UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

þ

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

¨

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

For the transition period from                      to                     

Commission file number 000-30653

 

Galaxy Gaming, Inc.

(Exact name of registrant as specified in its charter)

 

 

Nevada

 

20-8143439

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

6767 Spencer Street,

Las Vegas, Nevada

 

89119

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number: 702-939-3254

Securities registered under Section 12(b) of the Exchange Act:

Title of each class

none

Securities registered under Section 12(g) of the Exchange Act:

Title of each class

Common Stock, par value $0.001

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes  ¨    No  þ

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the issuer has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  þ    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 232.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     Yes  ¨    No  þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s second fiscal quarter was $2,396,834.  Shares of common stock held by each officer and each person known to the registrant to own 10% or more of the outstanding voting securities of the registrant were excluded in that such persons may be deemed to be affiliates.  This determination of affiliation status is not a determination for other purposes.  The registrant has one class of securities, its common stock.

As of March 30, 2016 the registrant had 39,315,591 shares of common stock outstanding. 

 

 

 

 


GALAXY GAMING, INC.

ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2015

TABLE OF CONTENTS

 

 

 

 

  

Page

 

PART I

 

Item 1.

 

 

Business

  

4

Item 1A.

 

Risk Factors

  

9

Item 1B.

 

Unresolved Staff Comments

  

9

Item 2.

 

Properties

  

9

Item 3.

 

Legal Proceedings

  

10

Item 4.

 

Mine Safety Disclosures

  

10

 

PART II

 

Item 5.

 

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  

11

Item 6.

 

Selected Financial Data

  

13

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

14

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

  

17

Item 8.

 

Financial Statements and Supplementary Data

  

18

Item 9.

 

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

  

41

Item 9A.

 

Controls and Procedures

  

41

Item 9B.

 

Other Information

  

41

 

PART III

 

Item 10.

 

 

Directors, Executive Officers and Corporate Governance

  

42

Item 11.

 

Executive Compensation

  

45

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  

47

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

  

47

Item 14.

 

Principal Accountant Fees and Services

  

48

 

PART IV

 

Item 15.

 

 

Exhibits, Financial Statement Schedules

  

49

 

 

 

2


Unless the context indicates otherwise, references to “Galaxy Gaming,” “we,” “us,” “our” or the “Company,” refer to Galaxy Gaming, Inc., a Nevada corporation, the company filing this report. Unless indicated otherwise, the terms and titles, “Chief Executive Officer,” “CEO,” “Chairman,” “Chairman of the Board” and “President” refers to Mr. Robert B. Saucier; “CFO,” “Chief Financial Officer,” “Secretary” and “Treasurer,” refers to Mr. Gary A. Vecchiarelli; and “Board” refers to the Company’s board of directors.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains statements that do not relate to historical or current facts, but are “forward-looking” statements. These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable. These statements may also relate to future events or trends, our future prospects and proposed new products, services, developments, or business strategies, among other things. These statements can generally (although not always) be identified by their use of terms and phrases such as anticipate, appear, believe, could, would, estimate, expect, indicate, intent, may, plan, predict, project, pursue, will, continue and other similar terms and phrases, as well as the use of the future tense.

Actual results could differ materially from those expressed or implied in our forward looking statements. Our future financial condition and results of operations, as well as any forward looking statements, are subject to change and to inherent known and unknown risks and uncertainties. You should not assume at any point in the future that the forward looking statements in this report are still valid. We do not intend, and undertake no obligation, to update our forward looking statements to reflect future events or circumstances.

 

 

 

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PART I

 

 

ITEM 1. BUSINESS

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’s experience.

History and Development of Galaxy Gaming

In 1997, Galaxy Gaming’s founder and President, Robert Saucier, was an investor in a small casino in Washington State.  The casino had ten tables, primarily blackjack.  During his tenure at this casino, Mr. Saucier invented a side bet for the casino game of blackjack known as Horseshoe Blackjack.  The side bet became very popular and the casino’s winnings from the games increased significantly.  On October 7, 1997, Galaxy Gaming Corporation (“GGCORP”) was formed and Mr. Saucier exchanged all of his rights, title and interest in his invention for stock in the corporation.  Other Washington casinos recognized the popularity and profitability of this side bet and requested intellectual property licenses to offer the Horseshoe Blackjack side bet at their casinos.  GGCORP modified the invention, changed its name to Lucky Ladies and filed for a method patent, which was later granted.

In 2002, the business and assets of GGCORP was acquired by Galaxy Gaming, LLC (“GGLLC”).  Lucky Ladies remained GGLLC’s only product until late 2002, when it debuted a new casino poker game called Texas Shootout.  This game quickly became popular with casinos and their customers.  GGLLC increased its sales force and expanded distribution into new jurisdictions.  Subsequently, GGLLC grew methodically and intentionally by reinvesting earnings and introducing new products at a regular pace.  Galaxy Gaming, Inc. (“GGINC”) was formed in 2006 and in 2007, the assets and business operations of GGLLC were acquired by GGINC.  In February 2009, GGINC executed a share exchange and reverse merger with Secured Diversified Investment, Ltd. (“SDI”).  On September 1, 2009, the Company’s Board of Directors approved a merger with the SDI’s wholly-owned subsidiary, GGINC, pursuant to Nev. Rev. Stat 92A.180 (“Short Form Merger”).  As part of the Short Form Merger, the Board authorized a change in the name of the company formerly known as SDI to “Galaxy Gaming, Inc.,” which remains the operating company as of the date of this Report.

Casinos use our proprietary products to enhance their gaming floor operations and improve their profitability, productivity and security, as well as to offer popular cutting-edge gaming entertainment content and technology to their players. We market our products to land-based, riverboat, 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, Australia and Africa and to cruise ships and internet gaming sites worldwide. We currently have an installed base of our products on over 5,000 gaming tables located in about 600 casinos, which positions us as the second largest provider of proprietary table games in the world.

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 website, www.galaxygaming.com. Information found on the website 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 Bet games include Lucky Ladies, 21+3 and Bonus Craps.  Premium Games are unique stand-alone Proprietary Table Games with their own unique set of rules and strategies. Examples of our Premium Games include High Card Flush, Three Card Poker and Texas Shootout.  Generally, Premium Games generate higher revenue per table placement than the Side Bet games. Internally, we track revenue by each of our Proprietary Table Games. We do not internally track direct costs associated with the revenue of each of our proprietary casino games since it would require subjective allocations of common costs.

Enhanced Table Systems. Enhanced Table Systems are electronic enhancements used on casino table games to add to player appeal and to enhance game security. We include three products in this category: our Bonus Jackpot System, our Inter-Casino Jackpot System and MEGA-Share.

Enhanced Table Systems: Bonus Jackpot System. The Bonus Jackpot System facilitates a jackpot that 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 stagnant, adjustable or progressive style jackpot.

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The Bonus Jackpot System is an advanced electronic system installed on gaming tables that is used to detect players’ wagers, evaluate game play, determine dealer efficiency and to assist in calculating jackpots and bonusing offerings. The Bonus Jackpot System also includes an electronic display system used on gaming tables to display game information to the players known as TableVision. Casinos use TableVision as an enhanced display to generate additional player interest and to promote various aspects of the game offered such as jackpots and bonusing programs. The Bonus Jackpot System allows the casino to seamlessly collect and process data and in turn, offer jackpots and other bonusing schemes to their players as determined by them using the data collected and processed.

The most current version of the Bonus Jackpot System as of the date of this Report is the Andromeda 4, which allows for sensors for up to 16 player positions and up to 6 sensors per player position (maximum total of 96 data gathering points). Sensors can be placed discreetly under the felt or be an enhanced sensor with a multi-colored LED light. The enhanced sensors increase security and reliability while providing the player with a positive indication a wager has been recorded. Another feature of our Bonus Jackpot system is the ability to keep track of and display more than one jackpot. This ability, combined with the expansion of multiple sensors, permits us to offer a unique bonusing system called “MEGA-Share” to our casino clients.

Enhanced Table Systems: Inter-Casino Jackpot System. We leverage the abilities of our Bonus Jackpot System to connect and/or aggregate bonus or progressive jackpots from multiple casinos into a common network. This methodology has long been practiced in the slot machine industry beginning with the introduction of IGT’s Megabucks in the 1990’s. These systems are referred to as “wide area progressives” and nearly every major slot machine manufacturer has a wide area progressive system. We developed our version of a wide area progressive jackpot system for table games that we call the Inter-Casino Jackpot System. We receive compensation by collecting a transaction fee from our casino clients either based upon their players’ participation in the Inter-Casino Jackpot System or a flat monthly fee.

Enhanced Table Systems: MEGA-Share. 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.  When one player obtains a winning hand entitling him or her to a jackpot, the event also triggers a second MEGA-Share jackpot that is divided among all players who made a MEGA-Share qualified wager. MEGA-Share rewards the other players playing on other tables, other games, or even other casinos with a share of the MEGA-Share jackpot, provided that they placed a qualifying MEGA-Share wager. We believe the Bonus Jackpot System and MEGA-Share may offer casinos an opportunity to significantly increase player interest, thereby increasing casino revenues and generating increased recurring revenue for us.

e-Tables. In 2011, we licensed the worldwide rights (excluding Oklahoma, Kentucky and the Caribbean) to the TableMAX e-Table system. Simultaneously we obtained e-Table rights to the casino table games Caribbean Stud, Caribbean Draw, Progressive Blackjack, Texas Hold’em Bonus and Blackjack Bullets. A description of this agreement is contained in Note 17 of our audited financial statements included in Item 8. The TableMAX e-Table system is a fully automated, dealer-less, multi-player electronic table game platform. These platforms allow us to offer our table game content in markets where live table games are not permitted. Our e-Table product enables the 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.

Ancillary Equipment.   In 2014, we licensed the worldwide rights to a patented technology that detects invisible card markings.  In recent years, there has been a significant increase in the number of businesses that offer tools that allow individuals to cheat casinos and card rooms.  These businesses, typically located in China or Eastern Europe, are booming due to the significant revenues they are deriving from sales of cheating products all around the world.  These products typically include daubs or inks that can be used by players to mark cards.  The markings can only be seen by using discrete technology, special glasses or contact lenses.  If a player is able to recognize any face down cards on the table or next card to be dealt, the player can obtain a significant edge resulting in an unfair game and potential significant loses to casinos or other players. Upon licensing, we further refined and developed the technology which has been branded as SpectrumVision.  The SpectrumVision technology utilizes 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 has the ability to see such marking using the entire spectrum of ultra-violet, infrared and natural light.  Units of SpectrumVision began shipping in 2015.

Our revenues consist primarily of recurring royalties received from our clients for the licensing of our game content and other products. Typically over 95% of our total revenues are recurring. In 2015, recurring revenues represented 99% of our total revenues. These recurring revenues generally have few direct costs thereby generating high gross profit margins in excess of 90%. 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 as reimbursement from the sale of associated products.

A significant portion of our business is conducted with four large clients who operate numerous casinos throughout North American and the United Kingdom. Aggregated revenues from these significant clients accounted for approximately 33.6% of revenues in 2015 and 2014.

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For more information about our revenues, operating income and assets, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” included in this Form 10-K.

STRATEGY

We believe that entertaining casino games will enhance players’ experiences and generate brand loyalty, resulting in increased profits for our casino clients. We continue to expand our product offering by focusing on innovative products and services. As we continue to develop and enhance our brand names and reputation, we anticipate expanding to new product lines that complement our overall strategy and enhance our market presence.

Our long-term business strategy is designed to enhance client value by producing products that players enjoy playing. We believe that we will enhance shareholder value by capitalizing on existing and emerging markets and the worldwide proliferation of gaming and continuing to build our recurring revenues. To achieve both of these objectives, we employ the following strategies:

 

1.

Expand our inventory of products and technologies to attain a fully comprehensive portfolio;

 

2.

Increase our per unit price point by leveraging our Enhanced Table Systems;

 

3.

Grow our e-Table and ancillary product business; and

 

4.

Expand our revenues from ancillary products.

Expand our inventory of products and technologies to attain a fully comprehensive portfolio. Historically, only one company in the table game industry, Scientific Games, Inc. (formerly SHFL Entertainment, Inc.) (“Scientific Games”), has had the ability to offer casinos nearly all of the table game products they require. Scientific Game’ss unique ability to offer numerous products both in terms of game content and what they term as “utility” products (e.g. card shufflers, smart dealing shoes, baccarat displays, etc.), has stifled competition from other companies, including us, who are disadvantaged without a complete product line offering. Our strategy is to be an alternative for casino operators by offering a complete and comprehensive portfolio of games, products, systems, technologies and methodologies for casino table games. If we achieve this objective, we intend to offer complete turn-key systems rather than compete solely as a purveyor of individual products. We continuously develop and/or seek to acquire new proprietary table games to complement our existing offerings and to extend our penetration of proprietary table games on the casino floor. We expect to accomplish this strategic shift through internal development of products as well as continued acquisitions from others.

Our first preference is to develop internally our products and intellectual property. Our engineering team works to develop new cutting-edge table game content and ancillary products. Together they have been responsible for the continued development of our Proprietary Table Games and Enhanced Table Systems. We intend to further expand our product line including so-called “utility” products now offered by our competitors through our continued research, design, development and engineering efforts.

In addition, we are constantly seeking to acquire marketable products developed by others. Since 2010, we have made a number of successful asset acquisitions. In October 2011, we acquired over 20 different table games, including 21+3, Two-way Hold’em and Three Card Poker from Prime Table Games.  The Prime Table Games intellectual property portfolio included 47 patents and patents pending, 96 worldwide trademark and design registrations and 47 domain name registrations.  Since 2011, we have developed the intellectual property into products such as World Poker Tour® Heads Up Hold’em, Four Card Frenzy, Three Card Prime, Cajun Stud and Commission Free Emperor’s Challenge.  Those games are currently played on approximately 2,200 tables in over 250 casinos in the world. In November 2011, we acquired the table games Bonus Craps, Four The Money, Rainbow Poker and Roulette Craps together with nine patents, various trademarks and an assignment of existing licensing agreements with various casinos throughout the United States from Lakes Entertainment, Inc.  In March 2012, we acquired Double Action Blackjack as a result of a settlement with Unax Service, LLC. In September 2012, we acquired High Card Flush from Red Card Gaming, Inc., which had earned two gaming industry awards: the 2012 Casino Journal’s “Best New Table Game,” as voted on by casino table game managers and “Best Traditional Table Game” as awarded by Casino Enterprise Management Magazine. Please also see “Item 3 Legal Proceedings” with respect to enforcement of our Rights against Red Card Gaming, Inc. and AGS, LLC.  In 2014, we acquired Lucky Win Baccarat to enhance our Baccarat game portfolio, and exclusive rights to proprietary technology used to develop SpectrumVision, our card marking detection system.  In March 2015, we licensed exclusive rights to a side-bet for roulette which we have branded as TRIO-lette.

We anticipate the continued acquisition and/or development of additional new proprietary table games and associated intellectual property. When combined with our existing portfolio, new proprietary games will give us the comprehensive spectrum of products to offer casinos a complete solution, thereby increasing our competitiveness in the marketplace.

Increase our per unit price point by leveraging our Enhanced Table Systems. Our Enhanced Table Systems permit us the opportunity to significantly increase the amount of recurring revenue we receive from each table game placement. Accordingly, our goal is to concentrate on installing new game placements using one or more of our Enhanced Table Systems and to convert our existing Proprietary Table Game placements that currently do not incorporate our Enhanced Table Systems. We have modified most of our Premium Table Games and many of our Side Bets to benefit from the economics this new system affords us. In the future, we intend to be able to offer this platform for all games.

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Additionally, we expect that most or all of our new Proprietary Table Games will facilitate the Bonus Jackpot System component. The technology developed with the Bonus Jackpot System has allowed us to offer not only bonus jackpots and progressive jackpots, but also provides us the infrastructure to offer our Inter-Casino Jackpot System and MEGA-Share.

MEGA-Share and our Inter-Casino Jackpot System are unrelated but can be combined if so desired by our clients. A casino could operate either or both simultaneously.

Grow our e-Table business. Our TableMAX product line is developed for us by TableMAX Corporation. Having installed the majority of TableMAX e-Tables we received from TableMax Corporation, we are awaiting the next major release of the TableMAX e-Table, referred to as the “Model E.” In 2013, we were informed by TableMAX Corporation that the Model E’s development was completed. We have acquired the requisite approvals for the Model E in 2013 and began offering this product to gaming operators in late 2014.

Expand our ancillary product revenues. The new SpectrumVision product is the result of an exclusive license we obtained in 2014.  A prototype of SpectrumVision was showcased in our booth at G2E in September 2014 and the World Game Protection Conference in March 2015, where it received significant interest from table game operators and surveillance managers around the world.  We expect SpectrumVision will be a product that every casino & card room operator will need as a deterrent and surveillance tool.  In addition to industry utilizing the product, we expect gaming regulators to use the device to assist in suspected cheating investigations.  Since obtaining the exclusive license, we have employed an outsourcing strategy to design and manufacture a final SpectrumVision product, which we began shipping in 2015.

COMPETITION

We compete with other gaming products and supply companies for space on the casino floor, as well as for our client’s capital spending. Our competition for casino placement and the attention of players comes from a variety of sources, including companies that design and market proprietary table games, electronic table game platforms, e-Tables and other gaming products.

With respect to our Proprietary Table Games, we compete with several companies which primarily develop and license proprietary table games. Our competitors include, but are not limited to, Scientific Games, AGS, DEQ Systems, TCS/John Huxley, and Masque Publishing. Competition in this product group is particularly based on price, brand recognition, player appeal and the strength of underlying intellectual property. Smaller developers and vendors are more able to participate in developing and marketing table games, compared to other gaming products, because of the lower cost and complexity associated with the development of these products and a generally less stringent regulatory environment. Larger competitors typically have superior capital resources, distribution and product inventory than we do. We compete on these bases, as well as on the strength of our extensive sales, service and distribution channels. We have been able to increase our placements of table games not only because of the general growth of casino gaming, but also by displacing other proprietary and public domain table game products.

With respect to our Enhanced Table Systems, we compete primarily with Scientific Games, DEQ Systems and TCS/John Huxley. Scientific Games has a progressive jackpot system it uses with its proprietary table games. DEQ Systems, which has limited game content, often uses its platform with other companies’ games including ours and those of Scientific Games.  TCS/John Huxley has introduced a bonusing platform available for public domain games, and has limited game content.

With respect to our e-Table system, there are numerous other companies that manufacture and/or sell e-Tables that are similar. These companies include, but are not limited to, TCS/John Huxley, Aristocrat, Interblock, Aruze Gaming Corporation, Novomatic Industries, Multimedia Games and Scientific Games. Our e-Tables, as well as those of other companies, also compete for casino floor space with live table games and slots. One of our competitive strengths in this segment is the ability to offer our proprietary table game titles on e-Table platforms.

Many of our competitors have longer operating histories, significantly greater resources, greater brand recognition and more firmly established supply relationships. Moreover, we expect additional competitors to emerge in the future. We believe that the principal competitive factors in our market include products that appeal to casinos and players, jurisdictional approvals and a well-developed sales and distribution network. Although we plan to compete effectively in this market, we recognize that this market is relatively new and is evolving rapidly, and accordingly, there can be no assurance that we will be able to compete effectively. We believe that our success will depend upon our ability to remain competitive in our field. We compete with others in efforts to obtain or create innovative products, obtain financing, acquire other gaming companies, and license and distribute products. The failure to compete successfully in the market for proprietary table games, electronic table game platforms and multi-casino jackpots could have a material adverse effect on our business.

We believe we have competitive advantages resulting from broad alliances and lengthy business relationships with our clients and an extensive intellectual property portfolio. Our historically high levels of customer service and support, worldwide name and brand recognition and geographic diversity are also competitive assets. We believe our reputation for consistently delivering and supporting quality products will encourage operators to select our products and enable us to maintain and create a substantial market position.

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MANUFACTURING AND SUPPLIERS

We obtain most of the parts for our products from third party suppliers, including both off-the-shelf items as well as components manufactured to our specifications. We also manufacture a small number of parts in-house that are used both for product assembly and for servicing existing products. We generally perform warehousing, quality control, final assembly and shipping ourselves from our facilities in Las Vegas, Nevada, although small inventories are maintained and repairs are performed by our field service employees. We believe that our sources of supply for components and raw materials are adequate and that alternative sources of materials are available.

RESEARCH AND DEVELOPMENT

While we are committed to growing the sales of our marketed products, we strive to maintain a robust pipeline of products under development to bring to market. We employ a staff of electrical, mechanical and software engineers, graphic artists and game developers to support, improve and upgrade our products and to develop and explore other potential table game products. We perform our research and development ourselves at our corporate offices. We also expect to use contracted third party developers to conduct research and development for certain product offerings.

We believe that one of our strengths is identifying new product opportunities and developing new products. Therefore we expect to continue to spend a significant portion of our annual revenues on research and development, including the acquisition of intellectual property and technology from third parties. We have incurred approximately $455,000 and $473,000 in research and development expenditures during 2015 and 2014, respectively. Consistent with our increased focus on development of new products, we anticipate significant increased research and development expenditures in 2016 and future years.

INTELLECTUAL PROPERTY

Our products and the intellectual property associated with them are typically protected by patents, trademarks and copyrights. There can be no assurance that the steps we have taken to protect our intellectual property will be sufficient. In addition, the laws of some foreign countries do not protect intellectual property to the same extent as the laws of the United States, which could increase the likelihood of infringement. Furthermore, other companies could develop similar or superior products without violating our intellectual property rights. If we resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome, disruptive and expensive, and distract the attention of management, and there can be no assurance that we would prevail.

We have been and are subject to litigation claiming that we have infringed the rights of others and/or that certain of our patents and other intellectual property are invalid or unenforceable. We have also brought actions against others to protect our rights. A description of certain of these matters is contained in Note 12 of our audited financial statements, included in Item 8 and incorporated herein by this reference.

GOVERNMENT REGULATION

We are subject to regulation by governmental authorities in most jurisdictions in which we offer our products. The manufacturing and distribution of casino games, gaming equipment, systems technology, and related services, as well as the operation of casinos, are all subject to regulation by a variety of federal, state, international, tribal, and local agencies with the majority of oversight provided by individual state gaming control boards. While the regulatory requirements vary by jurisdiction, most require:

 

·

Findings of suitability for the company, individual officers, directors, key employees and major shareholders;

 

·

Documentation of qualification, including evidence of financial stability;

 

·

Specific product approvals for gaming equipment manufacturers; and

 

·

Licenses, registrations and/or permits.

Gaming regulatory requirements vary from jurisdiction to jurisdiction, and obtaining licenses, registrations, findings of suitability for our officers, directors, and principal stockholders and other required approvals with respect to us, our personnel and our products are time consuming and expensive. Generally, gaming regulatory authorities have broad discretionary powers and may deny applications for or revoke approvals on any basis they deem reasonable. We have approvals that enable us to conduct our business in numerous jurisdictions, subject in each case to the conditions of the particular approvals. These conditions may include limitations as to the type of game or product we may sell or lease, as well as limitations on the type of facility, such as riverboats, and the territory within which we may operate, such as tribal nations. We have authorizations with certain Native American tribes throughout the United States which have compacts with the states in which their tribal dominions are located or operate or propose to operate casinos. These tribes generally require suppliers of gaming and gaming-related equipment to obtain authorizations.

The nature of the industry and our worldwide operations make this process very time consuming and require extensive resources. We engage legal resources familiar with local customs in certain jurisdictions to assist in keeping us compliant with applicable regulations

8


worldwide. Through this process, we seek to assure both regulators and investors that all our operations maintain the highest levels of integrity and avoid any appearance of impropriety.

Gaming laws and regulations serve to protect the public interest and ensure gambling related activity is conducted honestly, competitively, and free of corruption. Regulatory oversight additionally ensures that the local authorities receive the appropriate amount of gaming tax revenues. As such, our financial systems and reporting functions must demonstrate high levels of detail and integrity.

We have obtained or applied for all required government licenses, permits, registrations, findings of suitability, and approvals necessary to manufacture and distribute gaming products in all jurisdictions where we directly operate. Although many regulations at each level are similar or overlapping, we must satisfy all conditions individually for each jurisdiction. We have never been denied a gaming related license, nor have our licenses ever been suspended or revoked.

Gaming jurisdictions. Gaming jurisdictions that have legalized gaming typically require various licenses, registrations, findings of suitability, permits, and approvals of manufacturers and distributors of gaming devices and equipment as well as licensure provisions related to changes in control. In general, such requirements involve restrictions and approvals. Additionally, we license and/or lease our products through licensed distributors. We offer our products throughout most of the United States, Canada, Caribbean, South Africa, United Kingdom and selected parts of Europe.

Native American gaming regulation. Gaming on Native American lands within the United States is governed by the Federal Indian Gaming Regulatory Act of 1988 (“IGRA”) and specific tribal ordinances and regulations. Class III gaming (table games and slot machines, for example), as defined under IGRA, also requires a Tribal-State Compact, which is a written agreement between a specific tribe and the respective state. This compact authorizes the type of Class III gaming activity and the standards, procedures and controls under which the Class III gaming activity must be conducted. The National Indian Gaming Commission (“NIGC”) has oversight authority over gaming on Native American lands and generally monitors tribal gaming, including the establishment and enforcement of required minimum internal control standards. Each tribe is sovereign and must have a tribal gaming commission or office established to regulate tribal gaming activity to ensure compliance with IGRA, NIGC, and its Tribal-State Compact. We have complied with each of the numerous vendors licensing and specific product approval and shipping notification requirements imposed by Tribal-State Compacts and enforced by tribal and/or state gaming agencies under IGRA in the Native American lands in which we do business.

Application of future or additional regulatory requirements. In the future we intend to seek the necessary registrations, licenses, approvals, and findings of suitability for us, our products, and our personnel in other jurisdictions throughout the world. However, we may be unable to obtain such necessary items, or if such items are obtained, may be revoked, suspended, or conditioned. In addition, we may be unable to obtain on a timely basis, or to obtain at all, the necessary approvals of our future products as they are developed, even in those jurisdictions in which we already have existing products licensed or approved. If the necessary regulations are not sought after or the required approvals not received, we may be prohibited from selling our products in that jurisdiction or may be required to sell our products through other licensed entities at a reduced profit.

EMPLOYEES

We have seventeen full-time employees, including executive officers, management personnel, accounting personnel, office staff, sales staff, service technicians and research and development personnel.  We employ four part-time employees.  Our employees are co-employed by Advanstaff, Inc. a professional employer organization engaged by us to provide payroll and human resource services. As needed from time to time, we also pay for the services of independent contractors.

 

 

ITEM 1A. RISK FACTORS.

A smaller reporting company is not required to provide the information required by this Item.

 

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

 

ITEM 2. PROPERTIES

We do not own any real property used in the operation of our current business. We maintain our corporate office at 6767 Spencer Street, Las Vegas, Nevada.  We currently pay rent to an unrelated party pursuant to a lease entered into effective in 2014 with a current monthly rental payment of approximately $18,000. We currently occupy approximately 24,000 square feet of combined office and warehouse space.  See Note 12 to our audited financial statements, included in Item 8, for further details.

 

 

9


ITEM 3. LEGAL PROCEEDINGS

We have been named in and have brought lawsuits in the normal course of business. A description of these matters is contained in Note 12 to our audited financial statements which are included in Item 8 and incorporated herein by this reference.

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

California administrative action.  In March 2003, Galaxy Gaming of California, LLC (“GGCA”), an independent entity managed by GGLLC, submitted an application to the California Gambling Control Commission (“California Commission”) for a determination of suitability to conduct business with tribal gaming operations in California.  At the time, our CEO was a member of GGCA and was required to be included in the application process.  In July 2013, the California Commission denied the applications of our CEO and GGCA for a finding of suitability.  The California Commission also denied a request for stay or any further reconsideration of the matter.

In August 2013, GGCA and our CEO filed a motion for writ of mandate with the Sacramento County Superior Court, asking the Court for a judicial review of the California Commission’s ruling.  A hearing on the motion was originally scheduled for October 2015 and has been rescheduled to July 2016.  Subsequently, in September 2013, we were notified that until this matter was deemed resolved, we were not permitted to conduct business with tribal casinos in California.

In July 2014, we filed an application with the California Bureau of Gambling Control for a finding of suitability.  As of the date of this Report, that application was in process.

In Bet Litigation.  In November 2014, we filed a complaint for patent infringement against In Bet Gaming, Inc. and In Bet, LLC, alleging that their “In-Between” side bet game infringes on one or more of our patents.  The litigation is currently pending.

Red Card Gaming & AGS Litigation.  In September 2012, we executed an asset purchase agreement (“APA”) with Red Card Gaming, Inc. (“RCG”), for the purchase of all the rights, title and interest in and for the game known as High Card Flush and all associated intellectual property.  The APA included customary non-compete, non-disparagement and right of first refusal provisions.  In 2014, AGS, LLC (“AGS”) purchased RCG’s rights in the APA and became the assignee of the APA.  In September 2014 we notified RCG of their material breach of the APA and discontinued contingent consideration payments.  In November 2014, RCG and AGS attempted to terminate the APA and in December 2014, began selling their own High Card Flush game and filed a complaint against us alleging fraud, breach of contract and trademark infringement, among other allegations.  We filed counterclaims against RCG and AGS alleging, among other things, fraud on the trademark office and in the marketplace, misappropriation of our trade secrets, breach of contract, infringement of our trademark and interference with customer relationships.

In February 2016, we received notice the arbitration panel (the “Panel”) issued an interim award (the “Interim Award”) which resulted in, among other things, our retention of all rights and privileges in the ownership of the product and trademark High Card Flush and an injunction prohibiting AGS and RCG from selling the High Card Flush game and using the trademark.  Additional briefing on the matter, relating to questions about the amount of attorneys’ fees to be awarded to Galaxy, has been requested from the Panel.  After reviewing the briefs, the Panel will either rule on the briefs or will schedule oral argument.  Based on the Interim Award, we believe the final award to be issued by the Panel will not contain a material adverse effect to us.

 

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

 

 

10


PART II

 

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is quoted on the OTCQB marketplace (“OTCQB”), which has a higher standard than the OTC Bulletin Board exchange we traded on in previous years.  The OTCQB has superior standards which are designed to improve marketplace integrity and enhance transparency for investors.  Our ticker symbol trades under the symbol GLXZ.

The following table sets forth the range of high and low closing sale prices for our common stock for each of the periods indicated as reported by the OTCQB.

 

 

 

2015

 

 

2014

 

Quarter Ended

 

High ($)

 

 

Low ($)

 

 

High ($)

 

 

Low ($)

 

March 31,

 

 

0.39

 

 

 

0.28

 

 

 

0.39

 

 

 

0.21

 

June 30,

 

 

0.30

 

 

 

0.16

 

 

 

0.50

 

 

 

0.33

 

September 30,

 

 

0.30

 

 

 

0.16

 

 

 

0.43

 

 

 

0.35

 

December 31,

 

 

0.27

 

 

 

0.17

 

 

 

0.49

 

 

 

0.34

 

 

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.

The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer’s account.

In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.

These disclosure requirements may have the effect of reducing the trading activity for our common stock. Therefore, stockholders may have difficulty selling our securities.

HOLDERS OF OUR COMMON STOCK

As of March 30, 2016, we had 39,315,591 shares of our common stock issued and outstanding, held by approximately 375 shareholders.

DIVIDEND POLICY

There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring dividends where after giving effect to the distribution of the dividend:

 

·

We would not be able to pay our debts as they become due in the usual course of business; or

 

·

Our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution

We have not declared any dividends and we do not plan to declare any dividends in the foreseeable future.

11


TRANSFER AGENT

Our stock transfer agent and registrar is Colonial Stock Transfer Company, Inc. located at 66 Exchange Place, 1st Floor, Salt Lake City, UT 84111. Their telephone number is (801) 355-5740.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

We have not yet adopted any formal equity compensation plans. In anticipation of establishing an equity compensation plan we have taken the following actions:

 

·

As condition of his 2012 employment agreement, our Board granted options to Gary A. Vecchiarelli, our CFO to purchase 100,000 shares of our common stock at an exercise price equal to the closing price of our common stock on the trading day prior to the grant date ($0.25). Such options vested over a three year period through June 30, 2015.  None of the options have been exercised to date.

 

·

As condition of a consulting agreement effective February 13, 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. Additionally, the Contractor will also receive options to purchase 37,500 shares of common stock, granted quarterly and vested immediately, with a strike price equal to the closing price on the last day of the applicable quarter.  The Contractor holds a total of 281,250 vested options, none of which have been exercised to date.

 

·

As condition of his Board of Directors Director Service Agreement, effective March 1, 2014, Norm DesRosiers, Director, was granted a restricted stock award of 100,000 shares of the Company’s common stock. The restricted stock award vested immediately. Mr. DesRosiers will also receive options to purchase 25,000 shares of common stock, granted quarterly and vested immediately, with a strike price equal to the closing price on the last day of the applicable quarter.  Mr. DesRosiers holds a total of 183,333 vested options, none of which have been exercised to date.

 

·

As condition of his Board of Directors Director Service Agreement, effective May 1, 2014, William Zender, Director, was granted a restricted stock award of 75,000 shares of the Company’s common stock. The restricted stock award vested immediately. Mr. Zender will also receive options to purchase 25,000 shares of common stock, granted quarterly and vested immediately, with a strike price equal to the closing price on the last day of the applicable quarter.  Mr. Zender holds a total of 175,000 vested options, none of which have been exercised to date.

 

·

On December 29, 2014, our Board agreed to a bonus which granted an aggregate 355,000 shares of common stock to several different employees in varying amounts based on performance.  Of this amount, 100,000 shares were issued to Gary A. Vecchiarelli, our CFO.  All shares granted on this date were vested immediately.

 

·

On February 15, 2015, the Company granted options to an employee to purchase 100,000 shares of our common stock at an exercise price equal to the closing price of our common stock on the trading day prior to the grant date ($0.34).  Such options will vest over three years as follows: 33% on the first anniversary (February 15, 2016) and the remainder in equal monthly installments for the remaining 24 months.

 

·

As condition of his Board of Directors Director Service Agreement, effective April 1, 2015, Bryan W. Waters, Director, was granted a restricted stock award of 75,000 shares of the Company’s common stock. The restricted stock award will vest  immediately. Mr. Waters will also receive options to purchase 25,000 shares of common stock, granted quarterly and vesting immediately, with a strike price equal to the closing price on the last day of the applicable quarter.  Mr. Waters holds a total of 75,000 vested options, none of which have been exercised to date.

 

·

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.

RECENT SALES OF UNREGISTERED SECURITIES

Effective April 1, 2015, Mr. Bryan Waters agreed to serve as a member of our Board of Directors. In connection with his appointment, Mr. Waters was granted a restricted stock award, covering 75,000 shares of our common stock. The restricted stock award vested immediately. We will also provide annual cash compensation of $30,000 to be paid in quarterly installments on the last day of each quarter. Mr. Waters will receive options to purchase 25,000 shares of common stock, granted quarterly and vested immediately, with a strike price equal to the closing price on the last day of the previous quarter. Exercise life of options shall be five years from the date of grant or ninety days from date of separation, whichever is less.

On November 14, 2015, we entered into an employment agreement with our Chief Financial Officer, Gary A. Vecchiarelli.  As a condition of his employment agreement, Mr. Vecchiarelli was granted 150,000 shares of our restricted common stock which vests in increments of 25,000 shares beginning June 30, 2016 and every six month anniversary thereafter, with all shares vesting on December 31, 2018.  Mr. Vecchiarelli’s employment agreement also allows him to utilize up to 50% of his annual bonus to purchase the Company’s common stock at a 50% discount.

12


On February 28, 2016, Mr. Vecchiarelli elected to use $9,000 of his annual 2015 bonus to purchase 100,000 shares of the Company’s common stock.  All shares purchased on this date were vested immediately.

In each of the transactions listed above, the securities were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, (the “Securities Act”) and rules and regulations promulgated thereunder.  None of the transactions involved a public offering.

 

 

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected historical financial data. We derived the selected statements of operations data for the years ended December 31, 2015 and 2014, and balance sheet data as of December 31, 2015 and 2014, from our audited financial statements and notes thereto that are included elsewhere in this annual report. We derived the selected statements of operations data and balance sheet data for the years ended December 31, 2013, 2012 and 2011, from our audited financial statements that do not appear in this annual report.

You should read the following financial information together with the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this annual report. The information set forth below is not necessarily indicative of our future financial condition or results of operations.

 

 

 

Years ended December 31,

 

 

 

2015

 

 

2014(1)

 

 

2013(2)

 

 

2012

 

 

2011(3)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

10,951,670

 

 

$

9,845,108

 

 

$

8,218,598

 

 

$

7,222,550

 

 

$

3,684,865

 

Net (loss) income

 

 

187,854

 

 

 

21,888

 

 

 

563,317

 

 

 

621,726

 

 

 

(473,336

)

Adjusted EBITDA (4)

 

 

3,267,119

 

 

 

3,754,851

 

 

 

3,434,215

 

 

 

2,847,459

 

 

 

147,212

 

Statement of Cash Flows Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

3,281,087

 

 

$

3,224,973

 

 

$

2,375,798

 

 

$

2,140,911

 

 

$

(273,425

)

Net cash used in investing activities

 

 

(45,638

)

 

 

(111,716

)

 

 

(17,690

)

 

 

(62,204

)

 

 

(10,175

)

Net cash (used in) provided by financing activities

 

 

(3,213,732

)

 

 

(2,977,932

)

 

 

(2,323,599

)

 

 

(1,402,484

)

 

 

22,073

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

570,623

 

 

$

560,184

 

 

$

438,502

 

 

$

398,424

 

 

$

182,907

 

Current assets

 

 

3,060,695

 

 

 

2,947,642

 

 

 

2,385,009

 

 

 

2,290,724

 

 

 

1,448,272

 

Total assets

 

 

17,971,048

 

 

 

19,492,083

 

 

 

21,227,355

 

 

 

22,404,946

 

 

 

23,115,411

 

Current liabilities

 

 

7,954,017

 

 

 

5,366,588

 

 

 

4,302,173

 

 

 

3,562,098

 

 

 

3,061,780

 

Total liabilities

 

 

15,520,839

 

 

 

17,616,501

 

 

 

19,948,112

 

 

 

21,812,962

 

 

 

22,775,599

 

Shareholders’ equity

 

 

2,450,209

 

 

 

1,875,582

 

 

 

1,279,243

 

 

 

591,984

 

 

 

339,812

 

 

 

(1)

In 2014, we recorded a $528,233 impairment charge to reduce the carrying value of intangible assets to their estimated fair value.

 

(2)

In 2013, we recorded a $150,000 impairment charge to reduce the carrying value of intangible assets to their estimated fair value.

 

(3)

In 2011, we made a significant acquisition of assets from Prime Table Game, LLC and Prime Table Games UK. The allocation of the total purchase price to the net assets acquired is as follows:

 

Patents

 

$

13,259,000

 

Customer relationships

 

 

3,400,000

 

Trademarks

 

 

2,740,000

 

Debt discount

 

 

1,530,000

 

Goodwill

 

 

1,091,000

 

Non-compete agreement

 

 

660,000

 

Total

 

$

22,680,000

 

 

13


We transferred the following consideration for the net assets acquired:

 

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

 

 

(4)

In addition to disclosing financial results prepared in accordance with U.S. GAAP, we disclose information regarding Adjusted EBITDA. Adjusted EBITDA includes adjusting net income/(loss) to exclude interest, taxes, depreciation, amortization and share based compensation. Adjusted EBITDA is not a measure of performance defined in accordance with U.S. GAAP. However, Adjusted EBITDA is used by management to evaluate our operating performance. Management believes that disclosure of the Adjusted EBITDA metric offers investors, regulators and other stakeholders a view of our operations in the same manner management evaluates its performance. When combined with U.S. GAAP results, management believes Adjusted EBITDA provides a comprehensive understanding of our financial results. Adjusted EBITDA should not be considered as an alternative to net income/(loss) or to net cash provided by/(used in) operating activities as a measure of operating results or of liquidity. It may not be comparable to similarly titled measures used by other companies, and it excludes financial information that some may consider important in evaluating our performance. A reconciliation of U.S. GAAP net income/(loss) from operations to Adjusted EBITDA is as follows:

 

 

 

Years ended December 31,

 

Adjusted EBITDA Reconciliation:

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

2011

 

Net income (loss)

 

$

187,854

 

 

$

21,888

 

 

$

563,317

 

 

$

621,726

 

 

$

(473,336

)

Interest income

 

 

(13,337

)

 

 

(23,478

)

 

 

(23,259

)

 

 

(21,600

)

 

 

(24,821

)

Interest expense

 

 

1,047,434

 

 

 

1,093,264

 

 

 

1,034,118

 

 

 

882,547

 

 

 

142,002

 

Income tax provision

 

 

251,629

 

 

 

139,745

 

 

 

69,767

 

 

 

(341,823

)

 

 

 

Depreciation

 

 

178,850

 

 

 

109,809

 

 

 

45,562

 

 

 

50,488

 

 

 

40,149

 

Amortization

 

 

1,495,012

 

 

 

1,561,631

 

 

 

1,588,905

 

 

 

1,564,969

 

 

 

435,218

 

Impairment of intangible assets

 

 

 

 

 

528,233

 

 

 

150,000

 

 

 

 

 

 

 

Share based compensation expense

 

 

119,677

 

 

 

323,759

 

 

 

5,805

 

 

 

91,152

 

 

 

28,000

 

Adjusted EBITDA

 

$

3,267,119

 

 

$

3,754,851

 

 

$

3,434,215

 

 

$

2,847,459

 

 

$

147,212

 

 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of our financial condition, results of operations and liquidity and capital resources as of December 31, 2015 and 2014 and for the years ended December 31, 2015 and 2014. This discussion should be read together with our audited consolidated financial statements and related notes included in Item 8. Financial Statements and Supplementary Data. Some of the information contained in this discussion includes forward-looking statements that involve risks and uncertainties; therefore our “Special Note Regarding Forward-Looking Statements” should be reviewed for a discussion of important factors that could cause actual results to differ materially from the results described in, or implied by, such forward-looking statements.

OVERVIEW

We develop, acquire, manufacture and market technology and entertainment-based products for the gaming industry for placement on the casino floor. Our products primarily relate to licensed casino operators’ table games activities and focus on either increasing their profitability, productivity and security or expanding their gaming entertainment offerings in the form of proprietary table games, electronically enhanced table game platforms, fully-automated electronic tables and other ancillary equipment.  Our products are offered in highly regulated markets throughout the world. Our products are manufactured at our headquarters and manufacturing facility in Las Vegas, Nevada, as well as outsourced for certain sub-assemblies in the United States.

Plan of operation.

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, Australia,

14


Africa and to cruise ships and internet gaming sites worldwide. We currently have an installed base of our products on over 5,000 gaming tables located in about 600 casinos, which positions us as the second largest provider of proprietary table games in the world.

Revenues consist of primarily recurring royalties received from our clients for the licensing of our game content and other products. These recurring revenues generally have few direct costs thereby generating high gross profit margins. In lieu of reporting as gross profit, this amount would be comparable to revenues less cost of ancillary products and assembled components on our financial statements. Additionally, we receive non-recurring revenue from the sale of associated products.

We group our products into four product categories we classify as “Proprietary Table Games,” “Enhanced Table Systems,”  “e-Tables,” And “Ancillary Equipment.” Our product categories are summarized below. Additional information regarding our products may be found on our web site, www.galaxygaming.com. Information found on the web site should not be considered part of this report.

Proprietary Table Games. We design, develop and deliver our Proprietary Table Games to enhance our casino clients’ table game operations. Casinos use our Proprietary Table Games in lieu of those games in the public domain (e.g. Blackjack, Craps, Roulette, etc.) because of their popularity with players and to increase profitability. Our Proprietary Table Games are grouped into two product types we call “Side Bets” and “Premium Games.” Side Bets are proprietary features and wagering schemes typically added to public domain games such as poker, baccarat, pai gow poker, craps and blackjack table games. Examples of side bets include such popular titles as Lucky Ladies, 21+3 and Bonus Craps. Premium Games are unique stand-alone games with their own unique set of rules and strategies. Examples of Premium Games include such popular titles as High Card Flush, World Poker Tour Heads Up Hold’em, Three Card Poker, Three Card Prime and Emperor’s Challenge. Typically, 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 16. The TableMAX e-Table system is a fully automated, multi-player electronic table game platform which does not need a human dealer. These platforms allow us to offer our Proprietary Table Game content in markets where live table games are not permitted. The e-Table product enables automation of certain components of traditional table games such as data collection, placement of bets, collection of losing bets and payment of winning bets. This automation provides benefits to both casino operators and players, including greater security and faster speed of play, reduced labor and other game related costs and increased profitability. As of December 2015, the TableMAX system offers several of our Proprietary Side Bets including Lucky Ladies and 21+3, and Premium Games Three Card Prime and World Poker Tour Heads Up Hold’em.

15


Ancillary Equipment.  In mid-2014, we entered into an exclusive licensing agreement with an independent inventor for worldwide rights to a proprietary technology which detects card markings.  With this technology, we developed SpectrumVision, one unit which can detect most known card markings normally invisible to the naked eye.  SpectrumVision will be leased for a monthly fee or one-time purchase price. We began shipping the first units in 2015.

Strategy.  We believe that entertaining casino games will enhance players’ experiences and generate brand loyalty, resulting in increased profits for our casino clients. We continue to expand our product offering by focusing on innovative products and services. As we continue to develop and enhance our brand names and reputation, we anticipate expanding to new product lines that complement our overall strategy and enhance our market presence.

Our long-term business strategy is designed to enhance client value by producing products players enjoy playing. We believe that we will enhance shareholder value by capitalizing on existing and emerging markets and the worldwide proliferation of gaming and continue to build our recurring revenues. To achieve both of these objectives, we employ the following strategies:

 

1.

Expand our inventory of products and technologies to attain a fully comprehensive portfolio;

 

2.

Increase our per unit price point by leveraging our Enhanced Table Systems;

 

3.

Grow our e-Table and ancillary product business; and

 

4.

Expand our revenues from ancillary products.

These strategies are discussed in more detail above in the section entitled “Business.”

Results of operations for the years ended December 31, 2015 and 2014. For the year ended December 31, 2015 our gross revenues increased $1,106,562 or 11% to $10,951,670, as compared to $9,845,108 in 2014. The increase was due primarily to the performance of the Prime Table Game assets added to our portfolio in October 2011, entrance into new markets and territories and the focus on Premium Games, which command a higher price point per unit. Our gross revenues include $10,915,410 or 99.7% of total revenues, which were derived from recurring product leases and royalties in 2015, compared to $9,835,345 or 99.9% in 2014. We consider our revenues from product leases and royalties to be our recurring revenues, and expect such revenues to provide the majority of our income going forward.

Additionally, the sale or reimbursement of our products and manufactured equipment increased $26,497 or 271% to $36,260 in 2015 from $9,763 in 2014. Our cost of ancillary products and assembled components increased $15,405 or 19% to $95,930 in 2015 from $80,525 in 2014. The majority of this increase was due to an increase in sales of tangible goods such as table signs. In 2015, there is a disproportionate relationship between revenues from product sales and service and the cost of ancillary products and assembled components because we offered promotions whereby we offered free table signs with executed licenses of certain premium games.

Selling, general and administrative expenses increased $1,596,516 or 29% to $7,133,681 in 2015 compared to $5,537,165 in 2014. The increase was primarily due to increased sales related expenses including sales commissions, payroll, travel and trade shows, increases in regulatory costs associated with product approvals and gaming licenses in new jurisdictions; increased costs of intellectual property and increases in legal expenses associated with ongoing legal proceedings.  Research and development expenses decreased $17,627 or 4% to $454,940 in 2015 compared to $472,567 in 2014.  Research and development costs remained consistent as we utilized outsourced contractors for specific research and development activities in lieu of retaining full-time employees.

In 2014 we recognized a $528,233 impairment charge to reduce the carrying value of certain intangible assets to its estimated fair value.  These intangibles were part of the acquisition with Prime Table Games in 2011.  As of December 2014, we determined that several patents had limited scope and were not commercially feasible given the ongoing maintenance costs related with such patents.

Total interest expense decreased $45,830 or 4% to $1,047,434 for 2015, compared to $1,093,264 in 2014. The decrease in interest expense is due to the contractual interest rate increase in payments related to the Prime Table Games acquisition.

Income before taxes increased $277,850 or 172% to $439,483 in 2015, compared to $161,633 in 2014. This is attributable to the increases in total revenues and the reduction in impairment of intangible assets, which occurred in 2014.  As a result, our net income increased to $187,854 in 2015 compared to $21,888 in 2014. The tax expense of $251,629 during 2015 was the result of tax on current year income.  This compared to a tax expense of $139,745 during 2014, which was also the result of tax on the respective year’s income.

Liquidity and capital resources. Until 2013, we incurred net losses for all annual periods since inception. We have typically funded our operating costs, research and development activities, working capital investments and capital expenditures associated with our growth strategy with proceeds from the sales and issuances of our common stock and other financing arrangements. We expect our revenues and earnings to increase in future periods, and we expect to reinvest these earnings in additional inventory and working capital to fund anticipated growth in our recurring revenue business.

16


As of December 31, 2015 we had total current assets of $3,060,695 and total assets of $17,971,048. Our total current liabilities as of December 31, 2015 were $7,954,017 and total liabilities were $15,520,839. Of our current assets, we had $570,623 in cash and equivalents as of December 31, 2015. We had restricted cash of $97,859 related to jackpot liabilities, which are restricted by regulatory guidelines and may not be used for operations. The corresponding jackpot liability of $106,671 has been recorded in current liabilities. The difference of $8,812 represents December’s outstanding client billing related to the player funded portion of the jackpot.

Our operating activities provided $3,281,087 in cash for the year ended December 31, 2015, compared to $3,224,973 for the year ended December 31, 2014. The primary components of our positive operating cash flow for the year ended December 31, 2015, were due to the increases in accounts payable and accrued expenses for tax planning items which occurred close to year-end. The growth in the deferred revenue account represents our continued overall revenue growth.

Additionally, investing activities used cash of $45,638 for the year ended December 31, 2015, compared to $111,716 for the year ended December 31, 2014. In both years, these amounts are primarily due to the acquisition of property and equipment.  In 2014, we also acquired intangible assets of $35,000.

Cash used in financing activities during the year ended December 31, 2015, was $3,213,732 compared to $2,977,932 for the year ended December 31, 2014.  In both years, these amounts relate to debt principal payments on the Prime Table Games asset acquisition.

We intend to fund our continuing operations through increased sales and ongoing operations. Additionally, the issuance of debt or equity financing arrangements may be required to fund expenditures or other cash requirements.

In 2015, we granted 150,000 shares of restricted stock to our Chief Financial Officer, Gary A. Vecchiarelli at a fair value of $0.20 per share pursuant to this November 2015 employment agreement.  During 2015, we also appointed a new member to the Board of Directors and issued a total of 75,000 shares of restricted common stock at a value of $0.27. In 2014, we granted a small group of employees an aggregate of 255,000 shares of restricted common stock at a fair value of $0.40 per share.  Additionally, we granted 100,000 shares of restricted common stock to our Chief Financial Officer, Gary A. Vecchiarelli, at a fair value of $0.40 per share.  During 2014, we also appointed two new members to the Board of Directors and issued a total of 175,000 shares of restricted common stock at fair values of $0.28 and $0.47. We did not receive any proceeds from these grants. The grants have been recorded as share-based compensation expense and are included on the statement of operations.

Despite our prior successful funding efforts, there can be no assurance that we will be successful in raising additional funding, if required. If we are not able to secure additional funding, the implementation of our business plan may be impaired. There can be no assurance that such additional financing will be available to us on acceptable terms or at all. We will from time to time acquire products and businesses complementary to our business. As a public entity, we may issue shares of our common stock and preferred stock in private or public offerings to obtain financing, capital or to acquire other businesses that can improve our performance and growth. To the extent that we seek to acquire other businesses in exchange for our common stock, fluctuations in our stock price could have a material adverse effect on our ability to complete acquisitions.

Off balance sheet arrangements. As of December 31, 2015, there were no off balance sheet arrangements.

Significant equipment. While we anticipate additional purchases of furniture and equipment in conjunction with our recent move into a new headquarters, we do not anticipate such purchases to be significant.

Accounting for income taxes.  We are subject to income taxes in both the United States and in certain non-U.S. jurisdictions.  We estimate our current tax position together with our future tax consequences attributable to temporary differences resulting from differing treatment of items, such as depreciation, amortization, and other reserves for tax and accounting purposes.  These temporary differences result in deferred tax assets and liabilities.  We must then assess the likelihood that our deferred assets will be recovered from future taxable income, prior year carryback, or future reversals of existing taxable temporary differences.  To the extent we believe that recovery is not more likely than not, we establish a valuation allowance against these deferred tax assets.  Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets.

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A smaller reporting company is not required to provide the information required by this Item.

 

 

17


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

 

 

  

Page

Report of Independent Registered Public Accounting Firms

  

19

Balance Sheets as of December 31, 2015 and 2014

  

20

Statements of Operations for the years ended December 31, 2015 and 2014

  

21

Statements of Comprehensive Income for the years ended December 31, 2015 and 2014

  

22

Statement of Changes in Stockholders’ Equity as of December 31, 2015

  

23

Statements of Cash Flows for the years ended December 31, 2015 and 2014

  

24

Notes to Financial Statements

  

25

 

 

 

18


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Galaxy Gaming, Inc.

 

We have audited the accompanying balance sheets of Galaxy Gaming, Inc. as of December 31, 2015 and 2014 and the related statements of income, comprehensive income, stockholders’ equity, and cash flows for the years ended December 31, 2015 and 2014. Galaxy Gaming, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Galaxy Gaming, Inc. as of December 31, 2015 and 2014, the results of its operations, and its cash flows, for the year ended December 31, 2015 and 2014, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ KLJ & Associates, LLP

 

KLJ & Associates, LLP

Edina, MN

March 30, 2016

 

 

 

19


GALAXY GAMING, INC.

BALANCE SHEETS

 

 

 

December 31,

 

 

 

2015

 

 

2014

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

570,623

 

 

$

560,184

 

Restricted cash

 

 

97,859

 

 

 

107,913

 

Accounts receivables, net allowance for bad debts of $30,944 and $34,887

 

 

1,828,669

 

 

 

1,472,743

 

Prepaid expenses

 

 

106,338

 

 

 

80,440

 

Inventory

 

 

411,700

 

 

 

232,789

 

Note receivable - related party, current portion

 

 

 

 

 

383,298

 

Deferred tax asset

 

 

43,017

 

 

 

47,691

 

Other current assets

 

 

2,489

 

 

 

62,584

 

Total current assets

 

 

3,060,695

 

 

 

2,947,642

 

Property and equipment, net

 

 

298,877

 

 

 

382,098

 

Products leased and held for lease, net

 

 

134,485

 

 

 

125,665

 

Intangible assets, net

 

 

13,261,636

 

 

 

14,756,648

 

Goodwill

 

 

1,091,000

 

 

 

1,091,000

 

Deferred tax assets, net of current portion

 

 

82,562

 

 

 

143,614

 

Other assets, net

 

 

41,793

 

 

 

45,416

 

Total assets

 

$

17,971,048

 

 

$

19,492,083

 

LIABILITIES AND STOCKHOLDERSEQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,421,848

 

 

$

518,428

 

Accrued expenses

 

 

823,964

 

 

 

519,166

 

Income taxes payable

 

 

170,331

 

 

 

22,872

 

Deferred revenue

 

 

717,690

 

 

 

647,625

 

Jackpot liabilities

 

 

106,671

 

 

 

111,360

 

Capital lease obligations, current portion

 

 

59,196

 

 

 

66,273

 

Long-term debt, current portion

 

 

4,648,120

 

 

 

3,480,864

 

Deferred rent, current portion

 

 

6,197

 

 

 

 

Total current liabilities

 

 

7,954,017

 

 

 

5,366,588

 

Deferred rent

 

 

52,643

 

 

 

56,242

 

Capital lease obligations, net of current portion

 

 

78,008

 

 

 

137,204

 

Long-term debt, net of debt discount, net of current portion

 

 

7,436,171

 

 

 

12,056,467

 

Total liabilities

 

 

15,520,839

 

 

 

17,616,501

 

Commitments and Contingencies (See Note 12)

 

 

 

 

 

 

 

 

Stockholders equity

 

 

 

 

 

 

 

 

Preferred stock, 10,000,000 shares, $.001 par value preferred stock

   authorized; 0 shares issued and outstanding

 

 

 

 

 

 

Common stock, 65,000,000 shares authorized; 39,215,591 and 38,990,591 shares

   issued and outstanding at December 31, 2015 and 2014, respectively

 

 

39,216

 

 

 

38,991

 

Additional paid-in capital

 

 

2,963,841

 

 

 

2,844,488

 

Accumulated deficit

 

 

(792,446

)

 

 

(980,300

)

Accumulated other comprehensive income (loss)

 

 

239,598

 

 

 

(27,597

)

Total stockholders equity

 

 

2,450,209

 

 

 

1,875,582

 

Total liabilities and stockholders equity

 

$

17,971,048

 

 

$

19,492,083

 

The accompanying notes are an integral part of the financial statements.

 

 

 

20


GALAXY GAMING, INC.

STATEMENTS OF OPERATIONS

 

 

 

Year Ended December 31,

 

 

 

2015

 

 

2014

 

Revenue:

 

 

 

 

 

 

 

 

Product leases and royalties

 

$

10,915,410

 

 

$

9,835,345

 

Product sales and service

 

 

36,260

 

 

 

9,763

 

Total revenue

 

 

10,951,670

 

 

 

9,845,108

 

Costs and expenses:

 

 

 

 

 

 

 

 

Costs of ancillary products and assembled components

 

 

95,930

 

 

 

80,525

 

Selling, general and administrative

 

 

7,133,681

 

 

 

5,537,165

 

Research and development

 

 

454,940

 

 

 

472,567

 

Depreciation

 

 

178,850

 

 

 

109,809

 

Amortization

 

 

1,495,012

 

 

 

1,561,631

 

Share-based compensation

 

 

119,677

 

 

 

323,759

 

Impairment of intangible assets

 

 

 

 

 

528,233

 

Total costs and expenses

 

 

9,478,090

 

 

 

8,613,689

 

Income from operations

 

 

1,473,580

 

 

 

1,231,419

 

Other income (expenses)

 

 

 

 

 

 

 

 

Interest income

 

 

13,337

 

 

 

23,478

 

Interest expense

 

 

(1,047,434

)

 

 

(1,093,264

)

Total other expense

 

 

(1,034,097

)

 

 

(1,069,786

)

Income before provision for income taxes

 

 

439,483

 

 

 

161,633

 

Provision for income taxes

 

 

(251,629

)

 

 

(139,745

)

Net income

 

$

187,854

 

 

$

21,888

 

Basic earnings per share

 

$

 

 

$

 

Diluted earnings per share

 

$

 

 

$

 

Weighted average number of shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

39,066,415

 

 

 

38,513,084

 

Diluted

 

 

39,123,489

 

 

 

38,517,594

 

The accompanying notes are an integral part of the financial statements.

 

 

 

21


GALAXY GAMING, INC.

STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

Year Ended December 31,

 

 

 

2015

 

 

2014

 

Net income

 

$

187,854

 

 

$

21,888

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax

 

 

267,195

 

 

 

250,012

 

Total comprehensive income

 

$

455,049

 

 

$

271,900

 

The accompanying notes are an integral part of the financial statements.

 

 

 

22


GALAXY GAMING, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

 

 

 

Common Stock

 

 

Additional

Paid in

 

 

Stock

 

 

Accumulated

 

 

Accumulated

Other Comprehensive

 

 

Total

Shareholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Warrants

 

 

Deficit

 

 

Income (Loss)

 

 

Equity

 

Beginning balance, January 1, 2014

 

 

38,310,591

 

 

$

38,311

 

 

$

2,330,676

 

 

$

190,053

 

 

$

(1,002,188

)

 

$

(277,609

)

 

$

1,279,243

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,888

 

 

 

 

 

 

21,888

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

250,012

 

 

 

250,012

 

Share based compensation expense

 

 

 

 

 

 

 

 

323,759

 

 

 

 

 

 

 

 

 

 

 

 

323,759

 

Issuance of restricted stock

 

 

680,000

 

 

 

680

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

680

 

Expiration of previously issued warrants

 

 

 

 

 

 

 

 

190,053

 

 

 

(190,053

)

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

 

 

38,990,591

 

 

 

38,991

 

 

 

2,844,488

 

 

 

 

 

 

(980,300

)

 

 

(27,597

)

 

 

1,875,582

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

187,854

 

 

 

 

 

 

187,854

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

267,195

 

 

 

267,195

 

Share based compensation expense

 

 

 

 

 

 

 

 

119,353

 

 

 

 

 

 

 

 

 

 

 

 

119,353

 

Issuance of restricted stock

 

 

225,000

 

 

 

225

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

225

 

Balance, December 31, 2015

 

 

39,215,591

 

 

$

39,216

 

 

$

2,963,841

 

 

$

 

 

$

(792,446

)

 

$

239,598

 

 

$

2,450,209

 

The accompanying notes are an integral part of the financial statements.

 

 

 

23


GALAXY GAMING, INC.

STATEMENTS OF CASH FLOWS

 

 

 

Year Ended December 31,

 

 

 

2015

 

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income for the year

 

$

187,854

 

 

$

21,888

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation expense

 

 

178,850

 

 

 

109,809

 

Amortization expense

 

 

1,495,012

 

 

 

1,561,631

 

Provision for bad debts

 

 

33,907

 

 

 

 

Inventory reserve

 

 

54,696

 

 

 

 

Amortization of debt discount

 

 

208,632

 

 

 

208,632

 

Provision for income taxes

 

 

251,629

 

 

 

139,745

 

Share-based compensation

 

 

119,677

 

 

 

323,759

 

Impairment of intangible assets

 

 

 

 

 

528,233

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Decrease in restricted cash

 

 

10,054

 

 

 

136,503

 

Increase in accounts receivable

 

 

(389,833

)

 

 

(199,455

)

Decrease (increase) in other current assets

 

 

60,095

 

 

 

(12,074

)

Increase in inventory

 

 

(288,795

)

 

 

(11,373

)

Increase in prepaid expenses

 

 

(25,898

)

 

 

(45,467

)

Increase in other long-term assets

 

 

 

 

 

(41,794

)

Increase in accounts payable

 

 

903,420

 

 

 

276,727

 

Increase in accrued expenses

 

 

304,798

 

 

 

198,209

 

Increase (decrease) in income taxes payable

 

 

109,015

 

 

 

(11,783

)

Increase in deferred revenue

 

 

70,065

 

 

 

120,703

 

Decrease in jackpot liabilities

 

 

(4,689

)

 

 

(135,162

)

Increase in deferred rent

 

 

2,598

 

 

 

56,242

 

Net cash provided by operating activities

 

 

3,281,087

 

 

 

3,224,973

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(45,638

)

 

 

(76,716

)

Acquisition of intangible assets

 

 

 

 

 

(35,000

)

Net cash used in investing activities

 

 

(45,638

)

 

 

(111,716

)

Cash flows from financing activities: