The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS
Unless the context indicates otherwise, references to “Galaxy Gaming, Inc.,” “we,” “us,” “our,” or the “Company,” refers to Galaxy Gaming, Inc., a Nevada corporation. “GGLLC” refers to Galaxy Gaming, LLC, a Nevada limited liability company that was a predecessor of the Company’s business, but is not directly associated with Galaxy Gaming, Inc.
Description of business.
We are an established global gaming company specializing in the design, development, manufacturing, marketing and acquisition of proprietary casino table games and associated technology, platforms and systems for the casino gaming industry. We are a leading supplier of gaming entertainment products worldwide and provide a diverse offering of quality products and services at competitive prices, designed to enhance the player experience.
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 and 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, 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 over 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.
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 our 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 our Premium Games include such popular titles
as High Card Flush, World Poker Tour Heads Up Hold’em
,
Three Card Poker,
and
Texas Shootout
. Generally, Premium 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 three products in this category: our
Bonus Jackpot System
, our
Inter-Casino Jackpot System
and our
MEGA-Share
. We receive compensation by collecting a fixed fee or a transaction fee.
Our
Bonus Jackpot System
facilitates a jackpot players can win by making a qualified wager. The jackpot is awarded to a player (or players) upon obtaining a specific triggering event. Our
Bonus Jackpot System
can facilitate either a fixed, adjustable or progressive style jackpot.
Our
Inter-Casino Jackpot System
leverages the abilities of our
Bonus Jackpot System
to connect and/or aggregate bonus or progressive jackpots from multiple casinos into a common network.
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. This jackpot winning event will trigger a second
MEGA-Share
jackpot that is divided among all players who made a
MEGA-Share
qualified wager.
5
e-Tables.
In 2011, we licensed the worldwide rights (excluding Oklahoma, Kentucky and the Caribbean), to the
TableMAX
e-Table system. Simultaneously we 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 16. The
TableMAX
e-Table system is a fully automated, deale
r-less, multi-player electronic table game platform. These platforms allow us to offer our Proprietary Table Game content in markets where live table games are not permitted. Our e-Table product enables automation of certain components of traditional tabl
e 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.
Ancillary equipment
. In 2014, we entered into an exclusive license for the worldwide rights to a patented technology that detects invisible card markings. With this technology, we developed
SpectrumVision
, which uses highly specialized and customized optics to see markings on playing cards that would otherwise be invisible or undetectable to the naked eye and surveillance cameras.
SpectrumVision
will be leased for a monthly fee or outright sale. Units sold may have a service contract issued in conjunction with the sale.
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.
Basis of presentation.
The accompanying unaudited interim condensed financial statements include the accounts of Galaxy Gaming, Inc. and are stated in conformity with accounting principles generally accepted in the United States of America, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in the financial statements have been condensed or omitted.
In the opinion of management, the accompanying unaudited interim financial statements contain all necessary adjustments, consisting only of those of a recurring nature, and disclosures to present fairly the Company’s financial position and the results of its operations and cash flows for the periods presented. These unaudited interim condensed financial statements should be read in conjunction with the financial statements and the related notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on March 30, 2016.
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. 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 4.
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.
6
Intellectual property and intangible assets.
These intellectual property and intangible assets have finite lives and are being amortized using the straight-line meth
od 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
|
Licensing agreements
|
|
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 PTG 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.
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 11. These improvements have been recorded as a capital lease and amortized over the life of the lease.
Concentration of risk.
We are exposed to risks associated with clients who represent a significant portion of total revenues. For the three months ended March 31, 2016 and 2015, respectively, we had the following client revenue concentrations:
|
|
Location
|
|
2016
Revenue
|
|
|
2015
Revenue
|
|
Client A
|
|
North America
|
|
|
14.2%
|
|
|
|
15.3%
|
|
Client B
|
|
North America
|
|
|
6.7%
|
|
|
|
1.6%
|
|
Client C
|
|
North America
|
|
|
6.4%
|
|
|
|
5.3%
|
|
Client D
|
|
United Kingdom
|
|
|
5.7%
|
|
|
|
6.7%
|
|
We are also exposed to risks associated with the expiration of our patents. Domestic and international patents for two of our products expired in June 2015. The patents account for approximately $1,453,393 or 49% of our revenue for the three months ended March 31, 2016.
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 of our 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.
|
7
The combination of hardware and software included in our Enhanced Table Systems and e-Tables is
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 s
oftware 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
and
SpectrumVision
.
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 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 tax provision or benefit.
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.
8
Recently adopted accounting standards – not adopted
We believe there is no additional new accounting guidance adopted, but not yet effective, which is relevant to the readers of our financial statements. However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on its financial reporting.
NOTE 3. PREPAID EXPENSES
Prepaid expenses consisted of the following at:
|
|
March 31,
2016
|
|
|
December
31,
2015
|
|
Insurance
|
|
$
|
17,376
|
|
|
$
|
13,408
|
|
Compliance
|
|
|
11,981
|
|
|
|
39,097
|
|
IT systems
|
|
|
10,541
|
|
|
|
19,041
|
|
Professional services
|
|
|
10,025
|
|
|
|
7,792
|
|
Other prepaid expenses
|
|
|
2,870
|
|
|
|
372
|
|
Rent
|
|
|
1,989
|
|
|
|
1,989
|
|
Travel
|
|
|
1,395
|
|
|
|
7,780
|
|
Trade show expense
|
|
|
—
|
|
|
|
6,000
|
|
Dues & subscriptions
|
|
|
—
|
|
|
|
10,859
|
|
Prepaid expenses
|
|
$
|
56,177
|
|
|
$
|
106,338
|
|
NOTE 4. INVENTORY
Inventory consisted of the following at:
|
|
March 31,
2016
|
|
|
December
31,
2015
|
|
Raw materials and component parts
|
|
$
|
266,563
|
|
|
$
|
231,709
|
|
Finished goods
|
|
|
175,701
|
|
|
|
170,528
|
|
Work-in-process
|
|
|
44,121
|
|
|
|
39,463
|
|
|
|
|
486,385
|
|
|
|
441,700
|
|
Less: inventory reserve
|
|
|
(30,000
|
)
|
|
|
(30,000
|
)
|
Inventory
|
|
$
|
456,385
|
|
|
$
|
411,700
|
|
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment, recorded at cost, consisted of the following at:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Furniture and fixtures
|
|
$
|
215,911
|
|
|
$
|
211,411
|
|
Leasehold improvements
|
|
|
156,843
|
|
|
|
156,843
|
|
Automotive vehicles
|
|
|
94,087
|
|
|
|
94,087
|
|
Computer equipment
|
|
|
92,285
|
|
|
|
89,203
|
|
Office equipment
|
|
|
32,873
|
|
|
|
29,140
|
|
|
|
|
591,999
|
|
|
|
580,684
|
|
Less: accumulated depreciation
|
|
|
(313,987
|
)
|
|
|
(281,807
|
)
|
Property and equipment, net
|
|
$
|
278,012
|
|
|
$
|
298,877
|
|
Included in depreciation expense was $32,180 and $30,142 related to property and equipment for the three months ended March 31, 2016 and 2015, respectively.
Property and equipment includes $243,970 of leasehold improvements, furniture and fixtures under capital leases as of March 31, 2016. Accumulated depreciation of assets under capital leases totaled $118,552 as of March 31, 2016.
9
NOTE 6. PRODUCTS LEASED AND HELD FOR LEASE
Products leased and held for lease consisted of the following at:
|
|
March 31,
2016
|
|
|
December
31,
2015
|
|
Enhanced table systems
|
|
$
|
298,956
|
|
|
$
|
288,683
|
|
Less: accumulated depreciation
|
|
|
(165,681
|
)
|
|
|
(154,198
|
)
|
Products leased and held for lease, net
|
|
$
|
133,275
|
|
|
$
|
134,485
|
|
Included in depreciation expense was $11,483 and $10,243 related to products leased and held for lease for the three months ended March 31, 2016 and 2015, respectively.
NOTE 7. INTANGIBLE ASSETS
Intellectual property and intangible assets consisted of the following at:
|
|
March 31,
2016
|
|
|
December
31,
2015
|
|
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
|
|
Licensing agreements
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
|
20,450,967
|
|
|
|
20,450,967
|
|
Less: accumulated amortization
|
|
|
(7,561,643
|
)
|
|
|
(7,189,331
|
)
|
Intangible assets, net
|
|
$
|
12,889,324
|
|
|
$
|
13,261,636
|
|
Amortization expense was $372,312 and $378,073 for the three months ended March 31, 2016 and 2015, respectively.
In October 2011, we acquired the following intangible assets related to the asset purchase with Prime Table Games LLC and Prime Table Games UK (collectively “Prime Table Games”):
|
|
Fair Value
|
|
Patents
|
|
$
|
13,259,000
|
|
Customer relationships
|
|
|
3,400,000
|
|
Trademarks
|
|
|
2,740,000
|
|
Goodwill
|
|
|
1,091,000
|
|
Non-compete agreement
|
|
|
660,000
|
|
Total acquired intangible assets
|
|
$
|
21,150,000
|
|
NOTE 8. ACCRUED EXPENSES
Accrued expenses, consisted of the following at:
|
|
March 31,
2016
|
|
|
December
31,
2015
|
|
Royalties
|
|
$
|
326,829
|
|
|
$
|
259,193
|
|
TableMAX reimbursement
|
|
|
174,638
|
|
|
|
136,785
|
|
Professional fees
|
|
|
93,947
|
|
|
|
154,888
|
|
Trade show expenses
|
|
|
82,628
|
|
|
|
78,549
|
|
Vacation
|
|
|
73,833
|
|
|
|
62,546
|
|
Salaries & payroll taxes
|
|
|
72,902
|
|
|
|
95,115
|
|
Accrued interest
|
|
|
32,068
|
|
|
|
14,832
|
|
Commissions
|
|
|
23,173
|
|
|
|
22,056
|
|
Accrued expenses
|
|
$
|
880,018
|
|
|
$
|
823,964
|
|
10
NOTE 9. CAPITAL LEASE OBLIGATIONS
Capital lease obligations consisted of the following at:
|
|
March 31,
2016
|
|
|
December
31,
2015
|
|
Capital lease obligation – leasehold improvements
|
|
$
|
100,170
|
|
|
$
|
107,365
|
|
Capital lease obligation – office furniture
|
|
|
19,593
|
|
|
|
29,839
|
|
|
|
|
119,763
|
|
|
|
137,204
|
|
Less: Current portion
|
|
|
(49,366
|
)
|
|
|
(59,196
|
)
|
Capital lease obligations
|
|
$
|
70,397
|
|
|
$
|
78,008
|
|
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 lease obligation – leasehold improvements requires 60 monthly payments of $2,879, including 5.5% interest, beginning May 2014 through May 2019.
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:
March 31,
|
|
Total
|
|
2017
|
|
$
|
54,692
|
|
2018
|
|
|
34,545
|
|
2019
|
|
|
34,545
|
|
2020
|
|
|
5,757
|
|
Total minimum lease payments
|
|
$
|
129,539
|
|
Less: amount representing interest
|
|
|
(9,776
|
)
|
Present value of net minimum lease payments
|
|
$
|
119,763
|
|
NOTE 10. NOTES PAYABLE
Notes payable consisted of the following at:
|
|
March 31,
2016
|
|
|
December
31,
2015
|
|
Notes payable, net of debt discount - PTG
|
|
$
|
10,261,236
|
|
|
$
|
10,934,544
|
|
Note payable – related party, Carpathia Associates
|
|
|
562,071
|
|
|
|
579,083
|
|
Note payable – related party, Robert Saucier
|
|
|
500,000
|
|
|
|
500,000
|
|
Vehicles, notes payable
|
|
|
66,624
|
|
|
|
70,664
|
|
|
|
|
11,389,931
|
|
|
|
12,084,291
|
|
Less: Current portion
|
|
|
(4,565,293
|
)
|
|
|
(4,648,120
|
)
|
Total long-term debt
|
|
$
|
6,824,638
|
|
|
$
|
7,436,171
|
|
In October 2011, we closed an asset acquisition with Prime Table Games (“PTG”). 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 ($10.0 million USD) note. The notes were recorded at fair value, net of a debt discount of $1,530,000. See Note 16 for further details.
The note payable – related party, Carpathia Associates, requires monthly principal and interest payments of $9,159, at a fixed interest rate of 7.3% through February 2017, at which time there is a balloon payment due of $1,003,000. This note payable is a result of the asset purchase agreement with GGLLC. The note payable between GGLLC and Bank of America was the subject of litigation and was settled in February 2014.
In October 2015 (the “Effective Date”), we entered into a Promissory Note (the “Saucier Note”) with Robert Saucier, Chief Executive Officer, pursuant to which we agreed to repay a loan of $500,000 made by Mr. Saucier to the Company. Under the terms of the 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. In April 2016, we fulfilled our obligation by paying $535,000 to Mr. Saucier, relieving it of any further payments or obligations under the Note.
11
Maturities of our notes payable are as follows:
Maturities as of
March 31,
|
|
Total
|
|
2017
|
|
|
4,565,293
|
|
2018
|
|
|
4,478,099
|
|
2019
|
|
|
2,923,408
|
|
2020
|
|
|
14,287
|
|
Total notes payable
|
|
$
|
11,981,087
|
|
Less: debt discount
|
|
|
(591,156
|
)
|
Notes payable, net of debt discount
|
|
$
|
11,389,931
|
|
NOTE 11. 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 in size, which is comprised of approximately 16,000 square feet of office space and an 8,000 square foot warehouse. The property is located in Las Vegas, Nevada.
The initial term of the Spencer Lease commenced on April 1, 2014. We paid approximately $153,000 in annual base rent in the first year, which increases 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 the then current fair market value rental rate determined in accordance with the terms of the Spencer Lease.
In connection with the Spencer Lease, the landlord has agreed to finance tenant improvements (“TI Allowance”) of $150,000. 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 9.
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 the landlord at least six months before the Termination Date. In the event we exercise our option to terminate, we must pay the landlord a 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.
Total rent expense was $72,154 and $73,951 for the three months ended March 31, 2016 and 2015, respectively.
Future minimum lease payments are as follows:
Twelve Months Ended
March 31,
|
|
Annual Obligation
|
|
2017
|
|
$
|
224,865
|
|
2018
|
|
|
233,604
|
|
2019
|
|
|
242,340
|
|
2020
|
|
|
63,933
|
|
2021
|
|
|
—
|
|
Total Estimated Lease Obligations
|
|
$
|
764,742
|
|
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, that are complex in nature and have outcomes that are difficult to predict. In accordance with topic ASC Topic 450, we record accruals for such contingencies to the extent that 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, statute or regulation. For a complete description of the facts and circumstances surrounding material litigation to which we are a party, see Note 12 in Item 8. “Financial Statements and Supplementary Data” included in our annual report on Form 10-K for the year ended December 31, 2015. There are no material updates to matters previously reported on Form 10-K for the year ended December 31, 2015, except:
12
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 cu
rrently 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. In March 2016, the Panel issued a recovery order (“Recovery Order”) and determined Galaxy was due 70% of its reasonable attorney fees. Additional briefing on the matter, relating to questions about the nature and amount of attorneys’ fees incurred has been requested. After reviewing the briefs, the Panel will determine the specific dollar amount to be entered as part of the final award (“Final Award”). Based on the Interim Award and Recovery Award, we believe the Final Award to be issued by the Panel will not contain a material adverse effect to us.
NOTE 12. 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 March 31, 2016.
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 as 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. Beginning June 30, 2016, the restricted stock will vest at six-month intervals through December 31, 2018.
As a condition of his 2015 employment agreement, Mr. Vecchiarelli can elect to use up to 50% of his annual bonus to purchase shares of the Company’s common stock at a 50% discount. The purchase price was to be determined by using the average closing price of the prior 10 business days discounted by 50%. On February 28, 2016, Mr. Vecchiarelli made the election to utilize $9,000 of his annual 2015 bonus to purchase 100,000 shares of common stock at the market price of $0.18 (effective price of $0.09 after discount). The shares vested immediately.
There were 39,315,591 common shares and no preferred shares issued and outstanding at March 31, 2016.
NOTE 13. RELATED PARTY TRANSACTIONS
We have a note payable to a related party, GGLLC, an entity formerly controlled by our CEO. Subsequently, GGLLC assigned the note to Carpathia. The note payable requires monthly principal and interest payments of $9,159, at a fixed interest rate of 7.3% through February 2017, at which time there is a balloon payment due of $1,003,000. The balance as of March 31, 2016 and December 31, 2015 was $595,789 and $1,065,324, respectively. This note payable is a result of the asset purchase agreement with GGLLC.
In August 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 amended 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 was that the balloon payment of $437,313, due under the terms of the note receivable from Carpathia, was to be applied to the outstanding note payable due to Carpathia . The balloon payment due in December 2018 will be $354,480.
13
As discussed in Note 10, we entered into the Saucier Note with Robert Saucier, our Chief Executi
ve Officer, on October 2015 (the “Effective Date”). Mr. Saucier loaned $500,000 to us, for which the terms of the Saucier Note require $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. In April 2016, the Company fulfilled its obligation by paying $535,000 to Mr. Saucier, relieving it of any further payments or obligations under t
he Note.
NOTE 14. INCOME TAXES
Our forecasted effective tax rate at March 31, 2016 is 41.8%, a 1.8% decrease from the 43.6% effective tax rate recorded at March 31, 2015. After a discrete benefit of $70,782, the effective tax rate for the three months ended March 31, 2016 was 28.83%. The discrete tax benefit was primarily due to changes in positions taken for uncertain tax positions.
NOTE 15. STOCK WARRANTS, OPTIONS AND GRANTS
Stock options.
For the three months ended March 31, 2016 and 2015, we issued 112,500 and 187,500 stock options, respectively. Stock options issued to members of our Board of Directors were 75,000 and 50,000 for the three months ended March 31, 2016 and 2015, respectively. Stock options issued to independent contractors were 37,500 and 37,500 for the three months ended March 31, 2016 and 2015, respectively.
During the three months ended March 31, 2015, we issued 100,000 stock options to an employee, with a vesting period of three years. The strike price was equal to the stock price at the date of the grant.
All stock options granted for the three months ended March 31, 2016 and 2015 were calculated to have fair values of $16,348 and $17,418, respectively, using the Black-Scholes option pricing model with the following assumptions:
|
|
Options Issued
Three Months Ended
March 31, 2016
|
|
Dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
89
|
%
|
Risk free interest rate
|
|
|
1.21
|
%
|
Expected life (years)
|
|
|
5.00
|
|
A summary of stock option activity is as follows:
|
|
Common
Stock Options
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding – January 1, 2015
|
|
|
381,250
|
|
|
$
|
0.36
|
|
Issued
|
|
|
675,000
|
|
|
|
0.23
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Outstanding – December 31, 2015
|
|
|
1,056,250
|
|
|
$
|
0.28
|
|
Issued
|
|
|
112,500
|
|
|
|
0.22
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Outstanding – March 31, 2016
|
|
|
1,168,750
|
|
|
$
|
0.27
|
|
Exercisable –March 31, 2016
|
|
|
337,500
|
|
|
$
|
0.19
|
|
Share based compensation.
The cost of all stock options issued have been classified as share based compensation for the three months ended March 31, 2016 and 2015, respectively. Total share based compensation was $20,471 and $18,870 for the three months ended March 31, 2016 and 2015, respectively.
14
NOTE 16. 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 (collectively “Prime Table Games”). 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 a non-compete agreement with us.
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 10 for details regarding the notes payable.
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 purchase price allocation
|
|
$
|
22,680,000
|
|
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.
15
Included in accrued expenses at March 31, 2016 and December 31, 2015, is $174,638 and $136,785, respectively, which represent reimbursement due to TMAX.
NOTE 17. SUBSEQUENT EVENTS
On April 1, 2016, we paid in full our short-term related party obligation, due to our Chief Executive Officer, in the amount of $535,000. Of this amount, $500,000 was related to principal and $35,000 was related to interest.
In accordance with ASC 855-10, we have analyzed our operations subsequent to March 31, 2016
to the date of 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 events discussed above.
16