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 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. Beginning 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. 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, Africa and to cruise ships and internet gaming sites worldwide. We currently
have an installed base of our products on over 3,000 gaming tables located in over 500 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 three product categories we classify as “Proprietary Table Games,” “Enhanced Table Systems”
and “e-Tables.” 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 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
Texas Shootout
,
Three Card Poker
,
Emperor’s Challenge, High Card Flush
and
WPT Heads’Up Hold’em
.
Typically, 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 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 them 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.
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 Generally Accepted Accounting Principles (“GAAP”) and have been consistently applied
to the preparation of the financial statements.
Basis
of presentation.
The accompanying unaudited interim financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”),
and should be read in conjunction with the audited financial statements and notes thereto contained herein and in our Form 10-K
filed with the SEC as of and for the year ended December 31, 2013. In the opinion of management, all adjustments necessary
in order for the financial statements to be not misleading have been reflected herein. The results of operations for
interim periods are not necessarily indicative of the results to be expected for the full year.
Basis
of accounting.
The financial statements have been prepared on the accrual basis of accounting in conformity with accounting
principles generally accepted in the United States of America. 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 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. Leasehold improvements are amortized
on a straight-line basis over the lesser of the estimated useful life of the improvement or remaining lease term. Our policy is
to capitalize expenditures that materially increase asset lives and expense ordinary repairs and maintenance as required.
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
|
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.
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 long-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. For the
six months ended June 30, 2014 and 2013, we had the following client revenue concentrations:
|
|
Location
|
|
2014
Revenue
|
|
2013
Revenue
|
Client
A
|
|
North
America
|
|
15.3%
|
|
12.5%
|
Client
B
|
|
United
Kingdom
|
|
12.3%
|
|
6.6%
|
Client
C
|
|
United
Kingdom
|
|
8.4%
|
|
8.4%
|
We
are also exposed to risks associated with the expiration of our patents. In 2015, domestic and international patents will expire
on two of our products, which account for approximately $2,675,793 or 56.6% of our revenue for the six months ended June 30, 2014.
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. Revenue from the sale of lifetime licenses, under which we have no continuing obligation, is recorded on the effective
date of the license agreement. Revenue from the sale of equipment or ancillary products is recorded in accordance with the contractual
shipping terms.
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 costs to develop our new and next-generation products. Our products
reach technological 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 record deferred tax assets and liabilities based on temporary differences between the financial reporting and
tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences
are expected to reverse. We reduce deferred tax assets by a valuation allowance when it is more likely than not that some or all
of the deferred tax assets will not be realized.
Our
provision for income taxes includes interest and penalties related to uncertain tax positions. We only 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. The tax benefits recognized in the financial statements from such
positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate
settlement.
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 - adopted
In
March 2013, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”)
requiring the release of cumulative translation adjustment into net income when an entity either sells a part or all of its investment
in a foreign entity or no longer holds a controlling financial interest in a foreign subsidiary. We adopted this ASU in 2014 and
it has not had a material impact on our financial statements.
In
February 2013, the FASB issued new accounting guidance for the recognition, measurement, and disclosure of obligations resulting
from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, including
debt arrangements, other contractual obligations, and settled litigation and judicial rulings. The new guidance is effective for
fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. We adopted this guidance
in 2014 and do not believe it has a significant impact on its consolidated results of operations, financial condition and cash
flows.
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. NOTE RECEIVABLE – RELATED PARTY
The
note receivable balance was as follows:
|
June 30, 2014
|
|
December 31, 2013
|
Note receivable
|
$
|
383,298
|
|
|
$
|
383,298
|
|
Less: current portion
|
|
(18,765
|
)
|
|
|
(18,212
|
)
|
Long-term note receivable
|
$
|
364,533
|
|
|
$
|
365,086
|
|
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 unpaid principal and interest is due August 2015.
Interest
income associated with this note receivable was $11,022 and $11,560 for the six months ended June 30, 2014 and 2013, respectively.
At June 30, 2014, there was an interest receivable balance of $28,720 which is included in other current assets.
Management
evaluates collectability on a regular basis and will set up reserves for uncollectible amounts when it has determined that some
or all of this receivable may be uncollectible. At June 30, 2014 and December 31, 2013, management believed that 100% of the note
receivable principal and interest amounts are collectible.
NOTE
4. PREPAID EXPENSES
Prepaid
expenses consisted of the following at:
|
June 30, 2014
|
|
December 31, 2013
|
Professional services
|
$
|
31,023
|
|
|
$
|
5,436
|
|
IT systems
|
|
24,057
|
|
|
|
8,923
|
|
Rent
|
|
17,162
|
|
|
|
175
|
|
Insurance
|
|
12,702
|
|
|
|
12,579
|
|
Dues & subscriptions
|
|
3,290
|
|
|
|
—
|
|
Other prepaid expenses
|
|
2,623
|
|
|
|
147
|
|
Inventory costs
|
|
2,520
|
|
|
|
2,520
|
|
Trade show expense
|
|
1,400
|
|
|
|
—
|
|
Property taxes
|
|
—
|
|
|
|
3,325
|
|
Regulatory compliance expenses
|
|
—
|
|
|
|
1,868
|
|
Prepaid expenses
|
$
|
94,777
|
|
|
$
|
34,973
|
|
NOTE
5. INVENTORY
Inventory
consisted of the following at:
|
June 30, 2014
|
|
December 31, 2013
|
Raw materials and component parts
|
$
|
203,685
|
|
|
$
|
182,351
|
|
Finished goods
|
|
92,494
|
|
|
|
95,579
|
|
Work-in-process
|
|
50,132
|
|
|
|
52,445
|
|
|
|
346,311
|
|
|
|
330,375
|
|
Less: inventory reserve
|
|
(32,895
|
)
|
|
|
(32,895
|
)
|
Inventory
|
$
|
313,416
|
|
|
$
|
297,480
|
|
NOTE
6. PROPERTY AND EQUIPMENT
Property
and equipment, recorded at cost, consisted of the following at:
|
June 30, 2014
|
|
December 31, 2013
|
Leasehold improvements
|
$
|
150,000
|
|
|
$
|
6,367
|
|
Furniture and fixtures
|
|
139,471
|
|
|
|
76,031
|
|
Computer equipment
|
|
78,770
|
|
|
|
69,960
|
|
Office equipment
|
|
12,270
|
|
|
|
12,270
|
|
|
|
380,511
|
|
|
|
164,628
|
|
Less: accumulated depreciation
|
|
(108,628
|
)
|
|
|
(119,676
|
)
|
Property and equipment, net
|
$
|
271,883
|
|
|
$
|
44,952
|
|
Property
and equipment includes $243,970 of leasehold improvements, furniture and fixtures under capital leases as of June 30, 2014. Accumulated
depreciation of assets under capital leases totaled $13,669 as of June 30, 2014.
Included
in depreciation expense was $24,926 and $9,378 related to property and equipment for the six months ended June 30, 2014 and 2013,
respectively.
NOTE
7. PRODUCTS LEASED AND HELD FOR LEASE
Products
leased and held for lease consisted of the following at:
|
June 30, 2014
|
|
December 31, 2013
|
Enhanced table systems
|
$
|
193,575
|
|
|
$
|
157,861
|
|
Less: accumulated depreciation
|
|
(87,557
|
)
|
|
|
(71,978
|
)
|
Products leased and held for lease,
net
|
$
|
106,018
|
|
|
$
|
85,883
|
|
Included
in depreciation expense was $16,008 and $10,251 related to products leased and held for lease for the six months ended June 30,
2014 and 2013, respectively.
NOTE
8. INTANGIBLE ASSETS
Intellectual
property and intangible assets consisted of the following at:
|
June 30, 2014
|
|
December 31, 2013
|
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
|
|
|
|
—
|
|
|
|
20,450,967
|
|
|
|
20,415,967
|
|
Less: accumulated amortization
|
|
(4,383,588
|
)
|
|
|
(3,604,456
|
)
|
Intangible assets, net
|
$
|
16,067,379
|
|
|
$
|
16,811,511
|
|
Amortization
expense was $779,133 and $794,452 for the six months ended June 30, 2014 and 2013, 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
9. ACCRUED EXPENSES
Accrued
expenses, consisted of the following at:
|
June 30, 2014
|
|
December 31, 2013
|
Commissions
|
$
|
111,520
|
|
|
$
|
92,744
|
|
Salaries & payroll taxes
|
|
64,039
|
|
|
|
59,266
|
|
Vacation
|
|
58,806
|
|
|
|
41,216
|
|
Trade show expenses
|
|
53,995
|
|
|
|
48,718
|
|
Professional fees
|
|
44,133
|
|
|
|
75,000
|
|
TableMAX reimbursement
|
|
31,490
|
|
|
|
—
|
|
Royalties
|
|
4,250
|
|
|
|
—
|
|
Accrued interest
|
|
3,170
|
|
|
|
2,443
|
|
Other accrued expenses
|
|
765
|
|
|
|
3,015
|
|
Accrued expenses
|
$
|
372,168
|
|
|
$
|
322,402
|
|
NOTE
10. CAPITAL LEASE OBLIGATIONS
Capital
lease obligations consisted of the following at:
|
June 30, 2014
|
Capital lease obligation – office furniture
|
$
|
86,118
|
|
Capital lease obligation – leasehold improvements
|
|
148,500
|
|
|
|
234,618
|
|
Less: Current portion
|
|
(61,305
|
)
|
Capital lease obligations
|
$
|
173,313
|
|
The
capital lease obligation – office furniture requires 30 monthly payments of $3,641, including interest at 10.2%, through
September 2016.
The
capital lease obligation – leasehold improvements requires 60 monthly payments of $2,879, including 5.5% interest, through
May 2019.
The
capital leases cover furniture and leasehold improvements located at our corporate headquarters in Las Vegas, NV. Annual requirements
for capital leases obligations are as follows:
June 30,
|
|
Total
|
|
2015
|
|
|
$
|
78,237
|
|
|
2016
|
|
|
|
78,237
|
|
|
2017
|
|
|
|
43,769
|
|
|
2018
|
|
|
|
34,545
|
|
|
2019
|
|
|
|
31,663
|
|
|
Total
minimum lease payments
|
|
|
$
|
266,451
|
|
|
Less:
amount representing interest
|
|
|
|
(31,833
|
)
|
|
Present
value of net minimum lease payments
|
|
|
$
|
234,618
|
|
NOTE
11. NOTES PAYABLE
Notes
payable consisted of the following at:
|
June 30, 2014
|
|
December 31, 2013
|
Note payable – related party
|
$
|
1,080,418
|
|
|
$
|
1,095,181
|
|
Notes payable, net of debt discount - PTG
|
|
16,402,876
|
|
|
|
17,480,676
|
|
|
|
17,483,294
|
|
|
|
18,575,857
|
|
Less: Current portion
|
|
(3,289,275
|
)
|
|
|
(2,929,918
|
)
|
Notes payable
|
$
|
14,194,019
|
|
|
$
|
15,645,939
|
|
The
note payable – related party 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. See Note 12 for further details.
In
October 2011, we closed an asset acquisition with Prime Table Games. 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 17 for further details.
Maturities
of our notes payable are as follows:
Maturities as of June 30,
|
|
Total
|
|
2015
|
|
|
$
|
3,135,743
|
|
|
2016
|
|
|
|
4,133,834
|
|
|
2017
|
|
|
|
5,453,591
|
|
|
2018
|
|
|
|
4,720,001
|
|
|
2019
|
|
|
|
996,387
|
|
|
Total
notes payable
|
|
|
$
|
18,439,556
|
|
|
Less:
debt discount
|
|
|
|
(956,262
|
)
|
|
Notes
payable, net of debt discount
|
|
|
$
|
17,483,294
|
|
NOTE
12. COMMITMENTS AND CONTINGENCIES
Operating
lease obligations.
In February 2014, we entered into a lease (the “Lease”) for a new corporate office with
an unrelated third party. The 5-year 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 Lease commenced on April 1, 2014. We are obligated to pay approximately $153,000 in annual base rent in the
first year, which shall 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 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 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 Lease.
In
connection with the Lease, the landlord has agreed to finance tenant improvements (“Tenant Improvements”) of $150,000.
The base rent is increased by an amount sufficient to fully amortize the Tenant Improvements through the 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. See Note 10.
Pursuant
to the lease, we have the option to terminate the Lease effective at the end of the 36th month (“Termination Date”).
We must deliver written notice of our intention to terminate the Lease to the 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 the landlord
with respect to the lease, plus (iii) all unamortized rental abatement amounts.
For
the period September 2010 to April 2014, we leased our offices from a related party that is connected with our CEO. The rental
agreement was on a month-to-month basis and monthly rent payments were $10,359. Through April 2014, we rented various temporary
storage facilities in the range of $150 to $460 a month. Our new corporate offices include approximately 8,000 square feet of
warehouse space and as of May 2014, virtually all of our external storage rental contracts have been eliminated.
Total
rent expense was $127,865 and $81,746 for the six months ended June 30, 2014 and 2013, respectively.
Future
minimum lease payments are as follows:
Twelve Months Ended June 30,
|
|
Annual Obligation
|
|
2015
|
|
|
$
|
209,568
|
|
|
2016
|
|
|
|
218,304
|
|
|
2017
|
|
|
|
227,052
|
|
|
2018
|
|
|
|
235,788
|
|
|
2019
|
|
|
|
244,524
|
|
|
Total
Estimated Lease Obligations
|
|
|
$
|
1,135,236
|
|
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 11 in Item 8. “Financial Statements and Supplementary
Data” included in our annual report on Form 10-K for the year ended December 31, 2013. There are no material updates to
matters previously reported on Form 10-K for the year ended December 31, 2013, except:
Bank
of America action.
In October 2012, we were served with a complaint by Bank of America (“BofA”) regarding a promissory
note payable between GGLLC and 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. On February 21, 2014, we reached a full
settlement of all claims alleged by BofA. Pursuant to the settlement, BofA and we agreed to dismiss its legal actions against
each other and enter into a mutual release of claims. Furthermore, we agreed to vacate the building located at 6980 O’Bannon
Drive no later than April 30, 2014. The complaint was dismissed by the court on April 10, 2014 and we vacated the building as
of April 18, 2014.
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
June 30, 2014.
In
February 2014, an independent contractor (the “Contractor”) was granted 150,000 shares of the Company’s 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, Director, was granted 100,000 shares of the Company’s restricted common stock as condition
of his Board of Directors Director Service Agreement. The restricted stock grant vested immediately.
In
April 2014, William A. Zender was appointed to serve as a member of our Board of Directors effective May 1, 2014. As a condition
of his Board of Directors Director Service Agreement, Mr. Zender was granted 75,000 shares of
our restricted common stock which vested immediately.
There
were 38,560,591 common shares and no preferred shares issued and outstanding at June 30, 2014.
Note
14. Related Party Transactions
We
leased our offices from the Saucier Business Trust, an entity that is related to our CEO through April 2014. The lease was entered
into effective September 1, 2010 for a period of two years requiring a monthly rental payment of $10,359. Total payments made
to this related party was $31,077 and $61,259 for each six month period ended June 30, 2014 and 2013.
We
have a note receivable from Abyss Group, LLC, an entity that is related to our CEO. This 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 whereby the monthly principal and interest payment was reduced to $3,332 and the unpaid principal and interest
is due August 2015. The balance as of June 30, 2014 and December 31, 2013 was $383,298 and $383,298, respectively. Interest income
associated with this note receivable was $11,022 and $11,560 for the six month periods ended June 30, 2014 and 2013, respectively.
We
have a note payable to a related party, GGLLC, an entity that is controlled by our CEO. The note payable required 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 June 30, 2014 and December 31, 2013 was $1,080,418 and $1,095,181, respectively. 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 March 2014. See Note 12 for further details.
Certain
administrative, accounting and legal support services are performed by Carpathia Associates, LLC, an entity related to our CEO.
We accrued or paid fees to the related party in the amount of $0 and $2,610 for the six months ended June 30, 2014 and 2013, respectively.
NOTE
15. INCOME TAXES
Our
forecasted effective tax rate at June 30, 2014 is 45.5%, a 7.9% increase from the 37.6% effective tax rate recorded at June 30,
2013. The increase in the expected annual rate in 2014 was primarily due to the non-availability of the Federal R&D tax credit,
since Congress has not extended this benefit yet for 2014. No discrete items were recorded for the six months ending June 30,
2014.
Note
16. Stock Warrants, Options AND GRANTS
Warrant
activity.
We have accounted for warrants as equity instruments in accordance with
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, 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 current warrant activity is as follows:
|
|
Common Stock Warrants
|
|
Weighted Average Exercise Price
|
|
Outstanding
– January 1, 2013
|
|
|
|
1,330,953
|
|
|
$
|
0.45
|
|
|
Issued
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
Expired
|
|
|
|
(714,286
|
)
|
|
|
0.40
|
|
|
Outstanding
– December 31, 2013
|
|
|
|
616,667
|
|
|
|
0.51
|
|
|
Issued
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
Expired
|
|
|
|
(441,667
|
)
|
|
|
0.40
|
|
|
Outstanding
– June 30, 2014
|
|
|
|
175,000
|
|
|
$
|
0.80
|
|
|
Exercisable
– June 30, 2014
|
|
|
|
—
|
|
|
|
—
|
|
Stock
options.
For the six months ended June 30, 2014 and 2013, we issued 106,250 and -0- stock options, respectively. Stock
options issued to members of our Board of Directors were 50,000 and -0- for the six months ended June 30, 2014 and 2013, respectively.
Stock options issued to independent contractors were 56,250 and -0- for the six months ended June 30, 2014 and 2013, respectively.
The stock options granted for the six months ended June 30, 2014 were calculated to have a fair value of $30,672 using the Black-Scholes
option pricing model with the following assumptions:
|
Options
Issued
Six
Months Ended
June
30, 2014
|
Dividend
yield
|
0%
|
Expected
volatility
|
86%
to 90%
|
Risk
free interest rate
|
1.62%
to 1.73%
|
Expected
life (years)
|
5.00
|
A
summary of stock option activity is as follows:
|
|
Common Stock Options
|
|
Weighted Average Exercise Price
|
|
Outstanding – January 1, 2013
|
|
|
|
100,000
|
|
|
$
|
0.25
|
|
|
Issued
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
Expired
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding – December 31, 2013
|
|
|
|
100,000
|
|
|
|
0.25
|
|
|
Issued
|
|
|
|
106,250
|
|
|
|
0.42
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
Expired
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding – June 30, 2014
|
|
|
|
206,250
|
|
|
$
|
0.34
|
|
|
Exercisable – June 30, 2014
|
|
|
|
172,916
|
|
|
$
|
0.36
|
|
Stock
grants.
For the six months ended June 30, 2014 and 2013, we granted 275,000 and -0- shares of common stock, respectively.
Stock granted to our Board of Directors was 175,000 and -0- shares for the six months ended June 30, 2014 and 2013. Stock granted
to independent contractors was 100,000 and -0- shares for the six months ended June 30, 2014 and 2013.
Share
based compensation.
The cost of all stock options and stock grants issued have been classified as share based compensation
for the six months ended June 30, 2014 and 2013, respectively. Total share based compensation was $114,823 and $2,902 for the
six months ended June 30, 2014 and 2013, respectively. The share based compensation is included in selling, general & administrative
expenses on the statement of operations.
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. 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
on approximately 500 tables in 200 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, 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
|
|
The
note payable to Prime Table Games UK is in the amount of £6,400,000 (GBP). Interest on the promissory notes was 0% in 2011.
The fair value of the notes, net of the debt discount was $20,670,000. The rate increased to 3% in 2012 and increases at 1% per
year thereafter to maximum of 9%. Payments on each of the notes are as follows:
Prime
Table Games LLC.
Monthly payments are due under this note, commencing with $100,000 due on or before January 28, 2012. Subsequent
payments are due on the 28th day of each month and the payment amount shall increase to $130,000 per month beginning 16 months
after the closing, $160,000 per month beginning in 28 months, $190,000 per month beginning in 40 months and $220,000 beginning
in 52 months until fully paid.
Prime
Table Games UK.
Monthly payments are due under this note, commencing with £64,000 due on or before January 28, 2012.
Subsequent payments are due on the 28th day of each month and the payment amount shall increase to £76,800 per month beginning
16 months after the closing, £89,600 per month beginning in 28 months, £102,400 per month beginning in 40 months,
£115,200 per month in 52 months until fully paid.
In
the event future monthly revenue received by us from the “Assets,” as defined in the Prime Agreement is less than
90% of the notes monthly payment due to Prime Table Games, then the note payments may, at our option, be adjusted to the higher
of $100,000 per month (for the Prime Table Games LLC note) and £64,000 per month (for the Prime Table Games UK note) or
90% of the monthly revenue amount. 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.
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”) for the purpose of conducting 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. 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
assigned, for the term of the TMAX Agreement, all of its existing gaming installations 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 however, TMAX agreed to reimburse us during the first 12 months from the
date of the TMAX Agreement for operating expenses of the TableMAX Division up to a maximum of $600,000. Subsequent to the 12 months
anniversary of the TMAX Agreement, TMAX notified us that they would continue to reimburse us for the losses attributed with the
TableMAX Division through December 31, 2012. 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.
While TMAX has not agreed to reimbursement of losses subsequent to December 31, 2012, we have not experienced significant losses
attributable to the TableMAX Division.
Included
in accrued expenses at June 30, 2014 is $31,490, representing reimbursement due to TMAX.
Note
18. Subsequent Events
In
accordance with ASC 855-10,
we have analyzed our operations subsequent to June 30, 2014 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.