Note 2: Significant Accounting Policies

This summary of our significant accounting policies is presented to assist in understanding Galaxy Gaming, Inc.’s financial statements.  The financial statements and notes are representations of our management, who are responsible for their integrity and objectivity.  These accounting policies conform to Generally Accepted Accounting Principles (“GAAP”) and have been consistently applied to the preparation of the financial statements.

Basis of Presentation

The accompanying interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Form 10-K filed with the SEC as of and for the period ended December 31, 2010.  In the opinion of management, all adjustments necessary in order for the financial statements to be not misleading have been reflected herein.  The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

Basis of Accounting

The financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America.  Revenues are recognized as income when earned and expenses are recognized when they are incurred.  We do not have significant categories of cost as our income is recurring with high margins.  Expenses such as wages, consulting expenses, legal and professional fees, advertising and rent are recorded when the expense is incurred.

Cash and Cash Equivalents

We consider cash on hand, cash in banks, certificates of deposit, and other short-term securities with maturities of three months or less when purchased, as cash and cash equivalents.

Our bank accounts are deposited in insured institutions.  The funds are insured up to $250,000.

Reclassifications

Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period financial statements.

Inventory

Inventory consists of products designed to enhance table games, such as signs, layouts, bases for the different signs and electronic devices to support our enhanced bonus platforms.  The inventory value is determined by the average cost method and management maintains inventory levels based on historical and industry trends.  Signs and layouts do not change unless the table game changes.  We do not allocate overhead to inventory as such costs are not significant.

Products leased and held for lease

Beginning with the quarter ended June 30, 2011, we began to provide table games with electronic enhancements whereby we collect monthly recurring fees associated with the performance of the system.  Since we retain title to the equipment, these assets are classified as “Products leased and held for lease” on the accompanying Balance Sheets.  These assets are stated at cost, net of depreciation.  Depreciation on leased products is calculated using the straight-line method over a one year period.

Fair Value of Financial Instruments

The fair value of cash and cash equivalents, accounts receivable, miscellaneous receivables, prepaid expenses, inventory, notes receivable - related party, accounts payable, accrued expenses and taxes, deferred revenue, notes payable - related party and notes payable approximates the carrying amount of these financial instruments due to their short-term nature.  The fair value of long-term debt, which approximates its carrying value, is based on current rates at which we could borrow funds with similar remaining maturities.

Property and Equipment

The capital assets are being depreciated over their estimated useful lives using the straight-line method of depreciation for book purposes.

Intangible Assets

We acquired through an asset purchase agreement with GGLLC the remaining intellectual property including patents, patent applications, trademarks, trademark applications, copyrights, know-how and trade secrets related to the casino gaming services including, but not limited to, games, side bets, inventions and ideas.

These intangible assets have finite lives and are being amortized using the straight-line method over their economic useful lives of twenty years.  The intangible assets are analyzed for potential impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable.  These assets were transferred at cost. We purchased back a regional territory from an outside sales representative.  The total value of this agreement was $150,000 and the resulting intangible asset has an infinite life.

As more fully described in Note 18, We executed an asset purchase agreement on April 15, 2010 with T&P Gaming, Inc., and its majority owners whereby we acquired the client installation base, intellectual property, territorial license and related inventory associated with the “Deuces Wild Hold’em Fold’em game (“Deuces Wild”) and related “Random Wild” game.

The client installation base and intellectual property have finite lives and are being amortized using the straight-line method over the following economic useful lives:

The intangible assets are analyzed for potential impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable.  The territorial license has an infinite life.

Revenue Recognition

Revenue is primarily derived from the licensing of products and intellectual property.  Consistent with our strategy, revenue is generated from negotiated recurring licensing fees for table game content and the performance of the electronic table game platform.  We also receive a one-time sale or reimbursement of the manufactured equipment.  When a table game is licensed without electronic enhancements, we generally sell the associated products and negotiate a month-to-month license fee for the game content.  When a table game is licensed with electronic enhancements, such as the Bonus Jackpot System, we generally sell the associated products, negotiate a month-to-month license fee for the game content, and collect an additional recurring fee associated with the performance of the system such as a fee per each wager placed.  We will also license table games with electronic enhancements whereby we collect just a month-to-month fee associated with the performance of the system.

Substantially all revenue is recognized when it is earned.  Clients are typically invoiced one month in advance for content fees and the advance billings are carried as deferred revenue on the balance sheet.  Additionally, clients may be invoiced at the time of shipment or delivery of product sales and invoiced in arrears for performance-based items.  The monthly recurring invoices are based on executed agreements with each client.  Total revenue from recurring royalties for the licensing of game content, fees paid based upon the performance of our electronic platforms was $1,506,600 and $1,433,941 for the six months ended June 30, 2011 and 2010 respectively.  Revenue from reimbursement of manufactured equipment and the sale of product was $23,596 and $55,655 for the six months ended June 30, 2011 and 2010 respectively.

Revenue as reimbursement from the sale of our associated products is recognized when the following criteria are met:

·                  Persuasive evidence of an arrangement between us and our client exists.

·                  Shipment has occurred.

·                  The price is fixed and or determinable; and

·                  Collectability is reasonably assured or probable

The software included in the Bonus Jackpot System serves to assist in the count of the number of wages; essentially the software is incidental to the operation of the system.  As such, we do not segregate the portion of revenue between manufactured equipment and any software or electronic devices needed to use the equipment when the system is sold.  Furthermore, we do not market the software separately from the equipment.

Costs of Ancillary Products and Assembled Components

Costs of Ancillary Products and Assembled Components include pay tables, layouts and signage as it relates to a specific proprietary game that our clients may elect to purchase in connection with the use of our game and the cost of the assembled components of the Bonus Jackpot System.

Research and Development

Research and development costs are charged to expense when incurred and are included in the consolidated statements of operations. These costs include salaries, benefits, and other internal costs allocated to software and hardware development efforts, as well as purchased components.

Deferred Income Taxes

Deferred income taxes are recognized by applying enacted statutory rates, applicable to future years, to temporary differences between the tax bases and financial statement carrying values of our asset and liabilities.  Valuation allowances are recorded to reduce deferred tax assets to amounts that are more likely than not to be realized.

Basic Income (Loss) per Share

Basic earnings per share excludes dilution and is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

Stock-Based Compensation

Stock-based compensation is accounted for at fair value in accordance with ASC Topic 718.  During the year ended December 31, 2010 our board of directors approved the adoption of a stock option plan.  We have not granted any stock options under this plan.

Management Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Estimates and assumptions have been made in determining the depreciable lives of such assets and the allowance for doubtful accounts receivable.  Actual results could differ from those estimates.

Recently Issued Accounting Guidance

We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.