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EX-32.1 - EX-32.1 - Galaxy Gaming, Inc.glxz-ex321_6.htm
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EX-31.1 - EX-31.1 - Galaxy Gaming, Inc.glxz-ex311_7.htm
EX-10.1 - EX-10.1 - Galaxy Gaming, Inc.glxz-ex101_283.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from       to

Commission file number: 000-30653

 

Galaxy Gaming, Inc.

(Exact name of small business issuer as specified in its charter)

 

 

Nevada

 

20-8143439

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer
Identification No.)

 

 

 

6767 Spencer Street, Las Vegas, NV 89119

(Address of principal executive offices)

 

(702) 939-3254

(Issuer’s telephone number)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the issuer (1) 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 issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    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      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period

for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act.          

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 39,365,591 common shares as of May 15, 2017.

 

 

 

 


 

GALAXY GAMING, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2017

TABLE OF CONTENTS

 

 

 

Page

 

PART I – FINANCIAL INFORMATION  

 

 

Item 1:

Financial Statements (unaudited)

3

Item 2:

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

16

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

18

Item 4:

Controls and Procedures

18

 

 

PART II – OTHER INFORMATION

 

 

Item 1:

Legal Proceedings

20

Item 5:

Other Information

20

Item 6:

Exhibits

20

 

 

2


 

PART I - FINANCIAL INFORMATION

 

 

ITEM 1. FINANCIAL STATEMENTS

Our financial statements included in this Form 10-Q are as follows:

 

 

 

 

 

 

3


 

GALAXY GAMING, INC.

CONDENSED BALANCE SHEETS

 

ASSETS

 

March 31,

2017

 

 

December 31,

2016

 

Current assets:

 

(unaudited)

 

 

 

 

 

Cash and cash equivalents

 

$

2,920,154

 

 

$

2,304,761

 

Restricted cash

 

 

115,513

 

 

 

84,577

 

Accounts receivable, net of allowance for bad debts of $31,125

 

 

1,996,542

 

 

 

2,137,245

 

Inventory, net

 

 

465,990

 

 

 

427,105

 

Prepaid expense and other

 

 

161,082

 

 

 

194,747

 

Total current assets

 

 

5,659,281

 

 

 

5,148,435

 

Property and equipment, net

 

 

327,600

 

 

 

356,253

 

Products leased and held for lease, net

 

 

215,794

 

 

 

212,131

 

Goodwill and other intangible assets, net

 

 

12,559,573

 

 

 

12,846,019

 

Deferred tax assets, net

 

 

367,057

 

 

 

367,057

 

Other assets, net

 

 

23,000

 

 

 

82,050

 

Total assets

 

$

19,152,305

 

 

$

19,011,945

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

394,009

 

 

$

461,913

 

Accrued expenses

 

 

1,209,057

 

 

 

1,109,428

 

Income taxes payable

 

 

864,405

 

 

 

786,430

 

Deferred revenue

 

 

954,923

 

 

 

1,014,731

 

Jackpot liabilities

 

 

125,002

 

 

 

90,960

 

Deferred rent, current portion

 

 

17,124

 

 

 

14,938

 

Current portion of long-term debt and capital lease obligations

 

 

1,219,022

 

 

 

1,230,285

 

Total current liabilities

 

 

4,783,542

 

 

 

4,708,685

 

Deferred rent, net

 

 

32,877

 

 

 

37,704

 

Capital lease obligations, net

 

 

38,944

 

 

 

46,978

 

Common stock warrant liability

 

 

990,116

 

 

 

923,616

 

Long-term debt, net

 

 

8,433,911

 

 

 

8,669,151

 

Total liabilities

 

 

14,279,390

 

 

 

14,386,134

 

Commitments and Contingencies (See Note 10)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Preferred stock, 10,000,000 shares authorized, $0.001 par value;

   0 shares issued and outstanding, respectively

 

 

 

 

 

 

Common stock, 65,000,000 shares authorized; $0.001 par value;

   39,365,591 and 39,315,591 shares issued and outstanding, respectively

 

 

39,366

 

 

 

39,316

 

Additional paid-in capital

 

 

3,194,260

 

 

 

3,109,473

 

Accumulated earnings

 

 

1,639,289

 

 

 

1,477,022

 

Total stockholders’ equity

 

 

4,872,915

 

 

 

4,625,811

 

Total liabilities and stockholders’ equity

 

$

19,152,305

 

 

$

19,011,945

 

 

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

 

4


 

GALAXY GAMING, INC.

CONDENSED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31, 2017

 

 

March 31, 2016

 

Revenue:

 

 

 

 

 

(restated)

 

Product leases and royalties

 

$

3,473,841

 

 

$

2,981,820

 

Product sales and service

 

 

1,455

 

 

 

2,279

 

Total revenue

 

 

3,475,296

 

 

 

2,984,099

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of ancillary products and assembled components

 

 

20,882

 

 

 

21,640

 

Selling, general and administrative

 

 

2,086,169

 

 

 

1,633,335

 

Research and development

 

 

138,047

 

 

 

79,342

 

Depreciation and amortization

 

 

436,085

 

 

 

415,974

 

Share-based compensation

 

 

49,837

 

 

 

20,471

 

Total costs and expenses

 

 

2,731,020

 

 

 

2,170,762

 

Income from operations

 

 

744,276

 

 

 

813,337

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense

 

 

(445,332

)

 

 

(258,195

)

Foreign currency exchange gains

 

 

7,797

 

 

 

112,562

 

Change in estimated fair value of warrant liability

 

 

(66,500

)

 

 

 

Interest income

 

 

 

 

 

56

 

Total other expense

 

 

(504,035

)

 

 

(145,577

)

Income before provision for income taxes

 

 

240,241

 

 

 

667,760

 

Provision for income taxes

 

 

(77,974

)

 

 

(239,925

)

Net income

 

$

162,267

 

 

$

427,835

 

Net income per share, basic and diluted

 

$

0.00

 

 

$

0.01

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

39,305,591

 

 

 

39,351,147

 

Diluted

 

 

40,817,678

 

 

 

39,455,591

 

 

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

 

 

5


 

GALAXY GAMING, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31, 2017

 

 

March 31, 2016

 

Cash flows from operating activities:

 

 

 

 

 

(restated)

 

Net income

 

$

162,267

 

 

$

427,835

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

436,085

 

 

 

415,974

 

Amortization of debt issuance costs and debt discount

 

 

73,729

 

 

 

52,158

 

Change in estimated fair value of warrant liability

 

 

66,500

 

 

 

 

Share-based compensation

 

 

49,837

 

 

 

20,471

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

(Increase) decrease in restricted cash

 

 

(30,936

)

 

 

51,044

 

Decrease in accounts receivable

 

 

140,704

 

 

 

78,239

 

Increase in inventory

 

 

(63,017

)

 

 

(54,958

)

Decrease in prepaid expenses and other current assets

 

 

33,665

 

 

 

52,651

 

Decrease in accounts payable

 

 

(67,905

)

 

 

(111,239

)

Increase in income tax payable

 

 

74,816

 

 

 

222,903

 

Increase in accrued expenses

 

 

99,629

 

 

 

56,054

 

(Decrease) increase in deferred revenue

 

 

(59,808

)

 

 

96,293

 

Increase (decrease) in jackpot liabilities

 

 

34,042

 

 

 

(22,470

)

Decrease in deferred rent

 

 

(2,641

)

 

 

(457

)

Net cash provided by operating activities

 

 

946,967

 

 

 

1,284,498

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of intangible assets

 

 

(27,470

)

 

 

 

Acquisition of property and equipment

 

 

(13,997

)

 

 

(11,314

)

Net cash used in investing activities

 

 

(41,467

)

 

 

(11,314

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

35,000

 

 

 

 

Debt issuance costs

 

 

(17,091

)

 

 

 

Principal payments on capital lease obligations

 

 

(7,611

)

 

 

(17,441

)

Principal payments on long-term debt

 

 

(303,563

)

 

 

(746,419

)

Net cash used in financing activities

 

 

(293,266

)

 

 

(763,860

)

Effect of exchange rate changes on cash

 

 

3,159

 

 

 

(1,962

)

Net increase in cash and cash equivalents

 

 

615,393

 

 

 

507,362

 

Cash and cash equivalents – beginning of period

 

 

2,304,761

 

 

 

570,623

 

Cash and cash equivalents – end of period

 

$

2,920,154

 

 

$

1,077,985

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

445,352

 

 

$

185,718

 

Inventory transferred to assets held for lease

 

$

24,132

 

 

$

10,273

 

Cash paid for income taxes

 

$

 

 

$

5,000

 

 

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

 

 

6


 

GALAXY GAMING, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. NATURE OF OPERATIONS AND RESTATEMENT

Unless the context indicates otherwise, references to “Galaxy Gaming, Inc.,” “we,” “us,” “our,” or the “Company,” refer to Galaxy Gaming, Inc., a publicly reporting Nevada corporation (“Galaxy Gaming”).

Nature of operations. We are an established global gaming company specializing in the design, development, manufacturing, marketing and acquisition of proprietary casino table games and associated technology, platforms and systems for the casino gaming industry. We are a leading supplier of gaming entertainment products worldwide and provide a diverse offering of quality products and services at competitive prices designed to enhance the player experience.

Restatement. The financial statements as of and for the three months ended March 31, 2016 have been restated to correct the following errors noted during the preparation of the financial statements for the year ended December 31, 2016: (i) the amortization of original issue discount related to notes payable to Prime Table Games LLC and Prime Table Games UK (the “PTG Notes”) was not previously deducted from taxable income in our federal tax returns from 2011 through 2015 or to derive the income tax provision for the three months ended March 31, 2016, which resulted in an understatement of deferred tax assets and an overstatement of the income tax provision in those periods; and (ii) foreign currency exchange gains and losses related to the PTG Notes were incorrectly reported as other comprehensive income instead of earnings (i.e., non-operating income). The restatements to reflect the correction of both errors are referred to herein collectively as the "Restatement."

 

The table below sets forth the amounts as originally reported for the categories presented in the statement of income that were affected by the Restatement, the effect of the Restatement and the restated amounts for the three months ended March 31, 2016:

 

 

 

As originally reported

 

 

Impact of restatement

 

 

As restated

 

Selling, general and administrative

 

$

1,652,304

 

 

$

(18,969

)

 

$

1,633,335

 

Provision for income taxes

 

 

(156,863

)

 

 

(83,062

)

 

 

(239,925

)

Foreign currency exchange gains

 

 

 

 

 

112,562

 

 

 

112,562

 

Net income

 

 

379,367

 

 

 

48,468

 

 

 

427,835

 

 

The table below sets forth the amounts as originally reported for the categories presented in the statement of cash flow that were affected by the Restatement, the effect of the Restatement and the restated amounts for the three months ended March 31, 2016:

 

 

 

As originally reported

 

 

Impact of restatement

 

 

As restated

 

  Net income

 

 

379,367

 

 

 

48,468

 

 

 

427,835

 

  Deferred income tax provision

 

 

156,863

 

 

 

(156,863

)

 

 

 

  Decrease in accounts receivable

 

 

76,900

 

 

 

1,339

 

 

 

78,239

 

  Decrease in accounts payable

 

 

(111,065

)

 

 

(174

)

 

 

(111,239

)

  Increase in income taxes payable

 

 

134,792

 

 

 

88,111

 

 

 

222,903

 

  Increase in accrued expenses

 

 

56,598

 

 

 

(544

)

 

 

56,054

 

  Net cash provided by operating activities

 

 

1,304,161

 

 

 

(19,663

)

 

 

1,284,498

 

  Principal payments on notes payable

 

 

(766,082

)

 

 

19,663

 

 

 

(746,419

)

  Net cash used in financing activities

 

 

(783,523

)

 

 

19,663

 

 

 

(763,860

)

 

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation.  The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules of the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments necessary in order for the financial statements to be not misleading have been reflected herein. As permitted by the rules and regulations of the SEC, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations.  The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.

7


 

In the opinion of management, the accompanying unaudited interim financial statements contain all necessary adjustments, consisting only of those of a recurring nature, and disclosures to present fairly our financial position and the results of its operations and cash flows for the periods presented. These unaudited interim condensed financial statements should be read in conjunction with the financial statements and the related notes thereto included in our Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC on April 14, 2017 (the “2016 10-K”).

Basis of accounting. The financial statements have been prepared on the accrual basis of accounting in conformity with U.S. GAAP. Revenues are recognized when earned and expenses are recognized when they are incurred. We do not have significant categories of cost as a vast majority of our revenue is recurring with high margins. Expenses such as wages, consulting expenses, legal, regulatory and professional fees and rent are recorded when the expense is incurred.

Significant Accounting Policies. See Note 2 in Item 8. “Financial Statements and Supplementary Data” included in our 2016 10-K.

Use of estimates and assumptions. We are required to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our company and the industry as a whole, and information available from other outside sources. Our estimates affect reported amounts for assets, liabilities, revenues, expenses and related disclosures. Actual results may differ from initial estimates.

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

Recently adopted accounting standards

Inventory.  In July 2015, the FASB issued ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory.  ASU 2015-11 changes the criteria for measuring inventory within the scope of the ASU.  Inventory will now be measured at the lower of cost or net realizable value, while the concept of market value will be eliminated.  The ASU defines net realizable value as the estimated selling process in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.  ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with earlier adoption permitted.  ASU 2015-11 was adopted effective January 1, 2017 using the required prospective adoption approach, which did not have a material effect on our financial condition, results of operations or cash flows.

Stock-based compensation. In March 2016, the FASB issued No. ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This standard is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. ASU 2016-09 was adopted effective January 1, 2017 using the prospective adoption approach, which did not have a material impact on our financial condition, results of operations or cash flows.

New accounting standards not yet adopted

Revenue Recognition.  In May 2014, the FASB issued ASU No. 2014-09 (Topic 606), Revenue from Contracts with Customers, which is a comprehensive new revenue recognition standard that will supersede virtually all existing revenue guidance, including industry-specific guidance.  Under the new standard, revenue will be recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods and services.  The standard creates a five-step model that will generally require companies to use more judgment and make more estimates than under current guidance when considering the terms of contracts along with all relevant facts and circumstances.  These include the identification of customer contracts and separating performance obligations, the determination of transaction price that potentially includes an estimate of variable consideration, allocating the transaction price to each separate performance obligation, and recognizing revenue in line with the pattern of transfer.

In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09 by one year to now be effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017.  Early adoption of the standard is permitted but not before the original effective date of December 15, 2016.  The ASU may be adopted using a full retrospective approach or reporting the cumulative effect as of the date of adoption.  We are currently evaluating the impact of adopting this guidance; however, we expect to adopt using the modified retrospective approach.

Leases.  In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).  The amended guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  The adoption of this guidance is expected to result in a significant portion of our operating leases being recognized on our balance sheets.  The guidance requires lessees and lessors to recognize and

8


 

measure leases at the beginning of the earliest period presented using a modified retrospective approach.  ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years with earlier adoption permitted.  We are currently evaluating the impact of adopting this guidance.

Restricted Cash. In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires amounts generally described as restricted cash and cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. Upon the adoption of ASU 2016-08, restricted cash will be included within beginning and ending cash and cash equivalents amounts on our consolidated statements of cash flows.  

 

NOTE 3. INVENTORY

Inventory consisted of the following at March 31, 2017 and December 31, 2016:

 

 

 

2017

 

 

2016

 

Raw materials and component parts

 

$

209,051

 

 

$

171,478

 

Finished goods

 

 

143,346

 

 

 

128,956

 

Work-in-process

 

 

138,593

 

 

 

151,671

 

     Inventory, gross

 

 

490,990

 

 

 

452,105

 

Less: inventory reserve

 

 

(25,000

)

 

 

(25,000

)

     Inventory, net

 

$

465,990

 

 

$

427,105

 

 

 

NOTE 4. PROPERTY AND EQUIPMENT

Property and equipment, net consisted of the following at March 31, 2017 and December 31, 2016: 

 

 

 

2017

 

 

2016

 

Furniture and fixtures

 

$

269,470

 

 

$

269,471

 

Automotive vehicles

 

 

202,144

 

 

 

202,143

 

Leasehold improvements

 

 

156,843

 

 

 

156,843

 

Computer equipment

 

 

107,462

 

 

 

105,114

 

Office equipment

 

 

49,520

 

 

 

37,871

 

     Property and equipment, gross

 

 

785,439

 

 

 

771,442

 

Less: accumulated depreciation

 

 

(457,839

)

 

 

(415,189

)

     Property and equipment, net

 

$

327,600

 

 

$

356,253

 

 

For the three months ended March 31, 2017 and 2016, depreciation expense related to property and equipment of $42,650 and $32,180, respectively, is included in depreciation and amortization expense.

 

Accumulated depreciation of leasehold improvements totaled $89,896 and $82,183 as of March 31, 2017 and December 31, 2016, respectively.

 

 

NOTE 5. PRODUCTS LEASED AND HELD FOR LEASE

Products leased and held for lease consisted of the following at March 31, 2017 and December 31, 2016:

 

 

 

2017

 

 

2016

 

Enhanced table systems

 

$

397,960

 

 

$

424,364

 

Less: accumulated depreciation

 

 

(182,166

)

 

 

(212,233

)

     Products leased and held for lease, net

 

$

215,794

 

 

$

212,131

 

 

For the three months ended March 31, 2017 and 2016, depreciation expense related to products leased and held for lease of $20,469 and $11,483, respectively, is included in depreciation and amortization expense.

 

9


 

NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and finite-lived intangible assets consisted of the following at March 31, 2017 and December 31, 2016:

 

 

 

2017

 

 

2016

 

Patents

 

$

1,091,000

 

 

$

1,091,000

 

Finite-lived intangible assets:

 

 

 

 

 

 

 

 

Patents

 

 

13,615,967

 

 

 

13,615,967

 

Customer relationships

 

 

3,400,000

 

 

 

3,400,000

 

Trademarks

 

 

2,740,000

 

 

 

2,740,000

 

Non-compete agreements

 

 

660,000

 

 

 

660,000

 

Software

 

 

86,520

 

 

 

 

     Other intangible assets, gross

 

 

20,502,487

 

 

 

20,415,967

 

Less: accumulated amortization

 

 

(9,033,914

)

 

 

(8,660,948

)

     Other intangible assets, net

 

 

11,468,573

 

 

 

11,755,019

 

     Goodwill and other intangible assets, net

 

$

12,559,573

 

 

$

12,846,019

 

 

 

NOTE 7. ACCRUED EXPENSES

Accrued expenses, consisted of the following at March 31, 2017 and December 31, 2016:

 

 

 

2017

 

 

2016

 

TableMAX license fee

 

$

549,312

 

 

$

470,512

 

Payroll and related

 

 

307,690

 

 

 

405,553

 

Professional fees

 

 

185,015

 

 

 

59,567

 

Commissions and royalties

 

 

108,171

 

 

 

54,551

 

Accrued interest

 

 

2,622

 

 

 

2,602

 

Other

 

 

56,247

 

 

 

116,643

 

     Total accrued expenses

 

$

1,209,057

 

 

$

1,109,428

 

TableMAX license fee. Under the terms of a five-year licensing agreement (the “ TMAX Agreement”) with TableMAX Corporation (“TMAX”) a provider of electronic table games and platforms headquartered in Las Vegas, Nevada, we previously had exclusive worldwide rights (excluding one international territory and two U.S. states) to the TMAX electronic gaming platform and certain related game titles.  Pursuant to the terms of the TMAX Agreement, the licensee fee payable to TMAX is dependent upon our generating profitable operating results specifically from the use of TMAX products.  To the extent there are net profits (as defined in the TMAX Agreement), a percentage of such net profits is payable to TMAX depending on the number of TMAX product installations.  The TMAX Agreement expired during 2016, and we are currently negotiating the licensing fee (if any) that is payable to TMAX.

 

 

NOTE 8. CAPITAL LEASE OBLIGATIONS

Capital lease obligations consisted of the following at March 31, 2017 and December 31, 2016:

 

 

 

2017

 

 

2016

 

Capital lease obligation – leasehold improvements

 

$

70,396

 

 

$

78,008

 

Less: Current portion

 

 

(31,452

)

 

 

(31,030

)

     Total capital lease obligations - long-term

 

$

38,944

 

 

$

46,978

 

 

Future annual payments for capital leases obligations are as follows for the years ending March 31:

 

March 31,

 

Total

 

2018

 

$

31,452

 

2019

 

 

33,226

 

2020

 

 

5,718

 

   Total minimum lease payments

 

$

70,396

 

 

 

10


 

NOTE 9. LONG-TERM DEBT

Long-term debt consisted of the following at March 31, 2017 and December 31, 2016:

 

 

 

2017

 

 

2016

 

Term loan

 

$

10,237,500

 

 

$

10,500,000

 

Notes payable, related party

 

 

490,838

 

 

 

509,135

 

Equipment notes payable

 

 

152,955

 

 

 

162,274

 

Insurance notes payable

 

 

22,616

 

 

 

36,063

 

     Notes payable -gross

 

 

10,903,909

 

 

 

11,207,472

 

Less:

 

 

 

 

 

 

 

 

Unamortized debt issuance costs

 

 

(578,660

)

 

 

(595,462

)

Warrants issued

 

 

(703,768

)

 

 

(743,604

)

    Notes payable - net

 

 

9,621,481

 

 

 

9,868,406

 

Less: Current portion

 

 

(1,187,570

)

 

 

(1,199,255

)

    Long-term debt, net

 

$

8,433,911

 

 

$

8,669,151

 

 

Term loan.  In August 2016, we entered into a term loan agreement (the “Term Loan Agreement”) for an aggregate principal amount of $10,500,000 (the "Term Loan").  Proceeds of the Term Loan were primarily used to prepay in full the outstanding notes payable to unrelated parties. The remainder of the proceeds from the Term Loan was used for general corporate purposes and working capital needs.  The Term Loan is secured by a senior lien on substantially all of our assets.  In conjunction with the Term Loan, we also entered into a warrant agreement (the “Warrant Agreement”), pursuant to which we issued the lenders a six-year warrant to purchase 1,965,780 shares of our common stock (the “Warrants”) (Note 13).

 

Under the Term Loan, we are subject to quarterly financial covenants that, among other things, limit our annual capital expenditures (as defined in the Term Loan Agreement), and require us to maintain a specified leverage ratio and minimum EBITDA amounts, each of which are defined in the Term Loan agreement.  We were in compliance with the financial covenants of the Term Loan Agreement as of March 31, 2017.

 

During the initial twelve-month period of the Term Loan, the outstanding principal will accrue interest at the rate of 14.0% per annum. Thereafter, the outstanding principal will accrue interest at the lesser of 14.0% per annum or 12.5% per annum for any quarterly period in which we achieve a specified leverage ratio.  

 

The Term Loan required quarterly interest-only payments through December 31, 2016, after which we are required to make quarterly principal payments of $262,500 plus accrued interest. The remaining principal and any unpaid interest will be payable in full on August 29, 2021. Voluntary prepayments of the Term Loan, in full or in part, are permitted after the first anniversary of the Term Loan, subject to certain premiums.  The Term Loan also requires certain mandatory prepayments in the amount of 100% of the proceeds from certain asset dispositions (other than in the ordinary course of business) and certain other extraordinary events, and 25% of the proceeds from the sale and issuance of capital stock. Substantially all of our assets are pledged as collateral for the Term Loan. 

 

The foregoing summary of the Term Loan Agreement and the Warrant Agreement is qualified in its entirety by reference to the respective agreements, which are found as Exhibits 99.1 and 99.2, respectively, to our Form 8-K filed with the SEC on August 29, 2016.

 

Notes payable, related party.  In connection with an asset purchase agreement executed in December 2007, we executed a note payable due to an entity owned and controlled by our Chief Executive Officer (“CEO”).  This note requires annual principal and interest payments of $109,908, at a fixed interest rate of 7.3% through December 2018, at which time there is a balloon payment due of $354,480.

 

11


 

As of March 31, 2017, maturities of our long-term debt obligations are as follows:

 

Maturities as of

March 31,

 

Total

 

2018

 

$

1,187,570

 

2019

 

 

1,503,811

 

2020

 

 

1,086,007

 

2021

 

 

1,072,138

 

2022

 

 

6,054,383

 

Total notes payable

 

 

10,903,909

 

Less:

 

 

 

 

Unamortized debt issuance costs

 

 

(578,660

)

Warrants issued

 

 

(703,768

)

Notes payable, net

 

$

9,621,481

 

 

 

NOTE 10. COMMITMENTS AND CONTINGENCIES

Concentration of risk. We are exposed to risks associated with clients who represent a significant portion of total revenues. For the three months ended March 31, 2017 and 2016, respectively, we had the following client revenue concentration:

 

 

 

Location

 

2017

Revenue

 

 

2016

Revenue

 

Client A

 

North America

 

 

14.6%

 

 

 

14.2%

 

 

We are also exposed to risks associated with the expiration of our patents. In 2015, domestic and international patents for two of our products expired, which accounted for approximately $1,421,231 or 41% of our revenue for the three months ended March 31, 2017. However, we assumed an agreement between the previous owner of these patents and a competitor of ours that prohibits any similar product offerings based on these expired patents until March 2023. As a result, we do not expect the expiration of these patents to have a significant adverse impact on our financial statements.

Operating lease. In February 2014, we entered into a lease (the “Spencer Lease”) for a new corporate office with an unrelated third party. The five-year Spencer Lease is for a building approximately 24,000 square feet, which is comprised of approximately 16,000 square feet of office space and 8,000 square feet of warehouse space. The property is located in Las Vegas, Nevada.

The initial term of the Spencer Lease commenced on April 1, 2014. We were obligated to pay approximately $153,000 in annual base rent in the first year, and the annual base rent is scheduled to increase by approximately 4% each year. We are also obligated to pay real estate taxes and other building operating costs. Subject to certain conditions, we have certain rights under the Spencer Lease, including rights of first offer to purchase the premises if the landlord elects to sell. We also have an option to extend the term of the Spencer Lease for two consecutive terms of three years each, at the then current fair market value rental rate determined in accordance with the terms of the Spencer Lease.

In connection with the commencement of the Spencer Lease, the landlord agreed to finance tenant improvements (“TI Allowance”) of $150,000. The base rent is increased by an amount sufficient to fully amortize the TI Allowance through the initial Spencer Lease term upon equal monthly payments of principal and interest, with interest imputed on the outstanding principal balance at the rate of 5.5% per annum. The TI Allowance has been classified as a capital lease on the balance sheet.

Total rent expense was $70,570 and $72,154 for the three months ended March 31, 2017 and 2016, respectively.

12


 

There are currently no operating lease commitments that extend beyond April 1, 2020.  As of March 31, 2017, the amounts shown in the accompanying table reflect our estimates of annual future minimum lease obligations:  

 

Twelve Months Ending

March 31,

 

Annual Obligation

 

2018

 

$

228,000

 

2019

 

 

236,736

 

2020

 

 

59,730

 

Total obligations

 

$

524,466

 

 

Legal proceedings. In the ordinary course of conducting our business, we are, from time to time, involved in various legal proceedings, administrative proceedings, regulatory government investigations and other matters, including those in which we are a plaintiff or defendant, that are complex in nature and have outcomes that are difficult to predict.  In accordance with ASC Topic 450, we record accruals for such contingencies to the extent we conclude that it is probable that a liability will be incurred and the amount of the related loss can be reasonably estimated.  Our assessment of each matter may change based on future unexpected events.  An unexpected adverse judgment in any pending litigation could cause a material impact on our business operations, intellectual property, results of operations or financial position.  Unless otherwise expressly stated, we believe costs associated with litigation will not have a material impact on our financial position or liquidity, but may be material to the results of operations in any given period.  We assume no obligation to update the status of pending litigation, except as may be required by applicable law, statue or regulation. For a complete description of the facts and circumstances surrounding material litigation to which we are a party, see Note 12 in Item 8. “Financial Statements and Supplementary Data” included in our 2016 10-K.

 

NOTE 11. STOCKHOLDERS’ EQUITY

In February 2017, a former employee forfeited 100,000 shares of unvested restricted stock and paid us $35,000 in connection with the exercise of 150,000 fully-vested stock options.

 

     

NOTE 12. INCOME TAXES

 

Our forecasted annual effective tax rate at March 31, 2017 was 35.0%, as compared to 35.4% at March 31, 2016.  For the three months ended March 31, 2017 and 2016, our effective tax rate was 31.4% and 35.5%, respectively.  The decrease in the effective tax rate is primarily due to excess stock compensation benefits in income tax expense for the three months ended March 31, 2017 resulting from the adoption of ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting.

 

 

NOTE 13. STOCK WARRANTS, OPTIONS AND GRANTS

 

Stock options. For each of the three months ended March 31, 2017 and 2016, we issued 112,500 stock options to members of our Board of Directors and independent contractors.  

 

The fair value of all stock options granted for the three months ended March 31, 2017 and 2016 was determined to be $47,635 and $16,348, respectively, using the Black-Scholes option pricing model with the following assumptions:

 

 

 

 

Three months ended

March 31, 2017

 

 

Three months ended

March 31, 2016

 

Dividend yield

 

 

0%

 

 

 

0%

 

Expected volatility

 

 

85%

 

 

 

89%

 

Risk free interest rate

 

 

1.93%

 

 

 

1.21%

 

Expected life (years)

 

 

5.00

 

 

 

5.00

 

 

13


 

A summary of stock option activity is as follows:

 

 

 

Common stock options

 

 

Weighted-average

exercise price

 

 

Aggregate intrinsic value

 

 

Weighted-average remaining contractual term (years)

 

Outstanding – December 31, 2016

 

 

1,496,250

 

 

$

0.32

 

 

$

385,017

 

 

 

3.57

 

Issued

 

 

112,500

 

 

 

0.63

 

 

 

 

 

 

 

Exercised

 

 

(150,000

)

 

 

0.23

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding – March 31, 2017

 

 

1,458,750

 

 

$

0.36

 

 

$

400,329

 

 

 

3.65

 

Exercisable – March 31, 2017

 

 

1,338,193

 

 

$

0.36

 

 

$

365,368

 

 

 

3.64

 

 

A summary of unvested stock option activity is as follows:

 

 

 

Common stock options

 

 

Weighted-average

exercise price

 

 

Aggregate intrinsic value

 

 

Weighted-average remaining contractual term (years)

 

Unvested – December 31, 2016

 

 

128,889

 

 

$

0.34

 

 

$

30,933

 

 

 

3.99

 

Granted

 

 

112,500

 

 

 

0.63

 

 

 

 

 

 

 

Vested

 

 

(120,832

)

 

 

0.61

 

 

 

 

 

 

 

Forfeited or expired

 

 

 

 

 

 

 

 

 

 

 

 

Unvested – March 31, 2017

 

 

120,557

 

 

 

0.34

 

 

$

28,934

 

 

 

3.81

 

 

Warrants.  On August 29, 2016, in connection with the Term Loan Agreement, we issued the lenders the Warrants to purchase 1,965,780 shares of common stock at an initial exercise price of $0.30 per share. The number of shares of common stock issuable upon exercise of the Warrants, and/or the exercise price of such shares, is subject to standard anti-dilution adjustments in the event of stock splits, reorganizations, stock dividends, and similar events. As of the date of the Warrant Agreement, the shares of common stock issuable upon a full exercise of the Warrants would represent 5.0% of the total issued and outstanding shares of our common stock. The lenders were also granted the right, but not the obligation, to purchase up to 5.0% of the total number of new securities that we may, from time to time, sell and issue.

 

The Warrants expire on August 29, 2022, and may not be exercised prior to the earliest of (a) the fifth anniversary of the Term Loan Agreement, (b) the date on which the obligations described in the Term Loan Agreement are repaid in full, or (c) the date on which the Lender declares all or any portion of the outstanding amount of the Term Loan to be due and payable under the terms of the Term Loan Agreement (collectively, the "Trigger Date"). Exercise of the Warrants requires a sixty (60) day prior written notice, during which time we may exercise our Call Right described below.

 

The Warrant Agreement includes a call right (the "Call Right") whereby we can purchase the Warrants for a fixed sum of $1,333,333 upon providing the Warrant holders with a thirty (30) day prior written notice. Furthermore, the Warrant Agreement also includes a put right (the "Put Right") whereby the Lenders may require us to purchase from the Lenders all or any portion of the Warrants at a purchase price equal to the lesser of (a) the fair market value of the underlying shares of common stock as of the date of exercise of the Put Right, or (b) $1,333,333. The Put Right may not be exercised prior to the Trigger Date (as defined above), and the Put Right expires on August 29, 2022.  The foregoing summary of the Term Loan Agreement and the Warrant Agreement is qualified in its entirety by reference to the respective agreements, which are found as Exhibits 99.1 and 99.2, respectively, to our Form 8-K filed with the SEC on August 29, 2016.

 

NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS

We estimate fair value for financial assets and liabilities in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”). ASC 820 defines fair value, provides guidance for measuring fair value, requires certain disclosures and discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). ASC 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:

 

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

14


 

 

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

 

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

 

The estimated fair value of cash equivalents, restricted cash, accounts receivable and accounts payable approximates the carrying amount of these financial instruments due to their short-term nature. The estimated fair value of our long-term debt and capital lease obligations approximates their carrying value based upon our expected borrowing rate for debt with similar remaining maturities and comparable risk. As of March 31, 2017, the Warrants were the only financial instrument measured at estimated fair value on a recurring basis.

 

NOTE 15. SUBSEQUENT EVENT

 

On May 1, 2017, we entered into an employment agreement (the “Employment Agreement”) with Harry C. Hagerty, pursuant to which Mr. Hagerty will serve as our Chief Financial Officer.  The term of the Employment Agreement is through April 30, 2020.  Pursuant to the Employment Agreement, Mr. Hagerty shall receive a base salary of $120,000 per annum and be eligible for bonuses if and as approved by the Compensation Committee of our Board of Directors.  In addition, Mr. Hagerty will be granted stock options to purchase 400,000 shares of our Common Stock at an exercise price per share of $0.60, subject to vesting and other conditions.  

 

 

 

15


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

OVERVIEW

We develop, acquire, manufacture and market technology and entertainment-based products and services for the gaming industry for placement on the casino floor. Our products and services 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 and services are offered in highly regulated markets throughout the world. Our products and services are manufactured at our headquarters and manufacturing facility in Las Vegas, Nevada, as well as outsourced for certain sub-assemblies in the United States.

Additional information regarding our products and product categories may be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2016 10-K and on our web site, www.galaxygaming.com. Information found on the web site should not be considered part of this report.

 

As discussed in Note 1 to our financial statements included in Item 1 of this report, financial statements for the three months ended March 31, 2016 have been restated to correct certain errors noted during the preparation of the financial statements for the year ended December 31, 2016.  The restatements to reflect the correction of these errors are referred to herein collectively as the "Restatement." For further information regarding the Restatement, see our Current Report on Form 8-K filed with the SEC on April 3, 2017.

Results of operations for the three months ended March 31, 2017. For the three months ended March 31, 2017, our continuing operations generated gross revenues of $3,475,296 compared to gross revenues of $2,984,099 for the comparable prior-year period, representing an increase of $491,197, or 16%.  This increase was primarily attributable to our focus on Premium Games such as High Card Flush, which command a higher price point per unit, and the improved performance of side bet games such as 21+3 and Bonus Craps. Selling, general and administrative expenses for the three months ended March 31, 2017, were $2,086,169 compared to $1,633,335 for the three months ended March 31, 2016, representing an increase of $452,834, or 28%. Significant year-over-year changes in selling, general and administrative expenses consisted of the following categories:

 

 

 

Three months ended

March 31,

 

 

 

2017

 

 

2016

 

Compensation

 

$

680,970

 

 

$

415,729

 

Legal fees

 

$

39,143

 

 

$

196,302

 

 

 

Employee compensation expenses increased as a result of our investments in personnel as we grow as well as higher sales commissions due to higher revenues in 2017. Legal and professional fees have decreased due to the completion of legal proceedings in 2016.

Research and development expenses for the three months ended March 31, 2017 were $138,047, compared to $79,342 for the comparable prior-year period, representing an increase of $58,705, or 74%. This increase is primarily due to increased costs associated with testing our products.

 

16


 

Income from operations decreased $69,061, or 8%, to $744,276 for the three months ended March 31, 2017, compared to $813,337 for the comparable prior-year period. This decrease was primarily attributable to higher selling, general and administrative expenses.

Total interest expense increased $187,137, or 72%, to $445,332 for the three months ended March 31, 2017, compared to $258,195 for the comparable prior-year period. The increase in interest expense is primarily due to the Term Loan refinance transaction completed in August 2016.

The change in estimated fair value of warrants issued in connection with the Term Loan was $66,500 for the three months ended March 31, 2017, compared to zero for the comparable prior-year period. The estimated fair value is determined using the Black-Scholes pricing model.

Income tax provision decreased $161,951 or 68%, to $77,974 for the three months ended March 31, 2017, compared to $239,925 for the comparable prior-year period.  This is attributable to the decrease in income before provision for income taxes.  

Adjusted EBITDA. Adjusted EBITDA includes adjustment to net income to exclude interest, taxes, depreciation, amortization, share based compensation, loss on extinguishment of debt, foreign currency exchange gains, change in estimated fair value of warrant liability, and settlement income. Adjusted EBITDA is not a measure of performance defined in accordance with U.S. generally accepted accounting principles ("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 our 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 or to net cash provided by 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 from operations to Adjusted EBITDA is as follows:

 

 

 

Three months ended

March 31,

 

Adjusted EBITDA Reconciliation:

 

2017

 

 

2016

 

 

 

 

 

 

 

(restated)

 

Net income

 

$

162,267

 

 

$

427,835

 

Interest income

 

 

 

 

 

(56

)

Interest expense

 

 

445,332

 

 

 

258,195

 

Income tax provision

 

 

77,974

 

 

 

239,925

 

Depreciation and amortization

 

 

436,085

 

 

 

415,974

 

Share based compensation expense

 

 

49,837

 

 

 

20,471

 

Foreign currency exchange gains

 

 

(7,797

)

 

 

(112,562

)

Change in estimated fair value of warrant liability

 

 

66,500

 

 

 

 

Adjusted EBITDA

 

$

1,230,198

 

 

$

1,249,782

 

 

Liquidity and capital resources. As of March 31, 2017 we had total current assets of $5,659,281 and total assets of $19,152,305. This compares to $5,148,435 and $19,011,945, respectively as of December 31, 2016. The increase in current assets as of March 31, 2017 was primarily impacted by an increase in cash and cash equivalents, partially offset by a decrease in accounts receivable. Cash increased significantly due to reduced principal payments on the Term Loan as compared to the PTG Notes. Our total current liabilities as of March 31, 2017 were $4,783,542 versus $4,708,685 as of December 31, 2016. This increase was primarily driven by the increase in accrued expenses (including costs related to the Restatement) and increase in income tax payable. Our business model continues to be highly profitable and we have several options to ensure we are able to meet our short-term and long-term obligations.

 

We have undertaken certain growth initiatives to expand our recurring revenue base. As such we have made investments in personnel and research related to the development of our enhanced table systems. Additionally, we increased our sales and marketing budget and spent monies on regulatory efforts for the purpose of expanding our distribution network. We are also subject to several regulatory investigations and proceedings which may result in significant future legal and regulatory expenses. A significant increase in such expenses may require us to postpone growth initiatives or investments in personnel, inventory and research and development of our products. It is our intention to continue such initiatives and investments. However, to the extent we are not able to achieve our growth objectives or raise additional capital, we will need to evaluate the reduction of operating expenses.

 

At March 31, 2017, we do not have any available third-party lines or letters of credit or any written or oral commitments from officers or shareholders to provide us with loans or advances to support our operations or fund potential acquisitions.

17


 

Our operating activities provided $946,967 in cash for the three months ended March 31, 2017, compared to $1,284,498 for the three months ended March 31, 2016. The decrease in operating cash flow was primarily due to the decreases in net income, income taxes payable and deferred revenue, partially offset by increases in accrued expenses.

Additionally, investing activities used cash of $41,467 for the three months ended March 31, 2017. The cash flows from investing activities are due to the acquisition of software and property and equipment.  Cash used in financing activities during the three months ended March 31, 2017 was $293,266, which was primarily due to principal payments towards long-term debt and capital leases.

We intend to fund our continuing operations through increased sales and cash flow. However, the issuance of debt or equity financing arrangements may be required to fund expenditures or other cash requirements. There can be no assurance that we will be successful in raising additional funding, if necessary, and even if we are successful, it may not be on advantageous terms to us. If we are not able to secure additional funding, the implementation of our business plan could be impaired. In addition, we may incur higher capital expenditures in the future to expand our operations. We may from time to time acquire products and businesses complementary to our business. We may also incur significant expenses when applying for new licenses or in complying with current jurisdictional requirements. 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.

 

Critical accounting policies. The discussion of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with U.S. GAAP. Critical accounting policies are those policies that, in management's view, are most important in the portrayal of our financial condition and results of operations. See Note 2 of our financial statements included in Item 8. “Financial Statements and Supplementary Data” of our 2016 10-K for further detail on these critical accounting policies.

Off balance sheet arrangements. As of March 31, 2017, there were no off balance sheet arrangements.

Recently issued accounting pronouncements. 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.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

 

 

ITEM 4. CONTROLS AND PROCEDURES

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report.  This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2017 our disclosure controls and procedures were effective.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

No change in our internal control over financial reporting occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the effectiveness of internal controls. Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives and our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations

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include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

 

 

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the ordinary course of conducting our business, we are, from time to time, involved in various legal proceedings, administrative proceedings, regulatory government investigations and other matters, including those in which we are a plaintiff, that are complex in nature and have outcomes that are difficult to predict. In accordance with topic ASC Topic 450, we record accruals for such contingencies to the extent that we conclude that it is probable that a liability will be incurred and the amount of the related loss can be reasonably estimated. Our assessment of each matter may change based on future unexpected events. An unexpected adverse judgment in any pending litigation could cause a material impact on our business operations, intellectual property, results of operations or financial position. Unless otherwise expressly stated, we believe costs associated with litigation will not have a material impact on our financial position or liquidity, but may be material to the results of operations in any given period. We assume no obligation to update the status of pending litigation, except as may be required by applicable law, statute or regulation. For a complete description of the facts and circumstances surrounding material litigation to which we are a party, see Note 12 in Item 8. “Financial Statements and Supplementary Data” included in our See Note 2 in Item 8. “Financial Statements and Supplementary Data” included in our 2016 10-K. There are no material updates to matters previously reported on our 2016 10-K. 

ITEM 5. OTHER INFORMATION

On May 1, 2017, in connection with his employment agreement, we granted Harry Hagerty an option to purchase up to 400,000 shares of our common stock, with an exercise price of $0.60 per share, which option vests as follows: (i) immediately as to the first 100,000 shares of stock, (ii) as to the next 300,000 shares of stock, 100,000 shares on each of the first, second and third anniversary of the effective date of Mr. Hagerty’s employment agreement. The option must be exercised within five years from the date of grant or 90 days from the date of Mr. Hagerty’s separation from us. The option was issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, (the “Securities Act”) and rules and regulations promulgated thereunder. Our reliance upon Section 4(a)(2) of the Securities Act was based in part upon the following factors: (a) the issuance of the securities was in connection with an isolated private transaction which did not involve any public offering; (b) there was only a single offeree; (c) there were no subsequent or contemporaneous public offerings of the securities by us; and (d) the negotiations for the issuance of the securities took place directly between the offeree and us.

ITEM 6. EXHIBITS

 

Exhibit Number

 

Description of Exhibit

 

10.1

31.1

 

 

Employment agreement with Harry C. Hagerty, Chief Financial Officer, dated May 1, 2017

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002*

101

 

Financials in XBRL format

 

 

 

 

 

 

 

 

 

 

 

 

 

* In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed “filed” for the purposes of Section 18 of the Securities and Exchange Act of 1934 or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.  

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

Galaxy Gaming, Inc.

 

 

 

Date:

 

May 15, 2017

 

 

 

 

 

 

 

By:

 

/s/ ROBERT B. SAUCIER

 

 

 

 

Robert B. Saucier

 

 

 

 

Chief Executive Officer (Principal Executive Officer)

 

 

 

 

 

 

 

Galaxy Gaming, Inc.

 

 

 

Date:

 

May 15, 2017

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