements have been prepared in accordance with
U.S. GAAP
and the rules of the SEC. In the opinion of management, all adjustments necessary in order for the financial statements to be not misleading have been reflected herein.
Basis of accounting.
The financial statements have been prepared on the accrual basis of accounting in conformity with U.S. GAAP. Revenues are recognized as income when earned and expenses are recognized when they are incurred. We do not have significant categories of cost as our income is recurring with high margins. Expenses such as wages, consulting expenses, legal, regulatory and professional fees and rent are recorded when the expense is incurred.
Cash and cash equivalents.
We consider cash on hand, cash in banks, certificates of deposit, and other short-term securities with maturities of three months or less when purchased, as cash and cash equivalents. Our bank accounts are deposited in insured institutions. The funds are insured up to $250,000 per account. To date, we have not experienced uninsured losses.
Restricted cash.
We are required by gaming regulation to maintain sufficient reserves in restricted accounts to be used for the purpose of funding payments to winners of our jackpots offered. Compliance with restricted cash requirements for jackpot funding is reported to gaming authorities in various jurisdictions.
Inventory.
Inventory consists of ancillary products such as signs, layouts, and bases for the various games and electronic devices and components to support our Enhanced Table Systems. Units of SpectrumVision also reside in Inventory as finished goods, since we outsource the manufacturing of these units to a third party. Inventory value is determined by the average cost method and management maintains inventory levels based on historical and industry trends. We regularly assess inventory quantities for excess and obsolescence primarily based on forecasted product demand. See Note 5.
Products leased and held for lease.
We provide products whereby we maintain ownership and charge a fee for the use of the product. Since we retain title to the equipment, we classify these assets as “products leased and held for lease” and they are shown on the accompanying balance sheets. These assets are stated at cost, net of depreciation. Depreciation on leased products is calculated using the straight-line method over a three year period.
Property and equipment.
Property and equipment are being depreciated over their estimated useful lives, 3 to 5 years, using the straight-line method of depreciation for book purposes.
Intellectual property and intangible assets.
These intellectual property and intangible assets have finite lives and are being amortized using the straight-line method over their economic useful lives, five to thirty years. Material assets added over the past several years are as follows:
Client installation base
|
|
60 months
|
Patents
|
|
87 - 132 months
|
Trademarks
|
|
144 - 360 months
|
Client relationships
|
|
264 months
|
The intangible assets are analyzed for potential impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable.
Goodwill.
A goodwill balance of $1,091,000 was created as a result of the Prime Table Games asset acquisition. This asset will be assessed for impairment at least annually and if found to be impaired, its carrying amount will be reduced and an impairment loss will be recognized.
Impairment of long-lived assets.
We continually monitor events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances are present, we assess the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell.
In 2011, for $22,680,000 we acquired a large portfolio of intellectual property from a competitor that included patents, trademarks and a recurring revenue base in the United States and United Kingdom. See Note 17. The purchase price was allocated to various intangible assets including patents, client relationships, trademarks, non-compete agreement, goodwill and a debt discount. For the year ended December 31, 2014, we determined several patents purchased as part of this transaction to be impaired and reduced the carrying value of the intangible asset to zero during 2014. The total impairment charge recognized for these patents in 2014 was $528,233. There were no impairment charges identified for the year ended December 31, 2015.
27
Fair value of financial instruments.
The fair value of cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses, other current assets, inventory, notes
receivable-related party, deferred tax assets, accounts payable, accrued expenses, deferred revenue, jackpot liabilities and notes payable approximates the carrying amount of these financial instruments due to their short-term nature. The fair value of lo
ng-term debt, which approximates its carrying value, is based on current rates at which we could borrow funds with similar remaining maturities.
Concentration of risk.
We are exposed to risks associated with clients who represent a significant portion of total revenues. As of December 31, 2015 and 2014, we had the following client revenue concentrations:
|
|
Location
|
|
2015 Revenue
|
|
|
2014 Revenue
|
|
Client A
|
|
North America
|
|
|
14.7%
|
|
|
|
15.2%
|
|
Client B
|
|
North America
|
|
|
6.7%
|
|
|
|
5.7%
|
|
Client C
|
|
United Kingdom
|
|
|
6.5%
|
|
|
|
7.7%
|
|
Client D
|
|
North America
|
|
|
5.7%
|
|
|
|
5.0%
|
|
The amounts in accounts receivable related to these significant clients at December 31, 2015 and 2014 were approximately $400,000 and $451,000, respectively.
We are also exposed to risks associated with expiration of our patents. In 2015, domestic and international patents expired on two of our products, which account for approximately $5,745,000 or 53% of our revenue for the year ended December 31, 2015.
Leases.
We recognize rent expense for operating leases on a straight-line basis (including the effect of reduced or free rent and rent escalations) over the applicable lease term. The difference between the cash paid to the landlord and the amount recognized as rent expense on a straight-line basis is included in deferred rent. The landlord of our corporate headquarters financed leasehold improvements in the amount of $150,000. See Note 12. These improvements have been recorded as a capital lease and amortized over the life of the lease.
Revenue recognition.
Revenue is primarily derived from the licensing of our products and intellectual property. Consistent with our strategy, revenue is generated from negotiated month-to-month recurring licensing fees or the performance of our products, or both. We also, occasionally, receive a one-time sale of certain products and/or reimbursement of our manufactured equipment.
Substantially, all revenue is recognized when it is earned. Depending upon the product and negotiated terms, our clients may be invoiced monthly in advance, monthly in arrears or quarterly in arrears for the licensing of our products. If billed in advance, the advance billings are recorded as deferred revenue on our balance sheet. If billed in arrears, we recognize the corresponding preceding period’s revenue upon invoicing at the subsequent date. Generally, we begin earning revenue with the installation or “go live” date of the associated product in our clients’ establishment. The monthly recurring invoices are based on executed agreements with each client.
Additionally, clients may be invoiced for product sales at the time of shipment or delivery of the product. Revenue from the sale of our associated products is recognized when the following criteria are met:
|
(1)
|
Persuasive evidence of an arrangement between us and our client exists;
|
|
(2)
|
Shipment has occurred;
|
|
(3)
|
The price is fixed and or determinable; and
|
|
(4)
|
Collectability is reasonably assured or probable.
|
The combination of hardware and software included in our Enhanced Table Systems and e-Tables are essential to the operation of the respective systems. As such, we do not segregate the portion of revenue between manufactured equipment and any software or electronic devices needed to use the equipment when the system is provided. We do not market the software separately from the equipment.
Costs of ancillary products and assembled components.
Ancillary products include paytables (display of payouts), bases, layouts, signage and other items as they relate to support specific proprietary games in connection with the licensing of our games. Assembled components represent the cost of the equipment, devices and incorporated software used to support the
Bonus Jackpot System
.
Research and development.
We incur research and development (“R&D”) costs to develop our new and next-generation products. Our products reach commercial feasibility shortly before the products are released and therefore R&D costs are expensed as incurred. Employee related costs associated with product development are included in R&D costs.
Foreign currency translation.
For non-US functional accounts, assets and liabilities are translated at exchange rates in effect at the balance sheet date, and income and expense accounts at the average exchange rates for the year. Resulting currency translation adjustments are recorded as a separate component of shareholders’ equity. We record foreign currency transactions at the exchange
28
rate prevailing at the date of the transaction with resultant gains and losses being included in results of operations. Realized foreign currency transaction gains and losses have not been significant for any period presented.
Income taxes.
We use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry-forwards. These temporary differences will result in deductible or taxable amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some or all of the deferred tax assets may not be realized. Adjustments to the valuation allowance increase or decrease our income tafx provision or benefit. As of December 31, 2015 and 2014, we did not record a valuation allowance.
We follow the provisions contained in Accounting Standards Codification (“ASC”) Topic 740, Income Taxes. We recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
Judgment is required in determining the provision for incomes taxes and related accruals, deferred tax assets and liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, our tax returns are subject to audit by various tax authorities. Although we believe that our estimates are reasonable, actual results could differ from these estimates
Basic income (loss) per share.
Basic earnings per share is calculated by dividing net income by the weighted average number of common shares issued and outstanding during the year. Diluted earnings per share is similar to basic, except that the weighted average number of shares outstanding is increased by the potentially dilutive effect of outstanding stock options and warrants, if applicable, during the year, using the treasury stock method.
Stock-based compensation.
We measure and recognize all stock-based compensation, including restricted stock and stock-based awards to employees, under the fair value method. We measure the fair value of stock-based awards using the Black-Scholes model and restricted shares using the grant date fair value of the stock. Compensation is attributed to the periods of associated service and such expense is recognized on a straight-line basis over the vesting period of the awards. Forfeitures are estimated at the time of grant, with such estimate updated when the expected forfeiture rate changes.
Use of estimates and assumptions.
We are required to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our company and the industry as a whole, and information available from other outside sources. Our estimates affect reported amounts for assets, liabilities, revenues, expenses and related disclosures. Actual results may differ from initial estimates.
Reclassifications.
Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period financial statements.
Recently adopted accounting standards
Discontinued Operations.
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08,
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.
ASU 2014-08 changes the criteria for reporting discontinued operations and modifies related disclosure requirements. The new guidance is effective on a prospective basis for fiscal years beginning after December 15, 2014, and interim periods thereafter. The adoption of this guidance did not have a material effect on our financial condition, results of operations or cash flows.
Debt Issuance Costs.
In April 2015, the FASB issued ASU No. 2015-03,
Interest – Imputation of Interest (Subtopic 835-30): Simplifying the presentation of Debt Issuance Costs.
ASU 2015-03 intends to simplify the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. In August 2015, the FASB issued ASU No. 2015-15, which amended Subtopic 835-30 for the presentation and subsequent measurement of issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the arrangement. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years and is required to be applied retrospectively to all periods presented. Early adoption is permitted for financial statements that have not been previously issued. This guidance did not have a material effect on our financial condition, results of operations or cash flows.
Business Combinations.
In September 2015, the FASB issued ASU No. 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.
ASU 2015-16 eliminates the requirement to retrospectively apply adjustments
29
made to provisional amounts recognized in a business combination. It requires tha
t
an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amo
unts are determined. The amendments in this ASU require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the p
rovisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this ASU require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recor
ded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years beginning after
December 15, 2015, including interim periods within those fiscal years. The effect of adopting this guidance in 2015 did not have a material effect on our financial condition, results of operations or cash flows.
New accounting standards not yet adopted
Revenue Recognition.
In May 2014, the FASB issued ASU No. 2014-09 (Topic 606),
Revenue from Contracts with Customers
, which is a comprehensive new revenue recognition standard that will supersede virtually all existing revenue guidance, including industry-specific guidance. Under the new standard, revenue will be recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. The standard creates a five-step model that will generally require companies to use more judgment and make more estimates than under current guidance when considering the terms of contracts along with all relevant facts and circumstances. These include the identification of customer contracts and separating performance obligations, the determination of transaction price that potentially includes an estimate of variable consideration, allocating the transaction price to each separate performance obligation, and recognizing revenue in line with the pattern of transfer.
In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, which defers the effective date of ASU 2014-09 by one year to now be effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017. Early adoption of the standard is permitted but not before the original effective date of December 15, 2016. The ASU may be adopted using a full retrospective approach or reporting the cumulative effect as of the date of adoption. We are currently evaluating the impact of adopting this guidance.
Inventory.
In July 2015, the FASB issued ASU No. 2015-11,
Inventory: Simplifying the Measurement of Inventory.
ASU 2015-11 changes the criteria for measuring inventory within the scope of the ASU. Inventory will now be measured at the lower of cost and net realizable value, while the concept of market value will be eliminated. The ASU defines net realizable value as the estimated selling process in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with earlier adoption permitted. The prospective adoption of the ASU is required. We are currently evaluating the impact of adopting this guidance.
Deferred Taxes.
In November 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,
which eliminates the requirement to present deferred tax liabilities and assets as current and non-current in a classified balance sheet. Instead, all deferred tax assets and liabilities will be required to be presented as non-current. The ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The amendments in this guidance may be applied prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented with earlier application permitted for financial statements that have not been issued. This ASU is not expected to have a material impact on our financial statements.
Leases.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842).
The amended guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The adoption of this guidance is expected to result in a significant portion of our operating leases being recognized on our Balance Sheets. The guidance requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years with earlier adoption permitted. We are currently evaluating the impact of adopting this guidance.
NOTE 3. NOTE RECEIVABLE – RELATED PARTY
The note receivable at December 31, 2015 and 2014, was as follows:
|
|
2015
|
|
|
2014
|
|
Note receivable
|
|
$
|
—
|
|
|
$
|
383,298
|
|
Less: current portion
|
|
|
—
|
|
|
|
(383,298
|
)
|
Total long-term note receivable
|
|
$
|
—
|
|
|
$
|
—
|
|
30
A note receivable was acquired as part of the 2007 asset purchase agreement with GGLLC. The note receivable is a ten-year unsecured note with a 6% fixed interest
rate, monthly principal and interest payments of $6,598 with the unpaid principal and interest due in February 2017. The terms of the note were amended in September 2010 whereby the monthly principal and interest payment was reduced to $3,332 and the unpai
d principal and interest
was
due August 2015.
Interest income associated with this note receivable was $13,445 and $21,772 for the years ended December 31, 2015 and 2014, respectively. At December 31, 2015 and 2014, there was an interest receivable balance of $0 and $40,573 which is included in other current assets.
On August 10, 2015, our Board of Directors approved an agreement between the Company and Carpathia Associates, LLC, an entity which is owned and controlled by our Chief Executive Officer, Robert Saucier (the “Agreement”). The Agreement amends the terms of the note receivable and note payable previously entered into between the parties by offsetting the note receivable and note payable between the two parties. The effective result will be that the balloon payment of $437,313, due under the terms of the note receivable from Carpathia, will be applied to the outstanding note payable due to Carpathia. The Board believes that the Company benefits from the arrangement as the Agreement extends the note payable’s balloon payment from February 2017 to December 2018. The balloon payment due in December 2018 will be $354,480.
NOTE 4. PREPAID EXPENSES
Prepaid expenses consisted of the following as of December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
Regulatory compliance expenses
|
|
$
|
39,097
|
|
|
$
|
—
|
|
IT system
|
|
|
19,041
|
|
|
|
9,304
|
|
Insurance
|
|
|
13,408
|
|
|
|
16,612
|
|
Dues & subscriptions
|
|
|
10,859
|
|
|
|
14,562
|
|
Professional services
|
|
|
7,792
|
|
|
|
21,863
|
|
Travel
|
|
|
7,780
|
|
|
|
8,587
|
|
Trade show expense
|
|
|
6,000
|
|
|
|
7,000
|
|
Rent
|
|
|
1,989
|
|
|
|
1,989
|
|
Other prepaid expenses
|
|
|
372
|
|
|
|
523
|
|
Total prepaid expenses
|
|
$
|
106,338
|
|
|
$
|
80,440
|
|
NOTE 5. INVENTORY
Inventory consisted of the following as of December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
Raw materials and component parts
|
|
$
|
231,709
|
|
|
$
|
111,247
|
|
Finished goods
|
|
|
170,528
|
|
|
|
96,254
|
|
Work-in-process
|
|
|
39,463
|
|
|
|
69,464
|
|
Subtotal
|
|
|
441,700
|
|
|
|
276,965
|
|
Less: inventory reserve
|
|
|
(30,000
|
)
|
|
|
(44,176
|
)
|
Total inventory
|
|
$
|
411,700
|
|
|
$
|
232,789
|
|
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
Furniture and fixtures
|
|
$
|
211,411
|
|
|
$
|
197,751
|
|
Leasehold improvements
|
|
|
156,843
|
|
|
|
150,000
|
|
Vehicles
|
|
|
94,087
|
|
|
|
86,364
|
|
Computer equipment
|
|
|
89,203
|
|
|
|
84,186
|
|
Office equipment
|
|
|
29,140
|
|
|
|
17,403
|
|
|
|
|
580,684
|
|
|
|
535,704
|
|
Less: accumulated depreciation
|
|
|
(281,807
|
)
|
|
|
(153,606
|
)
|
Property and equipment, net
|
|
$
|
298,877
|
|
|
$
|
382,098
|
|
31
Included in depreciation expense was $128,859 and $69,904
related to property and equipment for the years ended December 31, 2015 and 2014, respectively.
Property and equipment includes $250,813 of leasehold improvements, furniture and fixtures under capital leases as of December 31, 2015. Accumulated depreciation of assets acquired under capital leases totaled $104,909 at December 31, 2015.
NOTE 7. PRODUCTS LEASED AND HELD FOR LEASE
Products leased and held for lease consisted of the following at December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
Enhanced table systems
|
|
$
|
288,683
|
|
|
$
|
233,496
|
|
Less: accumulated depreciation
|
|
|
(154,198
|
)
|
|
|
(107,831
|
)
|
Products leased and held for lease, net
|
|
$
|
134,485
|
|
|
$
|
125,665
|
|
Included in depreciation expense was $46,367 and $36,282 related to products leased and held for lease for the years ended December 31, 2015 and 2014, respectively.
NOTE 8. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
Patents
|
|
$
|
13,615,967
|
|
|
$
|
13,615,967
|
|
Customer relationships
|
|
|
3,400,000
|
|
|
|
3,400,000
|
|
Trademarks
|
|
|
2,740,000
|
|
|
|
2,740,000
|
|
Non-compete agreements
|
|
|
660,000
|
|
|
|
660,000
|
|
License agreements
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
|
20,450,967
|
|
|
|
20,450,967
|
|
Less: accumulated amortization
|
|
|
(7,189,331
|
)
|
|
|
(5,694,319
|
)
|
Intangible assets, net
|
|
$
|
13,261,636
|
|
|
$
|
14,756,648
|
|
Included in amortization expense was $1,495,012 and $1,561,631 related to the above intangible assets for the years ended December 31, 2015 and 2014, respectively.
In 2014, we recognized an impairment charge of $528,233 relating to patents purchased in 2011 from PTG. We determined these patents to be adversely limiting in scope and nature and have a carrying value in excess of their fair value. As of December 2014, we abandoned our maintenance of the patents and reduced the carrying value to zero.
NOTE 9. ACCRUED EXPENSES
Accrued expenses, consisted of the following at December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
Royalties
|
|
$
|
259,193
|
|
|
$
|
59,715
|
|
Professional fees
|
|
|
154,888
|
|
|
|
60,779
|
|
TableMAX reimbursement
|
|
|
136,785
|
|
|
|
72,636
|
|
Salaries & payroll taxes
|
|
|
95,115
|
|
|
|
70,262
|
|
Trade show expenses
|
|
|
78,549
|
|
|
|
41,666
|
|
Vacation
|
|
|
62,546
|
|
|
|
58,642
|
|
Commissions
|
|
|
22,056
|
|
|
|
148,902
|
|
Accrued interest
|
|
|
14,832
|
|
|
|
3,686
|
|
Other accrued expenses
|
|
|
—
|
|
|
|
2,878
|
|
Total accrued expenses
|
|
$
|
823,964
|
|
|
$
|
519,166
|
|
32
NOTE 10. CAPITAL LEASE OBLIGATIONS
Capital lease obligations consisted of the following at December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
Capital lease obligation – leasehold improvements
|
|
$
|
107,365
|
|
|
$
|
135,171
|
|
Capital lease obligation – office furniture
|
|
|
29,839
|
|
|
|
68,306
|
|
|
|
|
137,204
|
|
|
|
203,477
|
|
Less: Current portion
|
|
|
(59,196
|
)
|
|
|
(66,273
|
)
|
Capital lease obligations
|
|
$
|
78,008
|
|
|
$
|
137,204
|
|
The capital lease obligation – leasehold improvements requires 60 monthly payments of $2,879, including 5.5% interest, beginning May 2014 through May 2019.
The capital lease obligation – office furniture requires 30 monthly payments of $3,641, including interest at 10.2%, beginning April 2014 through September 2016.
The capital leases cover furniture and leasehold improvements located at our corporate headquarters in Las Vegas, Nevada. Annual requirements for capital leases obligations are as follows:
December 31,
|
|
Total
|
|
2016
|
|
$
|
65,615
|
|
2017
|
|
|
34,545
|
|
2018
|
|
|
34,545
|
|
2019
|
|
|
14,393
|
|
2020
|
|
|
—
|
|
Total minimum lease payments
|
|
$
|
149,098
|
|
Less: amount representing interest
|
|
|
(11,894
|
)
|
Present value of net minimum lease payments
|
|
$
|
137,204
|
|
NOTE 11. NOTES PAYABLE
Notes payable consisted of the following at December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
PTG notes payable, net of discount
|
|
$
|
10,934,544
|
|
|
$
|
14,385,643
|
|
Carpathia Associates note payable (related party)
|
|
|
579,083
|
|
|
|
1,065,324
|
|
Robert Saucier note payable (related party)
|
|
|
500,000
|
|
|
|
—
|
|
Vehicles, notes payable
|
|
|
70,664
|
|
|
|
86,364
|
|
|
|
|
12,084,291
|
|
|
|
15,537,331
|
|
Less: current portion
|
|
|
(4,648,120
|
)
|
|
|
(3,480,864
|
)
|
Total long-term debt
|
|
$
|
7,436,171
|
|
|
$
|
12,056,467
|
|
The Carpathia note payable is a related party note as a result of the asset purchase agreement with GGLLC. The note payable originally required monthly principal and interest payments of $9,159, at a fixed interest rate of 7.3% through February 2017, at which time there was a balloon payment due of $1,003,000. The note payable between GGLLC and Bank of America was the subject of litigation and was settled in February 2014. See Note 12 for further details regarding the litigation. On August 10, 2015, our Board of Directors approved an agreement of offset between the Company and Carpathia which amends the terms of the note receivable and note payable previously entered into. See Note 3 for further details regarding the offset.
On October 26, 2015, we entered into a note payable with Mr. Saucier our CEO. We agreed to repay a loan of $500,000 made by Mr. Saucier to the Company. Under the terms of the note payable, $590,000 shall be due on or before October 26, 2016, unless we pay Mr. Saucier $535,000 on or before April 26, 2016, in which case we will have fulfilled all of our obligations under the note. The note payable is unsecured.
33
In October 2011, we c
losed an asset acquisition with Prime Table Games (“PTG Assets”). Included within the structure of the $23 million acquisition was a $22.2 million component consisting of two promissory notes: 1) a note payable for $12.2 million, and 2) a note payable for
£6.4 million (GBP). The fair value of the notes, net of the debt discount, was $20,670,000 at the time of issuance. The note terms are summarized as follows:
|
|
Monthly Payment Amounts
|
|
|
|
|
|
|
|
Prime Table Games, LLC
|
|
|
Prime Table Games UK
|
|
|
|
|
|
Payment Year
|
|
(in USD)
|
|
|
(in GBP)
|
|
|
Interest Rate
|
|
2012
|
|
$
|
100,000
|
|
|
£
|
64,000
|
|
|
|
3
|
%
|
2013
|
|
|
130,000
|
|
|
|
76,800
|
|
|
|
4
|
%
|
2014
|
|
|
160,000
|
|
|
|
89,600
|
|
|
|
5
|
%
|
2015
|
|
|
190,000
|
|
|
|
102,400
|
|
|
|
6
|
%
|
2016
|
|
|
220,000
|
|
|
|
115,200
|
|
|
|
7
|
%
|
2017
|
|
|
220,000
|
|
|
|
115,200
|
|
|
|
8
|
%
|
2018
|
|
|
220,000
|
|
|
|
115,200
|
|
|
|
9
|
%
|
In the event future monthly revenue received by us from the PTG Assets is less than 90% of the notes monthly payment due to Prime Table Games, then the note payments at our option, may be adjusted to the higher of $100,000 per month (for Prime Table Games, LLC) and £64,000 per month (for Prime Table Games UK) or 90% of the monthly revenue amount generated from the PTG Assets. If we engage in this payment adjustment election, the note shall not be deemed in default and the interest rate of the note will increase 2% per annum for the duration of the note or until the standard payment schedule resumes.
The notes are collateralized by the all of the assets acquired from Prime Table Games LLC and Prime Table Games UK.
Maturities of our notes payable as of December 31, 2015 are as follows:
Maturities as of:
|
|
Total
|
|
2016
|
|
$
|
4,648,120
|
|
2017
|
|
|
4,370,645
|
|
2018
|
|
|
3,689,905
|
|
2019
|
|
|
18,934
|
|
2020
|
|
|
—
|
|
Total long term debt
|
|
$
|
12,727,604
|
|
Less: debt discount
|
|
|
(643,313
|
)
|
Long-term debt, net of debt discount
|
|
$
|
12,084,291
|
|
NOTE 12. COMMITMENTS AND CONTINGENCIES
Operating lease obligations.
In February 2014, we entered into a lease (the “Spencer Lease”) for a new corporate office with an unrelated third party. The 5-year Spencer Lease is for a building approximately 24,000 square feet, which is comprised of approximately 16,000 square feet office space and 8,000 square feet warehouse. The property is located in Las Vegas, Nevada.
The initial term of the Spencer Lease commenced on April 1, 2014. We are obligated to pay approximately $153,000 in annual base rent in the first year, and the annual base rent will increase by approximately 4% each year. We are also obligated to pay real estate taxes and other building operating costs. Subject to certain conditions, we have certain rights under the Spencer Lease, including rights of first offer to purchase the premises if the landlord elects to sell. We also have an option to extend the term of the Spencer Lease for two consecutive terms of three years each, at then current fair market value rental rate determined in accordance with the terms of the Lease.
In connection with the Spencer Lease, the landlord agreed to finance tenant improvements of $150,000 (“TI Allowance”). The base rent is increased by an amount sufficient to fully amortize the TI Allowance through the Spencer Lease term upon equal monthly payments of principal and interest, with interest imputed on the outstanding principal balance at the rate of 5.5% per annum. The TI Allowance has been classified as a capital lease on the balance sheet. See Note 10.
Pursuant to the Spencer Lease, we have the option to terminate the Spencer Lease effective at the end of the 36th month (“Termination Date”). We must deliver written notice of our intention to terminate the Spencer Lease to landlord at least six months before the Termination Date. In the event we exercise our option to terminate, we shall pay the landlord a termination fee (the “Termination Fee”) equal to the sum of (i) all unamortized TI Allowance amounts, plus (ii) all unamortized leasing commissions paid by landlord with respect to the Spencer Lease, plus (iii) all unamortized rental abatement amounts.
34
The amounts shown in the accompanyin
g table reflect our estimates of lease obligations for the twelve months ending
2016
through 20
20
and are based upo
n our current operating leases:
Twelve Months Ended December 31,
|
|
Annual Obligation
(Estimate)
|
|
2016
|
|
|
222,678
|
|
2017
|
|
|
231,420
|
|
2018
|
|
|
240,156
|
|
2019
|
|
|
125,064
|
|
2020
|
|
|
—
|
|
Total Estimated Lease Obligations
|
|
$
|
819,318
|
|
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. In accordance with ASC Topic 450, we record accruals for such contingencies to the extent we conclude that it is probable that a liability will be incurred and the amount of the related loss can be reasonably estimated. Our assessment of each matter may change based on future unexpected events. 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. We assume no obligation to update the status of pending litigation, except as may be required by applicable law, statue or regulation.
California administrative action –
In March 2003, Galaxy Gaming of California, LLC (“GGCA”), an independent entity managed by GGLLC, submitted an application to the California Gambling Control Commission (“California Commission”) for a determination of suitability to conduct business with tribal gaming operations in California. At the time, our CEO was a member of GGCA and was required to be included in the application process. In July 2013, the California Commission denied the applications of our CEO and GGCA for a finding of suitability. The California Commission also denied a request for stay or any further reconsideration of the matter.
In August 2013, GGCA and our CEO filed a motion for writ of mandate with the Sacramento County Superior Court, asking the Court for a judicial review of the California Commission’s ruling. A hearing on the motion has been scheduled for July 2016. There can be no assurances that the judicial review will be successful or that our CEO will be found suitable. Subsequently, in September 2013, we were notified that until this matter is resolved, we were not permitted to conduct business with tribal casinos in California.
In July 2014, we filed an application with the California Bureau of Gambling Control for a finding of suitability. That application is in process.
Bank of America action.
In October 2012, we were served with a complaint by Bank of America (“BofA”) regarding a promissory note payable by GGLLC to BofA. The complaint, filed in the Eighth Judicial District Court in the State of Nevada, alleged that we received valuable assets from GGLLC in 2007 for little or no consideration. In the complaint, BofA sought to collect in full the outstanding principal and any accrued interest owed under the promissory note. We filed a cross-complaint against BofA claiming that abuse of process, slander of business and detrimental promissory reliance. On February 21, 2014, we reached a full settlement and all legal actions against all parties were subsequently dismissed.
In Bet litigation.
In November 2014, we filed a complaint for patent infringement against In Bet Gaming, Inc. and In Bet, LLC, alleging that their “In-Between” side bet game infringes on one or more of our patents. The litigation is currently pending.
Red Card Gaming & AGS litigation
. In September 2012, we executed an asset purchase agreement (“APA”) with Red Card Gaming, Inc. (“RCG”), for the purchase of all the rights, title and interest in and for the game known as
High Card Flush
and all associated intellectual property. The APA included customary non-compete, non-disparagement and right of first refusal provisions. In 2014, AGS, LLC (“AGS”) purchased RCG’s rights in the APA and became the assignee of the APA. In September 2014 we notified RCG of their material breach of the APA and discontinued contingent consideration payments. In November 2014, RCG and AGS attempted to terminate the APA and in December 2014, began selling their own High Card Flush game and filed a complaint against us alleging fraud, breach of contract and trademark infringement, among other allegations. We filed counterclaims against RCG and AGS alleging, among other things, fraud on the trademark office and in the marketplace, misappropriation of our trade secrets, breach of contract, infringement of our trademark and interference with customer relationships.
In February 2016, we received notice the arbitration panel (the “Panel”) issued an interim award (the “Interim Award”) which resulted in, among other things, our retention of all rights and privileges in the ownership of the product and trademark
High Card Flush
and an injunction prohibiting AGS and RCG from selling the
High Card Flush
game and using the trademark. Additional briefing on the matter, relating to questions about the amount of attorneys’ fees to be awarded to Galaxy, has been requested from the Panel. After
35
reviewing the briefs, the Panel will either rule on th
e briefs or will schedule oral argument. Based on the Interim Award, we believe the final award to be issued by the Panel will not contain a material adverse effect to us.
Uncertain tax positions
. As further discussed in Note 15, we have adopted the provision of ASC 740. We had $67,873 of uncertain tax position as of December 31, 2015. Due to the inherent uncertainty of the underlying tax positions, it is not possible to forecast the payment of this liability to any particular year.
NOTE 13. STOCKHOLDERS’ EQUITY
We had 65,000,000 shares of $.001 par value common stock and 10,000,000 shares of $.001 par value preferred stock authorized as of December 31, 2015.
In February 2014, an independent contractor (the “Contractor”) was granted 150,000 shares of our restricted common stock. Of this amount, 75,000 vested and transferred immediately, with the remaining 75,000 vesting in equal installments through (and transferring on) January 1, 2015.
In March 2014, Norm DesRosiers, one of our Directors, was granted 100,000 shares of our restricted common stock as condition of his Board of Directors Director Service Agreement. The fair market value of the grant was $28,000 which was determined using our closing stock price at March 1, 2014, the date of the grant. The restricted stock grant vested immediately.
In May 2014, William A. Zender, one of our Directors, was granted 75,000 shares of our restricted common stock as condition of his Board of Directors Director Service Agreement. The fair market value of the grant was $35,250 which was determined using our closing stock price at May 1, 2014 the date of the grant. The restricted stock grant vested immediately.
In December 2014, the Board of Directors approved a stock grant for a small group of employees that granted 255,000 shares of restricted common stock. The fair market value of the grant was $102,000 which was determined using our closing stock price at December 29, 2014, the date of the grant. The restricted stock grant vested immediately.
In December 2014, the Compensation Committee of the Board of Directors approved a bonus in the form of stock compensation to our Chief Financial Officer Gary A. Vecchiarelli, based on Mr. Vecchiarelli’s individual performance. The stock grant was for 100,000 restricted shares of our common stock with a fair market value of $40,000. The value of the bonus was determined using our closing stock price at December 29, 2014, the date of the grant.
In April 2015, Bryan Waters, one of our Directors, was granted 75,000 shares of our restricted common stock as condition of his Board of Directors Director Service Agreement. The fair market value of the grant was $22,500, which was determined using our closing stock price at April 1, 2015, the date of the grant. The restricted stock grant vested immediately.
In November 2015, Gary Vecchiarelli, our CFO, was granted 150,000 shares of our restricted common stock as condition of his Employment Agreement. The fair market value of the grant was $30,000, which was determined using our closing stock price at November 14, 2015, the date of the grant. The restricted stock will vest at six-month intervals through December 31, 2018.
There were 39,215,591 common shares and no preferred shares issued and outstanding at December 31, 2015.
NOTE 14. RELATED PARTY TRANSACTIONS
Through April 2014, we leased our prior offices located on O’Bannon Drive in Las Vegas from the Saucier Business Trust, an entity that is related to our CEO. The lease was entered into effective September 1, 2010 for a period of two years requiring a monthly rental payment of $10,360. Our lease expired at the end of August 2012 and then converted to a term of month-to-month. Total payments made were $0 and $37,296 in 2015 and 2014, respectively.
On December 31, 2007, as a part of our acquisition of assets from GGLLC, an entity formerly controlled by our CEO, we acquired a note receivable from Abyss Group, LLC (“Abyss”), an entity that was formerly related to the wife of our CEO. Subsequently, Abyss assigned the note to Carpathia Associates, LLC (“Carpathia”), an entity controlled by our CEO. The note receivable was a ten-year unsecured note with a 6% fixed interest rate, monthly principal and interest payment of $6,598 with the unpaid principal and interest due in February 2017. The terms of the note were amended whereby the monthly principal and interest payment was reduced to $3,332 and the unpaid principal and interest was to be due August 2015.
As part of the acquisition of assets from GGLLC in 2007, we entered into a note payable to GGLLC. Subsequently, GGLLC assigned the note payable to Carpathia. The note payable originally required monthly principal and interest payments of $9,159 at a fixed interest rate of 7.3% through February 2017, at which time a balloon payment of $1,003,000 would be due. The note payable between GGLLC and Bank of America was the subject of litigation and was settled in February 2014. See Note 12 for further details regarding the settlement with Bank of America.
36
On
August 10, 2015
, our Board of Directors approved an agreement of offset (the “Offset Agreement”) between the Company and Carpathia. The Offset Agreement amended the terms of a note receivable and note payable previously entered into between the parties w
hich offsets the note receivable and note payable between the two parties. The effective result is that the balloon payment of $437,313, due in August 2015 under the original terms of the note receivable from Carpathia, will be applied to the outstanding
note payable due to Carpathia. The Board believes that the Company benefits from the arrangement as the Offset Agreement extends the note payable’s balloon
p
ayment from February 2017 to December 2018. The balloon payment due in December 2018 will be $354
,480.
The balance of the note receivable from Carpathia was $0 and$383,298 at December 31, 2015 and 2014, respectively. Interest income associated with this note receivable was $13,443 and $21,772 for December 31, 2015 and 2014, respectively.
The balance of the note payable to Carpathia was $579,083 and $1,065,324 at December 31, 2015 and 2014, respectively. Interest expense associated with this note payable was $60,985 and $80,054 for December 31, 2015 and 2014, respectively.
On October 26, 2015 we entered into a Promissory Note (the “Saucier Note”) with Robert Saucier, Chief Executive Officer, pursuant to which the Company has agreed to repay a loan of $500,000 made by Mr. Saucier to the Company. Under the terms of the Saucier Note, $590,000 shall be due on or before one year from the Effective Date, unless we pay Mr. Saucier $535,000 on or before six months from the Effective Date, in which case we will have fulfilled all of our obligations under the Note.
NOTE 15. INCOME TAXES
The components of the provision (benefit) consist of the following at December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
142,482
|
|
|
$
|
6,430
|
|
State
|
|
|
12,277
|
|
|
|
3,305
|
|
Total current
|
|
$
|
154,759
|
|
|
$
|
9,735
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
98,822
|
|
|
|
350,338
|
|
State
|
|
|
(1,952
|
)
|
|
|
1,115
|
|
Change in valuation allowance
|
|
|
—
|
|
|
|
(221,443
|
)
|
Total deferred
|
|
$
|
96,870
|
|
|
$
|
130,010
|
|
Provision (benefit) for income taxes
|
|
$
|
251,629
|
|
|
$
|
139,745
|
|
The income tax provision (benefit) differs from that computed at the federal statutory corporate income tax rate as follows for years ended December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
Tax provision/(benefit) computed at the federal statutory rate
|
|
$
|
155,841
|
|
|
$
|
68,787
|
|
State income tax (provision), net of federal benefit
|
|
|
6,112
|
|
|
|
3,067
|
|
Permanent items
|
|
|
93,300
|
|
|
|
95,916
|
|
Credits
|
|
|
(72,050
|
)
|
|
|
(83,978
|
)
|
True ups and rounding
|
|
|
553
|
|
|
|
206,719
|
|
Change in valuation allowance
|
|
|
—
|
|
|
|
(221,443
|
)
|
Uncertain tax positions
|
|
|
67,873
|
|
|
|
70,677
|
|
Income tax provision (benefit)
|
|
$
|
251,629
|
|
|
$
|
139,745
|
|
37
The tax effects of significant temporary differences representing net deferred tax assets and liabilities consisted of the
following at December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Current deferred tax assets
|
|
$
|
43,017
|
|
|
$
|
48,000
|
|
Intangible assets
|
|
|
185,000
|
|
|
|
96,000
|
|
Unrealized foreign currency translation
|
|
|
39,000
|
|
|
|
8,000
|
|
Research & development credits
|
|
|
110,000
|
|
|
|
205,000
|
|
Other
|
|
|
78,562
|
|
|
|
50,035
|
|
Total deferred tax assets
|
|
|
455,579
|
|
|
|
407,035
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Basis difference in fixed assets
|
|
|
(194,000
|
)
|
|
|
(148,000
|
)
|
Uncertain tax positions
|
|
|
(136,000
|
)
|
|
|
(68,000
|
)
|
Total deferred tax liabilities
|
|
|
(330,000
|
)
|
|
|
(216,000
|
)
|
|
|
|
|
|
|
|
|
|
Gross deferred tax asset (liability)
|
|
|
125,579
|
|
|
|
191,035
|
|
Less: valuation allowance
|
|
|
—
|
|
|
|
—
|
|
Net deferred tax assets
|
|
$
|
125,579
|
|
|
$
|
191,035
|
|
In accordance with ASC Topic 740, we analyzed our valuation allowance at December 31, 2015 and determined that, based upon available evidence, it is more likely than not that certain of its deferred tax assets will be realized and, as such, has removed any valuation allowance against certain deferred tax assets. We anticipate utilization of both our foreign tax credits and research credit carryforwards.
As of December 31, 2015, we expect to use all of our foreign tax credits of $26,173. The foreign tax credits will be used to offset federal income tax owed in 2015.
NOTE 16. STOCK OPTIONS AND WARRANTS
Warrant activity.
We have accounted for warrants as equity instruments in accordance with Emerging Issues Task Force (“EITF”)
00-19 (ASC 815-40) Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock
, and as such, they will be classified in stockholders’ equity as they meet the definition of “…indexed to the issuer’s stock” in
EITF 01-06 (ASC 815-40) The Meaning of Indexed to a Company’s Own Stock
. In prior years, we estimated the fair value of the warrants using the Black-Scholes option pricing model based on assumptions at the time of issuance.
A summary of warrant activity is as follows:
|
|
Common
Stock
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding - January 1, 2014
|
|
|
616,667
|
|
|
$
|
0.56
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
(616,667
|
)
|
|
|
0.56
|
|
Outstanding - December 31, 2014
|
|
|
—
|
|
|
|
—
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Outstanding - December 31, 2015
|
|
|
—
|
|
|
$
|
—
|
|
Exercisable - December 31, 2015
|
|
|
—
|
|
|
$
|
—
|
|
38
Stock options.
For the years ended December 31, 201
5
and 201
4
, we issued
675,00
0
and
289,583
stock options, respectively. Stock options issued to members of our Board of Directors were
275
,000
and
158,333
or the years ended December 31, 201
5
and 201
4
, respectively.
The stock options granted in 201
5
were calculated to have a fair value of $76,
22
7
using the Black-Scholes option pricing model with the following assumptions:
|
|
Options issued year ended
December 31, 2015
|
Dividend yield
|
|
0%
|
Expected volatility
|
|
84% - 85%
|
Risk free interest rate
|
|
1.18% - 1.81%
|
Expected life (years)
|
|
5
|
A summary of stock option activity is as follows:
|
|
Common
Stock
Options
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding - January 1, 2014
|
|
|
100,000
|
|
|
$
|
0.25
|
|
Issued
|
|
|
281,250
|
|
|
|
0.41
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Outstanding - December 31, 2014
|
|
|
381,250
|
|
|
|
0.36
|
|
Issued
|
|
|
675,000
|
|
|
|
0.23
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Outstanding - December 31, 2015
|
|
|
1,056,250
|
|
|
$
|
0.28
|
|
Exercisable - December 31, 2015
|
|
|
225,000
|
|
|
$
|
0.18
|
|
Share-based compensation.
The cost of all stock options and stock grants issued have been classified as share-based compensation on the statement of operations for the years ended December 31, 2015 and 2014. Total share-based compensation was $119,677 and $323,759 for the years ended December 31, 2015 and 2014, respectively.
NOTE 17. ASSET ACQUISITIONS AND SIGNIFICANT TRANSACTIONS
Acquisition of Prime Table Games’ assets.
In October 2011, we executed an asset purchase agreement (the “PTG Agreement”) with Prime Table Games, LLC and Prime Table Games UK. Under the terms of the PTG Agreement we acquired over 20 different table games, including
21+3
,
Two-way Hold’em
and
Three Card Poker,
which are currently played in over 250 casinos
worldwide (
Three Card Poker
rights are limited to the British Isles)
.
The intellectual property portfolio included 36 patents, 11 patents pending, 96 worldwide trademark and design registrations and 47 domain name registrations. The two principals of Prime Table Games also executed with us a non-compete agreement.
We accounted for the asset purchase as a business combination using the acquisition method of accounting which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the purchase date and be recorded on the balance sheet regardless of the likelihood of success of the related product or technology. The process for estimating the fair values of identifiable intangible assets involves the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. Transaction costs are not included as a component of consideration transferred and were expensed as incurred.
Consideration Transferred.
The acquisition-date fair value of the consideration transferred consisted of the following items:
Common stock - 2,000,000 shares
|
|
$
|
480,000
|
|
Note payable - Prime Table Games LLC
|
|
|
12,200,000
|
|
Note payable - Prime Table Games UK
|
|
|
10,000,000
|
|
Total
|
|
$
|
22,680,000
|
|
See Note 11 for details regarding the notes payable.
39
Fair value estimate of assets acquired and liabilities assumed.
The total purchase consideration is allocated to Prime Table Games intangible assets based on their estimated fair values as of the closing date. The allocation of the total purchase price to the net assets acquired is as follows:
Patents
|
|
$
|
13,259,000
|
|
Customer relationships
|
|
|
3,400,000
|
|
Trademarks
|
|
|
2,740,000
|
|
Debt discount
|
|
|
1,530,000
|
|
Goodwill
|
|
|
1,091,000
|
|
Non-compete agreement
|
|
|
660,000
|
|
Total
|
|
$
|
22,680,000
|
|
As of December 31, 2014, we determined several patents purchased as part of this transaction to be impaired and reduced the carrying value of the intangible asset to zero during 2014. The total impairment charge recognized for these patents in 2014 was $528,233.
TableMAX agreement
.
In February 2011, we entered into a definitive agreement (“TMAX Agreement”) with TableMAX Corporation (“TMAX”) a provider of electronic table games and platforms headquartered in Las Vegas, Nevada and a principal investor in TMAX. Under the terms of the TMAX Agreement, we have exclusive worldwide rights (excluding one international territory and two U.S. states) to the TMAX electronic gaming platform and certain game titles. We created an operating division (the “TableMAX Division”) which conducts sales, distribution, marketing, engineering, sub-licensing and manufacturing related to the TMAX products and related intellectual property. The TableMAX Division is wholly owned by us and is not considered owned by, related to, a joint venture partner of or an agent of TMAX in any manner. The term of the TMAX Agreement is five years. At any time during the term of the TMAX Agreement, either TMAX or we may make a written offer to purchase the sole ownership of the TableMAX Division. Such offer shall be subject to the parties’ mutual agreement and neither party shall be under any obligation to accept such an offer. If such an agreement has not been consummated within six months of the expiration of the TMAX Agreement, then each party must indicate to the other party no later than six months from the scheduled expiration of the TMAX Agreement, their intent to renew the TMAX Agreement for a term of at least one year, or terminate.
TMAX agreed to assign, for the term of the TMAX Agreement, all of its existing gaming installations and usable inventory to the TableMAX Division. We agreed to furnish our intellectual property relating to our table game content for use by the TableMAX Division, royalty-free for the term of the TMAX Agreement. The TMAX Agreement specifies annual performance targets whereby we are required, on a cumulative basis, to have minimum table placements. If we fail to meet the performance criteria as defined in the TMAX Agreement, we will be required to pay TMAX the difference between TMAX’s share of the actual profit obtained by the TableMAX Division and the estimated profit that would have been obtained if the minimum performance criteria had been obtained.
We are responsible for the losses of the TableMAX Division. Net profits from the TableMAX Division will be split between TMAX and us on a sliding scale basis dependent upon the number of TableMAX Division table installations and profit results as defined in the TMAX Agreement. We have not experienced significant losses attributable to the TableMAX Division.
Included in accrued expenses was $136,785 and $72,636, which represents reimbursement due to TMAX for the years ended December 31, 2015 and 2014, respectively.
NOTE 18. SUBSEQUENT EVENTS
Red Card Gaming & AGS Litigation.
In February 2016, we received notice the arbitration panel issued an interim award which results in retention of all rights and privileges in the ownership of the product and trademark
High Card Flush.
Please refer to Note 12 Commitments and Contingencies for detailed information.
In accordance with ASC 855-10, we have analyzed our operations subsequent to December 31, 2015 to the date these financial statements were issued, and have determined that we do not have any material subsequent events to disclose in these financial statements other than the event discussed above.
40