10-Q

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 September 30, 2018

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 on its corporate Web site, if any, every Interactive Data File required to be submitted 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 such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth 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: 39,882,591 common shares as of November 12, 2018.

GALAXY GAMING, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2018

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	20
Item 4:	Controls and Procedures	20
	PART II – OTHER INFORMATION
Item 1:	Legal Proceedings	21
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 6:	Exhibits	21

2

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

Condensed Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017	4
Condensed Statements of Operations for the three and nine months ended September 30, 2018 and 2017 (unaudited)	5
Condensed Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (unaudited)	6
Notes to Condensed Financial Statements (unaudited)	7

3

GALAXY GAMING, INC.

CONDENSED BALANCE SHEETS

	September 30,		December 31,
ASSETS	2018		2017
Current assets:	(Unaudited)
Cash, cash equivalents and restricted cash	$	5,246,345	$	3,581,209
Accounts receivable, net of allowance of $56,015 and $32,993, respectively		2,450,825		2,301,752
Inventory, net		694,670		524,126
Income tax receivable		106,178		—
Prepaid expense and other		450,788		363,102
Total current assets		8,948,806		6,770,189
Property and equipment, net		230,973		263,867
Assets deployed at client locations, net		375,665		373,650
Goodwill and other intangible assets, net		10,358,468		11,452,809
Deferred tax assets, net		230,648		230,648
Other assets, net		—		23,000
Total assets	$	20,144,560	$	19,114,163
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	510,880	$	1,035,383
Accrued expenses		1,223,634		887,796
Income taxes payable		—		519,610
Revenue contract liability		1,221,258		1,083,639
Deferred rent, current portion		21,038		23,679
Current portion of long-term debt and capital lease obligations		1,383,386		1,195,787
Other current liabilities		16,387		123,441
Total current liabilities		4,376,583		4,869,335
Deferred rent, net		—		14,025
Capital lease obligations, net		—		14,217
Long-term debt, net		8,993,771		7,420,385
Common stock warrant liability		—		1,333,333
Interest rate swap liability		28,707		—
Total liabilities		13,399,061		13,651,295
Commitments and Contingencies (See Note 11)
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;   39,882,591 and 39,565,591 shares issued and outstanding, respectively		39,883		39,566
Additional paid-in capital		4,507,974		3,957,703
Accumulated earnings		2,197,642		1,465,599
Total stockholders’ equity		6,745,499		5,462,868
Total liabilities and stockholders’ equity	$	20,144,560	$	19,114,163

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

4

GALAXY GAMING, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
Revenue:
Product leases and royalties	$	4,775,754		$	3,830,351		$	13,672,459		$	10,955,055
Product sales and service		30			69			191			9,469
Total revenue		4,775,784			3,830,420			13,672,650			10,964,524
Costs and expenses:
Cost of ancillary products and assembled components		47,828			50,369			107,215			133,517
Selling, general and administrative		2,559,056			2,362,601			7,741,213			6,808,659
Research and development		373,456			139,185			816,657			403,618
Depreciation and amortization		462,402			440,130			1,372,752			1,323,772
Share-based compensation		192,998			384,925			550,588			553,313
Total costs and expenses		3,635,740			3,377,210			10,588,425			9,222,879
Income from operations		1,140,044			453,210			3,084,225			1,741,645
Other income (expense):
Interest expense		(206,425	)		(432,466	)		(819,837	)		(1,316,045	)
Foreign currency exchange (loss) gain		(22,095	)		59,624			(542	)		125,576
Change in estimated fair value of warrant liability		—			(86,308	)		—			(409,717	)
Change in estimated fair value of interest rate swap liability		48,528			—			(28,707	)		—
Loss on extinguishment of debt		(1,765	)		—			(1,349,271	)		—
Interest income		343			—			974			—
Total other expense		(181,414	)		(459,150	)		(2,197,383	)		(1,600,186	)
Income (loss) before provision for income taxes		958,630			(5,940	)		886,842			141,459
Provision for income taxes		(166,662	)		(21,990	)		(154,799	)		(86,881	)
Net income (loss)	$	791,968		$	(27,930	)	$	732,043		$	54,578
Net income (loss) per share, basic and diluted	$	0.02		$	(0.00	)	$	0.02		$	0.00
Weighted-average shares outstanding:
Basic		39,844,863			39,432,982			39,805,144			39,368,521
Diluted		41,184,368			39,432,982			41,059,384			41,216,750

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

5

GALAXY GAMING, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30, 2018			September 30, 2017
Cash flows from operating activities:
Net income	$	732,043		$	54,578
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,372,752			1,323,772
Amortization of debt issuance costs and debt discount		119,809			218,910
Bad debt expense		38,374			6,000
Loss on extinguishment of debt		1,349,271			—
Change in estimated fair value of warrant liability		—			409,717
Change in estimated fair value of interest rate swap liability		28,707			—
Share-based compensation		550,588			553,313
Unrealized foreign exchange gains on cash, cash equivalents and restricted cash		(24,601	)		(92,243	)
Changes in operating assets and liabilities:
Accounts receivable		(187,445	)		(264,842	)
Inventory		(317,978	)		(271,149	)
Prepaid expenses and other current assets		(54,009	)		(112,410	)
Accounts payable		(524,503	)		(132,720	)
Income tax receivable/payable		(625,788	)		(124,271	)
Accrued expenses		335,838			612,611
Revenue contract liability		137,619			35,685
Other current liabilities		(107,054	)		29,000
Deferred rent		(16,666	)		(10,111	)
Net cash provided by operating activities		2,806,957			2,235,840
Cash flows from investing activities:
Investment in intangible assets		(33,048	)		(43,917	)
Acquisition of property and equipment		(67,050	)		(52,352	)
Net cash used in investing activities		(100,098	)		(96,269	)
Cash flows from financing activities:
Proceeds from debt issued		11,098,986			—
Proceeds from stock option exercises		—			35,000
Payments of debt issuance costs		(136,162	)		(17,091	)
Payment of warrant liability		(1,333,333	)		—
Principal payments on capital lease obligations		(24,415	)		(23,087	)
Principal payments on long-term debt		(10,296,900	)		(1,361,038	)
Payments of long-term debt redemption premium		(374,500	)		—
Net cash used in financing activities		(1,066,324	)		(1,366,216	)
Effect of exchange rate changes on cash		24,601			92,243
Net increase in cash, cash equivalents and restricted cash		1,665,136			865,598
Cash, cash equivalents and restricted cash – beginning of period		3,581,209			2,389,338
Cash, cash equivalents and restricted cash – end of period	$	5,246,345		$	3,254,936
Supplemental cash flow information:
Cash paid for interest	$	700,027		$	1,099,738
Inventory transferred to assets deployed at client locations	$	147,434		$	172,711
Cash paid for income taxes	$	795,818		$	150,000

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

6

GALAXY GAMING, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. NATURE OF OPERATIONS

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

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. Casinos use our proprietary products and services 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 and services to land-based, riverboat, cruise ship and internet gaming companies located in North America, the Caribbean, Central America, the British Isles, Europe and Africa and to cruise ships and internet gaming sites worldwide.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation.The accompanying condensed 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.

In the opinion of management, the accompanying unaudited interim condensed 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 our 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, 2017, filed with the SEC on April 2, 2018 (the “2017 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 (such as wages, consulting expenses, legal, regulatory and professional fees and rent)are recognized when they are incurred. We do not have significant categories of cost of revenue, as most of our revenue is derived from the licensing of intellectual property.

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, including the addition of restricted cash to cash and cash equivalents on the consolidated statements of cash flows as a result of the adoption of ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash.  See below for further detail.

Other Significant Accounting Policies. See Note 3 in Item 8. “Financial Statements and Supplementary Data” included in our 2017 10-K.

Recently adopted accounting standards

Revenue Recognition.  Effective January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), which is a comprehensive new revenue recognition standard that supersedes virtually all existing revenue guidance, including industry-specific guidance.  Under the new standard, revenue is 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 generally requires companies to use more judgment and make more estimates than under the previous 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. We adopted ASC 606 using the modified retrospective approach (reporting the cumulative effect as of the date of adoption).  See Note 3 for further detail.

7

Restricted Cash. Effective January 1, 2018, we adopted 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. We adopted this guidance on a retrospective basis, which resulted in the inclusion of restricted cashwithin cash and cash equivalents on our balance sheets and statements of cash flows. Such restricted cash represents reserves set side in a restricted bank account in accordance with the requirements of gaming regulations to be used for the purpose of funding payments to winners of jackpotsat one of our client locationsand was $60,996 and $95,062 at September 30, 2018 and December 31, 2017, respectively. Cash flows from operating activities for the nine months ended September 30, 2017increased by $8,693as a result of the adoption of this guidance.

Compensation - Stock Compensation.  Effective January 1, 2018, we adopted ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. The adoption did not have a material impact on our financial statements.

New accounting standards not yet adopted

Leases.  In February 2016, the Financial Accounting Standards Board (“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 guidance requires lessees and lessors to recognize and 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 will adopt the new standard effective January 1, 2019 and expect to recognize a portion of our operating leases as right-of-use assets and operating lease liabilities on our balance sheets upon adoption, which will increase our total assets and liabilities.

Goodwill Impairment. In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the current two-step goodwill impairment test by eliminating Step 2 of the test. This guidance requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of adopting this guidance and will adopt this guidance for the annual test to be performed for the year ended December 31. 2018.

Fair Value Measurement.  In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 addresses the required disclosures around fair value measurement, removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The standard is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted. We do not believe the adoption of this guidance will have a material impact on our financial statements.

Internal-Use Software. In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15. This new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption (including early adoption in any interim period) permitted. We do not believe the adoption of this guidance will have a material impact on our financial statements.

NOTE 3. REVENUE RECOGNITION

Adoption of ASC 606, Revenue from Contracts with Customers

On January 1, 2018, we adopted ASC 606 and applied it to all contracts using the modified retrospective method. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts have not and will not be adjusted and continue to be reported in accordance with our historical accounting treatment under Topic 605, Revenue Recognition.

8

The adoption of ASC 606 had the following impact on our balance sheet and statement of operations: (i) we reported higher product leases and royalty revenue and selling, general and administrative expense for the three and ninemonths ended September 30, 2018 as a result of the assessment of our distributor relationships.  We have entered into agreements with certain distributors in Europe, which sublicense our intellectual property to gaming establishments in Europe. We have historically recorded net revenues (gross revenue generated minus distributor fees paid) as product leases and royalty revenue. However, after applying principal vs. agent considerations to these distributor relationships in accordance with ASC 606, we have determined that revenues earned from gaming establishments in Europe should now be recorded as gross revenue and fees earned by such distributors should be recorded as selling, general and administrative expenses as we had control of the sub-licensed intellectual property prior to the licensing of such intellectual property to the gaming establishments; and (ii) prepayments from customers in advance of the period that the revenue is recognized were historically recorded under the caption “deferred revenue” in the accompanying balance sheet. This caption has now been renamed “revenue contract liability” in accordance with the requirements of ASC 606.

For the three months ended September 30, 2018, the adoption of ASC 606 had the following impact on our statement of operations:

	Three Months Ended September 30, 2018
	As reported		Balance without the adoption of ASC 606		Impact of the adoption
Product leases and royalties	$	4,775,754	$	4,544,912	$	230,842
Selling, general and administrative expense	$	2,559,056	$	2,328,214	$	230,842

For the six months ended September 30, 2018, the adoption of ASC 606 had the following impact on our statement of operations:

	Nine Months Ended September 30, 2018
	As reported		Balance without the adoption of ASC 606		Impact of the adoption
Product leases and royalties	$	13,672,459	$	12,968,848	$	703,611
Selling, general and administrative expense	$	7,741,213	$	7,037,602	$	703,611

Revenue Recognition

We generate revenue primarily from the licensing of our intellectual property. We also, occasionally, receive a one-time sale of certain products and/or reimbursement of our manufactured equipment.

License Fees. We derive product lease and royalty revenue from negotiated recurring fee license agreements and the performance of our products. We account for these agreements as month-to-month contracts for the purposes of ASC 606 and recognize revenue each month as we satisfy our performance obligations by granting access to intellectual property to our clients. In addition, revenue associated with performance-based agreements is recognized during the month that the usage of the product or intellectual property occurs.  We believe it is inappropriate to use the input method as the inputs do not correlate to the satisfaction of our performance obligations. Intellectual property requires significant upfront investment in the form of human resources required for their development and/or capital resources for acquisition from third parties. However, limited maintenance is required once the games have been placed on casino floors. The output method, on the other hand, recognizes revenue based on direct measurements of the value to our customers of the licensed intellectual property, which we believe is more appropriate. We have further applied the “as invoiced” practical expedient under the output method by recognizing product lease and royalty revenue in proportion to the amount for which we have the right to invoice.

Some of our intellectual property requires the installation of certain equipment and both the intellectual property and the related equipment are licensed in one bundled package. We have determined that the equipment is not distinct from the intellectual property and, therefore, we have only one performance obligation and, as a result, the allocation of the transaction price to different performance obligations is not necessary.

Product Sales.  Occasionally, we sell certain incidental products or receive reimbursement of our manufactured equipment after the commencement of the new license agreement. Revenue from such sales is recognized as a separate performance obligation when we ship the items.  

9

Disaggregation of Revenue.  The following table disaggregates our revenue by major source for the three and six months ended September 30, 2018 and 2017:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Table games	$	4,666,150	$	3,720,987	$	13,273,184	$	10,596,140
Other		109,634		109,433		399,466		368,384
Total revenue	$	4,775,784	$	3,830,420	$	13,672,650	$	10,964,524

The following table disaggregates our revenue by geographic location for the three and six months ended September 30, 2018 and 2017:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
North America and Caribbean	$	3,622,729	$	3,177,942	$	10,568,129	$	9,049,494
Europe		1,153,055		652,478		3,104,521		1,915,030
Total revenue	$	4,775,784	$	3,830,420	$	13,672,650	$	10,964,524

Revenue Contract Asset and Liability.  Upon the adoption of ASC 606, we have applied the practical expedient of expensing incremental commissions paid to sales representatives directly related to the acquisition and fulfilment of new contracts, when the amortization period of the contract asset that we otherwise would have recognized is one year or less.

We invoice our clients monthly in advance for unlimited use of our intellectual property licenses. Upon the adoption of ASC 606, we recognized a revenue contract liability that represents such advanced billing to our clients for unsatisfied performance.  We reduce the revenue contract liability and recognize revenue when we transfer those goods or services and, therefore, satisfy our performance obligation.

The table below summarizes changes in the revenue contract liability during the nine months ended September 30, 2018:

	Revenue Contract liability
Beginning balance – January 1, 2018	$	1,083,639
Increase (advanced billings)		10,234,834
Decrease (revenue recognition)		(10,097,215	)
Ending balance – September 30, 2018	$	1,221,258

Revenue recognized during the nine months ended September 30, 2018 that was included in the beginning balance of revenue contract liability above was $1,083,639.

NOTE 4. INVENTORY

Inventory, net consisted of the following at September 30, 2018 and December 31, 2017: 

	2018			2017
Raw materials and component parts	$	333,068		$	235,673
Finished goods		391,602			318,453
Inventory, gross		724,670			554,126
Less: inventory reserve		(30,000	)		(30,000	)
Inventory, net	$	694,670		$	524,126

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NOTE 5. PROPERTY AND EQUIPMENT

Property and equipment, net consisted of the following at September 30, 2018 and December 31, 2017: 

	2018			2017
Furniture and fixtures	$	312,639		$	280,694
Automotive vehicles		215,127			215,127
Leasehold improvements		156,843			156,843
Computer equipment		157,096			121,992
Office equipment		53,485			53,483
Property and equipment, gross		895,190			828,139
Less: accumulated depreciation		(664,217	)		(564,272	)
Property and equipment, net	$	230,973		$	263,867

Property and equipment, net included $156,843 of leasehold improvements acquired under capital leases as of September 30, 2018 and December 31, 2017.  Accumulated depreciation of leasehold improvements totaled $135,414 and $113,035 as of September 30, 2018 and December 31, 2017, respectively (Note 9).

For the nine months ended September 30, 2018 and 2017, depreciation expense related to property and equipment was $99,944 and $115,117, respectively.

NOTE 6. ASSETS DEPLOYED AT CLIENT LOCATIONS

Assets deployed at client locations, net consisted of the following at September 30, 2018 and December 31, 2017:

	2018			2017
Enhanced table systems	$	806,955		$	638,981
Less: accumulated depreciation		(431,290	)		(265,331	)
Assets deployed at client locations, net	$	375,665		$	373,650

For the nine months ended September 30, 2018 and 2017, depreciation expense related to assets deployed at client locations was $145,419 and $84,674, respectively.

NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and finite-lived intangible assets, net consisted of the following at September 30, 2018 and December 31, 2017:

	2018			2017
Goodwill	$	1,091,000		$	1,091,000
Finite-lived intangible assets:
Patents		13,475,000			13,475,000
Customer relationships		3,400,000			3,400,000
Trademarks		2,880,967			2,880,967
Non-compete agreements		660,000			660,000
Internally-developed software		136,015			102,968
Other intangible assets, gross		20,551,982			20,518,935
Less: accumulated amortization		(11,284,514	)		(10,157,126	)
Other intangible assets, net		9,267,468			10,361,809
Goodwill and other intangible assets, net	$	10,358,468		$	11,452,809

For the nine months ended September 30, 2018 and 2017 amortization expense related to the finite-lived intangible assets was $1,127,389 and $1,123,980, respectively.

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Estimated future amortization expense is as follows:

Twelve months Ending September 30,	Total
2019	$	1,508,864
2020		1,491,702
2021		1,401,025
2022		1,392,984
2023		253,507
Thereafter		3,219,386
Total amortization	$	9,267,468

NOTE 8. ACCRUED EXPENSES

Accrued expenses consisted of the following at September 30, 2018 and December 31, 2017:

	2018		2017
Payroll and related	$	1,077,907	$	712,584
Commissions and royalties		77,768		65,380
Professional fees		19,426		63,488
Other		48,533		46,344
Total accrued expenses	$	1,223,634	$	887,796

NOTE 9. CAPITAL LEASE OBLIGATIONS

Capital lease obligations consisted of the following at September 30, 2018 and December 31, 2017:

	2018			2017
Capital lease obligation	$	22,563		$	47,002
Less: Current portion		(22,563	)		(32,785	)
Total capital lease obligations – long-term	$	—		$	14,217

The capital leases consist of improvements located at our corporate headquarters in Las Vegas, Nevada.  

NOTE 10. LONG-TERM DEBT

Long-term debt consisted of the following at September 30, 2018 and December 31, 2017:

	2018			2017
Nevada State Bank Term Loan and Revolver	$	10,361,600		$	—
Breakaway Term Loan		—			9,450,000
Equipment notes payable		94,977			124,311
Insurance notes payable		—			73,734
Notes payable, gross		10,456,577			9,648,045
Less:
Unamortized debt issuance costs		(101,983	)		(480,397	)
Warrants issued		—			(584,261	)
Notes payable, net		10,354,594			8,583,387
Less: Current portion		(1,360,823	)		(1,163,002	)
Long-term debt, net	$	8,993,771		$	7,420,385

Nevada State Bank Credit Agreement.  On April 24, 2018, we entered into a credit agreement with ZB, N.A. dba Nevada State Bank (“NSB” and the “NSB Credit Agreement”), which provides for a $11.0 million five-year term loan (the “NSB Term Loan”) and a $1.0 million one-year revolving credit facility (the “NSB Revolver”).  

Outstanding balances under the NSB Term Loan and the NSB Revolver accrue interest based on one-month US dollar London interbank offered rate (“LIBOR”) plus an Applicable Margin of 3.50%, or 4.00%, depending on our Leverage Ratio (as defined in the NSB Credit Agreement).  

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We are required to make monthly principal and interest payments, both of which are calculated over a seven-year term, with a balloon payment due on April 24, 2023.  Borrowings under the NSB Credit Agreement are secured by a lien on substantially all of our assets.

Effective May 1, 2018, we entered into an interest rate swap agreement with an affiliate of NSB (the “Swap Agreement”) to fix the interest rate on the NSB Term Loan at 6.43% (assuming a Leverage Ratio less than 2.0) for three years. The notional amount of the Swap Agreement is initially $10.9 million but will decrease over time as a result of the anticipated principal paydowns.

The NSB Credit Agreement contains affirmative and negative financial covenants and other restrictions customary for borrowings of this nature.  In particular, we are required to maintain a minimum trailing-four-quarters Fixed Charge Coverage Ratio (as defined in the NSB Credit Agreement) of 1.25 and a maximum Leverage Ratio of 3.00.  The NSB Credit Agreement allows us to make share repurchases and to incur up to an additional $1.0 million of unsecured indebtedness provided that we are in compliance with the covenants in the NSB Credit Agreement on a pro forma basis. We were in compliance with the financial covenants of the NSB Credit Agreement as of September 30, 2018.

Upon execution of the NSB Credit Agreement, we borrowed $11.0 million under the NSB Term Loan and $0.1 million under the NSB Revolver. Borrowings under the NSB Revolver were repaid in full in July 2018 and $1.0 million was available at September 30, 2018 and the filing date of this Quarterly Report on Form 10-Q.

Breakaway Term loan.  In August 2016, we entered into a term loan agreement (the “Breakaway Term Loan Agreement”) for an aggregate principal amount of $10,500,000 (the "Breakaway Term Loan").  In conjunction with the Breakaway 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”).

The outstanding principal initially accrued interest at the rate of 14.0% per annum, which decreased to 12.5% per annum for any quarterly period in which we achieved a specified leverage ratio.  Beginning October 1, 2017, the interest rate per annum decreased to 12.5% due to the achievement of such ratio.

On April 24, 2018, we used the proceeds from the NSB Term Loan and the NSB Revolver to repay in full the remaining principal amount under the Breakaway Term Loan, together with accrued but unpaid interest, an early redemption premium and associated legal fees.  In addition, we redeemed the Warrants at $1,333,333.  The early redemption of the Breakaway Term Loan resulted in approximately $1.3 million of loss on extinguishment of debt.

As of September 30, 2018, future maturities of our long-term debt obligations are as follows:    

Twelve months Ending September	Total
2019	$	1,360,823
2020		1,437,950
2021		1,530,149
2022		1,616,655
Thereafter		4,511,000
Total notes payable		10,456,577
Less:
Unamortized debt issuance costs		(101,983	)
Notes payable, net	$	10,354,594

NOTE 11. COMMITMENTS AND CONTINGENCIES

Concentration of risk. We are exposed to risks associated with a client who represent a significant portion of total revenues. For the nine months ended September 30, 2018 and 2017, respectively, we had the following client revenue concentration:

	Location	2018 Revenue	2017 Revenue
Client A	North America	11.0%	13.6%

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 $6,484,265 or 47.4% of our revenue for the nine months ended September 30, 2018, as compared to $5,370,094 or 49.0% of our revenue for the nine months ended September 30, 2017. We continue to generate higher revenue from these products despite the expiration of the underlying patents and, accordingly, we do not expect the expiration of these patents to have a significant adverse impact on our future financial statements.

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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 an approximately 24,000 square foot space, 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 and expires on June 30, 2019. 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 Spencer Lease, the landlord agreed to finance tenant improvements of $150,000 (“TI Allowance”). 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 condensed balance sheet (Note 9).

Total rent expense was $222,296 and $217,650 for the nine months ended September 30, 2018 and 2017, respectively.

Estimated future minimum operating lease payment obligations total $179,190, which are all due within the twelve months ending September 30, 2019.  

Legal proceedings.In the ordinary course of conducting our business, we are, from time to time, involved in various legal and 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.  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 U.S. GAAP, 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 11 in Item 8. “Financial Statements and Supplementary Data” included in our 2017 10-K.

In September 2018, we were served with a complaint by TableMax Gaming, Inc. (“TMax”) regarding an Operation and License Agreement executed between TMax and us in February 2011 (the “TMAX Agreement”).  The complaint, filed in the Eighth Judicial District Court in Clark County, Nevada, alleges that we breached the TMAX Agreement, among other allegations. We filed an answer denying the allegations and counterclaimed for breach of contract, Abuse of Process and Fraud in the Inducement, among other counterclaims.  We believe the TMax complaint lacks any merit and intend to aggressively pursue dismissal of the complaint while pursuing our counterclaims.

NOTE 12. STOCKHOLDERS’ EQUITY

On March 31, 2018, we issued 13,000 restricted shares of our common stock valued at $13,520, to each of Messrs. Norm DesRosiers, Bryan Waters and William Zender, who are members of our Board of Directors (the “Board”), in consideration of their service on the Board during the three months ended March 31, 2018.  These shares vested immediately on the grant date.

On June 30, 2018, we issued 13,000 restricted shares of our common stock valued at $15,600, to each of Messrs. DesRosiers, Waters and Zender, in consideration of their service on the Board during the three months ended June 30, 2018.  These shares vested immediately on the grant date.

On September 30, 2018, we issued 13,000 restricted shares of our common stock valued at $16,770, to each of Messrs. DesRosiers, Waters and Zender, in consideration of their service on the Board during the three months ended September 30, 2018.  These shares vested immediately on the grant date.

On April 24, 2018, our Board authorized the repurchase of shares of our common stock in an amount not to exceed $1.0 million. Such repurchases may be made from time to time based on market conditions and may be completed in the open market or in privately-negotiated transactions. Repurchase transactions will be executed only when we believe that we will remain in compliance with the covenants of the NSB Credit Agreement.  Finally, execution of share repurchases may require regulatory approval in one or more jurisdictions. We have not repurchased any of our common stock as of September 30, 2018.

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NOTE 13. INCOME TAXES

Our forecasted annual effective tax rate at September 30, 2018 was 17.5%, as compared to 56.6% at September 30, 2017.  For the nine months ended September 30, 2018 and 2017, our effective tax rate was 17.5% and 61.4%, respectively.  The decrease in both rates was primarily due to a reduction in the federal statutory rate as a result of the Tax Cuts and Jobs Act signed in December 2017 (the “Tax Act”).  As of September 30, 2018, we had completed our preliminary assessment for the tax effects resulting from the enactment of the Tax Act and made a reasonable estimate of the effect on our annual effective tax rate and existing deferred tax balances. We will continue to make and refine our calculations as additional analysis is completed. In addition, our estimates may also be affected as we gain a more thorough understanding of the Tax Act.

NOTE 14. STOCK WARRANTS, OPTIONS AND GRANTS

On May 10, 2018, the Board ratified and confirmed the 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan is a broad-based plan under which 5,550,750 shares of our common stock are authorized for issuance for awards, including stock options, stock appreciation rights, restricted stock, and cash incentive awards to members of our Board, executive officers, employees and independent contractors. As of September 30, 2018, 689,000 shares remained available for issuance as new awards under the 2014 Plan.

Stock options. During the nine months ended September 30, 2018 and 2017, we issued 270,000 and 1,390,000 options to purchase our common stock, respectively, to members of our Board, executive officers, employees and independent contractors.  

The fair value of all stock options granted for the nine months ended September 30, 2018 and 2017 was determined to be $169,807 and $652,895, respectively, using the Black-Scholes option pricing model with the following assumptions:

	Nine Months Ended September 30, 2018		Nine Months Ended September 30, 2017
Dividend yield		0%		0%
Expected volatility	78%		80 - 87%
Risk free interest rate	2.46% - 2.73%		1.73 - 1.94%
Expected life (years)		5.00		5.00

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, 2017		2,811,250	$	0.54	$	1,849,517		3.65
Issued		270,000		0.98		—		—
Exercised		—		—		—		—
Expired		—		—		—		—
Outstanding – September 30, 2018		3,081,250	$	0.58	$	2,186,179		3.05
Exercisable – September 30, 2018		2,317,916	$	0.52	$	1,775,996		2.78

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, 2017		825,557		$	0.63	$	467,379		4.27
Granted		270,000			0.98		—		—
Vested		(332,223	)		0.64		—		—
Forfeited or expired		—			—		—		—
Unvested – September 30, 2018		763,334		$	0.75	$	410,184		3.82

As of September 30, 2018, our unrecognized stock-based compensation expense associated with the stock options issued was $299,788, which will be amortized over a weighted-average of 1.81 years.

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Warrants.  On August 29, 2016, in connection with the Breakaway Term Loan Agreement, we issued the lenders the Warrants to purchase 1,965,780 shares of our common stock at an initial exercise price of $0.30 per share. On April 24, 2018, we paid $1,333,333 to redeem the Warrants in full upon extinguishment of the Breakaway Term Loan (Note 10).

NOTE 15. 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.

• 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 their carrying amount 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 September 30, 2018,the interest rate swap agreement wasthe only financial instrument measured at estimated fair value on a recurring basis based on valuation reports provided by counterparties, which are classified as level 2 inputs.

NOTE 16. SUBSEQUENT EVENTS

On October 12, 2018, we granted the following stock options to purchase our restricted common stock: (i) 250,000 to Todd Cravens, our President and Chief Executive Officer; (ii) 180,000 to Harry Hagerty, our Chief Financial Officer; and (iii) 45,000 to our general counsel. The stock options were issued with a strike price of $1.187, have a contractual term of five years, contain customary change-of-control provisions, and vest in equal installments on each of the first three anniversaries from the grant date.

On November 5, 2018, we issued a press release and filed a related Form 8-K announcing that (i) Robert B. Saucier submitted his resignation as a member of our Board effective immediately and his resignation as Executive Vice President of Business Development effective on December 31, 2018; and (ii) that we have retained Macquarie Capital (USA) Inc. to assist it in evaluating strategic alternatives, including the potential sale of the shares of our common stock held by Triangulum Partners LLC, an entity controlled by Mr. Saucier.

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q.  This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act, and is subject to the safe harbors created by those sections.  Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward-looking statements.  In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements.  These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict.  Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. Such forward-looking statements speak only as of the date of this report; we undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements.  Readers are urged to carefully review and consider the various disclosures made by us in this report, as well as the disclosures made in the Galaxy Gaming, Inc. Annual Report on Form 10-K for the year ended December 31, 2017 filed on April 2, 2018 (the “2017 10-K”), and other filings we make with the Securities and Exchange Commission, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, operating results, financial condition and stock price.

Due to possible uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statements contained in this Quarterly Report, which speak only as of the date of this Quarterly Report, or to make predictions about future performance based solely on historical financial performance.  We disclaim any obligation to update forward-looking statements contained in this Quarterly Report.

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 2017 10-K and on our web site, www.galaxygaming.com. Information found on the web site should not be considered part of this report.

Results of operations for the three months ended September 30, 2018 and 2017. For the three months ended September 30, 2018, we generated gross revenues of $4,775,784 compared to gross revenues of $3,830,420 for the comparable prior-year period, representing an increase of 945,364, or 24.7%.  This increase was primarily attributable to higher revenue from: (i) Bonus Jackpot System due to additional game placements; (ii) internet-based gaming activities; and (iii) premium Games such as Heads Up Hold ’em, High Card Flush and Player’s Edge, which command a higher price point per unit. In addition, the adoption of ASC 606 resulted in $230,842 of higher revenue reported for the three months ended September 30, 2018. Since we elected to adopt ASC 606 using the modified retrospective approach, no changes were made to our previously issued financial statements, including the statement of operations for the three months ended September 30, 2017. Excluding the impact of the adoption of ASC 606, gross revenue for the three months ended September 30, 2018 would have been $4,544,942, an increase of 18.7% over the comparable prior period.

Selling, general and administrative expenses for the three months ended September 30, 2018 were $2,559,056 compared to $2,362,601 for the comparable prior period, representing an increase of $196,455, or 8.3%. Excluding the impact of the adoption of ASC 606, selling, general and administrative expenses for the three months ended September 30, 2018 would have been $2,328,214, a decrease of 0.9% over the comparable prior period.

Research and development expenses for the three months ended September 30, 2018 were $373,456, compared to $139,185 for the comparable prior-year period, representing an increase of $234,271, or 168.3%. This increase was primarily due to increased costs associated with testing our products currently in development.

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Stock-based compensation expenses for thethree months ended September 30, 2018was $192,998, as compared to $384,925for the comparable prior-year period, representing a decrease of $191,927, or 49.9%. During the three months ended September 30, 2017, we issued stock options and restricted shares of common stock to our President and Chief Executive Officer and Chairman of the Board, a portion of which was vested immediately and thus expensed during the quarter.  

Income from operations increased $686,834 or 151.5% to $1,140,044 for the three months ended September 30, 2018, compared to $453,210 for the comparable prior-year period. This increase was primarily attributable to higher revenue and lower share-based compensation expenses, partially offset by higher selling, general and administrative and research and development expenses.

Total interest expense decreased $226,041, or 52.3%, to $206,425 for the three months ended September 30, 2018, compared to $432,466 for the comparable prior-year period. The decrease was mainly attributable to lower interest rate on the NSB Term Loan and the NSB Revolver as compared to the Breakaway Term Loan.

There was no change in estimated fair value of warrants issued in connection with the Breakaway Term Loan for the three months ended September 30, 2018, compared to other expense of $86,308 for the comparable prior-year period. The Warrants were paid off on April 24, 2018 in connection with the payoff of the Breakaway Term Loan.

Income tax provision was $166,662 for the three months ended September 30, 2018, compared to a provision of $21,990 for the comparable prior-year period.  This increase was primarily attributable to the increase in income before provision for income taxes, partially offset by a reduction in the federal statutory rate as a result of the Tax Cuts and Jobs Act signed in December 2017.  

Results of operations for the nine months ended September 30, 2018 and 2017. For the nine months ended September 30, 2018, we generated gross revenues of $13,672,650 compared to gross revenues of $10,964,524 for the comparable prior-year period, representing an increase of $2,708,126, or 24.7%.  This increase was primarily attributable to higher revenue from: (i) Bonus Jackpot System due to additional game placements; (ii) internet-based gaming activities; and (iii) premium Games such as Heads Up Hold ’em, High Card Flush and Player’s Edge, which command a higher price point per unit. In addition, the adoption of ASC 606 resulted in $703,611 of higher revenue reported for the nine months ended September 30, 2018. Since we elected to adopt ASC 606 using the modified retrospective approach, no changes were made to our previously issued financial statements, including the statement of operations for the nine months ended September 30, 2017. Excluding the impact of the adoption of ASC 606, gross revenue for the nine months ended September 30, 2018 would have been $12,969,039, an increase of 18.3% over the comparable prior period.

Selling, general and administrative expenses for the nine months ended September 30, 2018 were $7,741,213 compared to $6,808,659 for the comparable prior period, representing an increase of $932,554, or 13.7%. The increase was primarily due to higher compensation and related expense as we continue to invest in personnel and attract new talent. Excluding the impact of the adoption of ASC 606, selling, general and administrative expenses for the nine months ended September 30, 2018 would have been $7,037,603, an increase of 6.0% over the comparable prior period.

Research and development expenses for the nine months ended September 30, 2018 were $816,657, compared to $403,618 for the comparable prior-year period, representing an increase of $413,039, or 102.3%. This increase was primarily due to increased costs associated with testing our products currently in development.

Stock-based compensation expenses for the nine months ended September 30, 2018 was $550,588, as compared to $553,313 for the comparable prior-year period, representing a decrease of $2,725, or 0.5%.

Income from operations increased $1,342,580 or 77.1% to $3,084,225 for the nine months ended September 30, 2018, compared to $1,741,645 for the comparable prior-year period. This increase was primarily attributable to higher revenue, partially offset by higher selling, general and administrative and research and development expenses.

Total interest expense decreased $496,208, or 37.7%, to $819,837 for the nine months ended September 30, 2018, compared to $1,316,045 for the comparable prior-year period. The decrease was mainly attributable to lower interest rate on the NSB Term Loan and the NSB Revolver as compared to the Breakaway Term Loan and a reduction in interest rate on the Breakaway Term Loan beginning October 1, 2017 due to achievement of a specified leverage ratio.

There was no change in estimated fair value of warrants issued in connection with the Breakaway Term Loan for the nine months ended September 30, 2018, compared to other expense of $409,717 for the comparable prior-year period. The Warrants were paid off on April 24, 2018 in connection with the payoff of the Breakaway Term Loan.

Loss on extinguishment of debt was $1,349,271 as a result of an early redemption premium paid in connection with the payoff of the Breakaway Term Loan and the write-off of unamortized debt issuance costs and estimated grant-date fair value of the Warrants.

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Income tax provision was $154,799 for the nine months ended September 30, 2018, compared to $86,881 for the comparable prior-year period.  This change was primarily attributable to the increase in income before provision for income taxes, partially offset bya reduction in the federal statutory rate as a result of the Tax Cuts and Jobs Act signed in December 2017.

Adjusted EBITDA.Adjusted EBITDA includes adjustments 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 September 30,						Nine Months Ended September 30,
Adjusted EBITDA Reconciliation:	2018			2017			2018			2017
Net income (loss)	$	791,968		$	(27,930	)	$	732,043		$	54,578
Interest expense		206,425			432,466			819,837			1,316,045
Foreign currency exchange loss (gain)		22,095			(59,624	)		542			(125,576	)
Change in estimated fair value of warrant liability		—			86,308			—			409,717
Change in estimated fair value of interest rate swap liability		(48,528	)		—			28,707			—
Loss on extinguishment of debt		1,765			—			1,349,271			—
Income tax provision		166,662			21,990			154,799			86,881
Depreciation and amortization		462,402			440,130			1,372,752			1,323,772
Share based compensation expense		192,998			384,925			550,588			553,313
Interest income		(343	)		—			(974	)		—
Adjusted EBITDA	$	1,795,444		$	1,278,265		$	5,007,565		$	3,618,730

Liquidity and capital resources.We expect that we will be able meet our operating, investing and financing needs for liquidity through cash on hand and anticipated positive cash flows from operations. In addition, as part of the refinancing transactions completed in April 2018, we have access to a revolving line of credit (borrowings on which may be restricted under certain circumstances). See Note 10 to our condensed financial statements included in Item 1 of this report.  However, our expectations may not be realized, and the issuance of additional debt or equity financing may be required. 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. Several unforeseen circumstances may affect our belief that our cash on hand and cash flows from operations will be adequate for our needs.  For example, we may incur higher capital expenditures than anticipated to expand our operations. We may from time to time acquire products and businesses complementary to our business. We may also incur higher-than-expected expenses when applying for new licenses or in complying with current jurisdictional requirements.

As of September 30, 2018, we had total current assets of $8,948,806 and total assets of $20,144,560. This compares to $6,770,189 and $19,114,163, respectively, as of December 31, 2017. The increase in current assets as of September 30, 2018 was primarily due to an increase in cash, cash equivalents and restricted cash. Our total current liabilities as of September 30, 2018 were $4,376,583 and $4,869,335 as of December 31, 2017. This decrease was primarily driven by a decrease in accounts payable (mainly due to a January 2018 payment of $774,645 for license fees previously accrued at December 31, 2017) and income taxes payable (principally due to tax payments made during the nine months ended September 30, 2018).

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 funds on regulatory efforts for the purpose of expanding the jurisdictions in which we can operate in. We have filed applications for new or enhanced licenses in several jurisdictions, 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.

19

At September 30, 2018, 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. In April 2018, we completed a refinancing transaction which provided us with a $1.0 million line of credit (borrowings on which may be restricted under certain circumstances).  See Note 10 to our condensed financial statements included in Item 1 of this report.

Our operating activities provided $2,806,957 in cash for the nine months ended September 30, 2018, compared to $2,235,840 for the three months ended September 30, 2017. The increase in operating cash flow was primarily due to the increase in net income.

Additionally, investing activities used cash of $100,098 for the nine months ended September 30, 2018, which was due to the acquisition of property and equipment.  Cash used in financing activities during the nine months ended September 30, 2018 was $1,066,324, which was primarily due to refinancing activities occurred on April 24, 2018 and principal payments towards long-term debt and capital leases.

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 3of our financial statements included in Item 8. “Financial Statements and Supplementary Data” of our 2017 10-K for further detail on these critical accounting policies.

Off balance sheet arrangements.As of September 30, 2018, 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

Disclosure Controls and Procedures

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.

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 September 30, 2018 our disclosure controls and procedures were effective.

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 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.

20

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, Contingencies, 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 GAAP, applicable law, statute or regulation. For a complete description of the facts and circumstances surrounding material litigation to which we are a party, See Note 11 in Item 8. “Financial Statements and Supplementary Data” included in our 2017 10-K. There are no material updates to matters previously reported on our 2017 10-K.

In September 2018, we were served with a complaint by TMax regarding the TMAX Agreement.  The complaint, filed in the Eighth Judicial District Court in Clark County, Nevada, alleges that we breached the TMAX Agreement, among other allegations. We filed an answer denying the allegations and counterclaimed for breach of contract, Abuse of Process and Fraud in the Inducement, among other counterclaims.  We believe the TMax complaint lacks any merit and intend to aggressively pursue dismissal of the complaint while pursuing our counterclaims.  

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On September 28, 2018, we issued 13,000 shares of our restricted common stock valued at $16,770 to each of Messrs. Norm DesRosiers, Bryan Waters and William Zender, who are members of our Board, in consideration of their service on the Board during the three months ended September 30, 2018.  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.  

Our reliance upon Section 4(a)(2) of the Securities Act in granting the aforementioned options to purchase shares of our common stock was based in part upon the following factors: (a) each of the issuances of the securities was in connection with an isolated private transaction which did not involve any public offering; (b) there were a limited number of offerees; (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	Form	File No.	Exhibit	Filing Date	Filed Herewith
10.1	Credit Agreement with ZB, N.A. dba Nevada State Bank, dated April 24, 2018	8-K	000-30653	10.1	April 27, 2018
31.1	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
31.2	Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
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					X
101	Financials in XBRL format					X

21

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:	November 14, 2018
	By:	/s/ TODD P. CRAVENS
		Todd P. Cravens
		President and Chief Executive Officer (Principal Executive Officer)
	Galaxy Gaming, Inc.
Date:	November 14, 2018
	By:	/s/ HARRY C. HAGERTY
		Harry C. Hagerty
		Chief Financial Officer (Principal Accounting Officer)

22

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Todd P. Cravens, certify that;

1. I have reviewed this quarterly report on Form 10-Q for the quarter ended September 30, 2018 of Galaxy Gaming, Inc. (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2018

/s/ TODD P. CRAVENS

By: Todd P. Cravens

Title: Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Harry C. Hagerty, certify that;

1. I have reviewed this quarterly report on Form 10-Q for the quarter ended September 30, 2018 of Galaxy Gaming, Inc. (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2018

/s/ HARRY C. HAGERTY

By: Harry C. Hagerty

Title: Chief Financial Officer

EX-32.1

Exhibit 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

In connection with the quarterly Report of Galaxy Gaming, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2018 filed with the Securities and Exchange Commission (the “Report”), I, Todd P. Cravens, Chief Executive Officer of the Company, and I, Harry C. Hagerty, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and the consolidated result of operations of the Company for the periods presented.

By:	/s/ TODD P. CRAVENS
Name:	Todd P. Cravens
Title:	Principal Executive Officer and Director
Date:	November 14, 2018

By:	/s/ HARRY C. HAGERTY
Name:	Harry C. Hagerty
Title:	Principal Financial Officer and Director
Date:	November 14, 2018

This certification has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2018	Nov. 12, 2018
Document And Entity Information [Abstract]
Entity Registrant Name	Galaxy Gaming, Inc.
Entity Central Index Key	0000013156
Document Type	10-Q
Document Period End Date	Sep. 30, 2018
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Common Stock, Shares Outstanding		39,882,591
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2018
Trading Symbol	GLXZ

XML

Condensed Balance Sheets (Unaudited) - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Current assets:
Cash, cash equivalents and restricted cash	$ 5,246,345	$ 3,581,209
Accounts receivable, net of allowance of $56,015 and $32,993, respectively	2,450,825	2,301,752
Inventory, net	694,670	524,126
Income tax receivable	106,178
Prepaid expense and other	450,788	363,102
Total current assets	8,948,806	6,770,189
Property and equipment, net	230,973	263,867
Assets deployed at client locations, net	375,665	373,650
Goodwill and other intangible assets, net	10,358,468	11,452,809
Deferred tax assets, net	230,648	230,648
Other assets, net		23,000
Total assets	20,144,560	19,114,163
Current liabilities:
Accounts payable	510,880	1,035,383
Accrued expenses	1,223,634	887,796
Income taxes payable		519,610
Revenue contract liability	1,221,258	1,083,639
Deferred rent, current portion	21,038	23,679
Current portion of long-term debt and capital lease obligations	1,383,386	1,195,787
Other current liabilities	16,387	123,441
Total current liabilities	4,376,583	4,869,335
Deferred rent, net		14,025
Capital lease obligations, net		14,217
Long-term debt, net	8,993,771	7,420,385
Common stock warrant liability		1,333,333
Interest rate swap liability	28,707
Total liabilities	13,399,061	13,651,295
Commitments and Contingencies (See Note 11)
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; 39,882,591 and 39,565,591 shares issued and outstanding, respectively	39,883	39,566
Additional paid-in capital	4,507,974	3,957,703
Accumulated earnings	2,197,642	1,465,599
Total stockholders’ equity	6,745,499	5,462,868
Total liabilities and stockholders’ equity	$ 20,144,560	$ 19,114,163

XML

Condensed Balance Sheets (Unaudited) (Parenthetical) - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Statement Of Financial Position [Abstract]
Accounts receivables, net allowance	$ 56,015	$ 32,993
Preferred Stock, Shares authorized	10,000,000	10,000,000
Preferred Stock, Par Value	$ 0.001	$ 0.001
Preferred Stock, Issued	0	0
Preferred Stock, Outstanding	0	0
Common Stock, Shares authorized	65,000,000	65,000,000
Common Stock, par value	$ 0.001	$ 0.001
Common Stock, Issued	39,882,591	39,565,591
Common Stock, Outstanding	39,882,591	39,565,591

XML

Condensed Statements of Operations (Unaudited) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Revenue:
Total revenue	$ 4,775,784	$ 3,830,420	$ 13,672,650	$ 10,964,524
Costs and expenses:
Cost of ancillary products and assembled components	47,828	50,369	107,215	133,517
Selling, general and administrative	2,559,056	2,362,601	7,741,213	6,808,659
Research and development	373,456	139,185	816,657	403,618
Depreciation and amortization	462,402	440,130	1,372,752	1,323,772
Share-based compensation	192,998	384,925	550,588	553,313
Total costs and expenses	3,635,740	3,377,210	10,588,425	9,222,879
Income from operations	1,140,044	453,210	3,084,225	1,741,645
Other income (expense):
Interest expense	(206,425)	(432,466)	(819,837)	(1,316,045)
Foreign currency exchange (loss) gain	(22,095)	59,624	(542)	125,576
Change in estimated fair value of warrant liability		(86,308)		(409,717)
Change in estimated fair value of interest rate swap liability	48,528		(28,707)
Loss on extinguishment of debt	(1,765)		(1,349,271)
Interest income	343		974
Total other expense	(181,414)	(459,150)	(2,197,383)	(1,600,186)
Income (loss) before provision for income taxes	958,630	(5,940)	886,842	141,459
Provision for income taxes	(166,662)	(21,990)	(154,799)	(86,881)
Net income (loss)	$ 791,968	$ (27,930)	$ 732,043	$ 54,578
Net income (loss) per share, basic and diluted	$ 0.02	$ 0.00	$ 0.02	$ 0.00
Weighted-average shares outstanding:
Basic	39,844,863	39,432,982	39,805,144	39,368,521
Diluted	41,184,368	39,432,982	41,059,384	41,216,750
Product leases and royalties
Revenue:
Total revenue	$ 4,775,754	$ 3,830,351	$ 13,672,459	$ 10,955,055
Product sales and service
Revenue:
Total revenue	$ 30	$ 69	$ 191	$ 9,469

XML

Condensed Statements of Cash Flows (Unaudited) - USD ($)	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Cash flows from operating activities:
Net income	$ 732,043	$ 54,578
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,372,752	1,323,772
Amortization of debt issuance costs and debt discount	119,809	218,910
Bad debt expense	38,374	6,000
Loss on extinguishment of debt	1,349,271
Change in estimated fair value of warrant liability		409,717
Change in estimated fair value of interest rate swap liability	28,707
Share-based compensation	550,588	553,313
Unrealized foreign exchange gains on cash, cash equivalents and restricted cash	(24,601)	(92,243)
Changes in operating assets and liabilities:
Accounts receivable	(187,445)	(264,842)
Inventory	(317,978)	(271,149)
Prepaid expenses and other current assets	(54,009)	(112,410)
Accounts payable	(524,503)	(132,720)
Income tax receivable/payable	(625,788)	(124,271)
Accrued expenses	335,838	612,611
Revenue contract liability	137,619	35,685
Other current liabilities	(107,054)	29,000
Deferred rent	(16,666)	(10,111)
Net cash provided by operating activities	2,806,957	2,235,840
Cash flows from investing activities:
Investment in intangible assets	(33,048)	(43,917)
Acquisition of property and equipment	(67,050)	(52,352)
Net cash used in investing activities	(100,098)	(96,269)
Cash flows from financing activities:
Proceeds from debt issued	11,098,986
Proceeds from stock option exercises		35,000
Payments of debt issuance costs	(136,162)	(17,091)
Payment of warrant liability	(1,333,333)
Principal payments on capital lease obligations	(24,415)	(23,087)
Principal payments on long-term debt	(10,296,900)	(1,361,038)
Payments of long-term debt redemption premium	(374,500)
Net cash used in financing activities	(1,066,324)	(1,366,216)
Effect of exchange rate changes on cash	24,601	92,243
Net increase in cash, cash equivalents and restricted cash	1,665,136	865,598
Cash, cash equivalents and restricted cash – beginning of period	3,581,209	2,389,338
Cash, cash equivalents and restricted cash – end of period	5,246,345	3,254,936
Supplemental cash flow information:
Cash paid for interest	700,027	1,099,738
Inventory transferred to assets deployed at client locations	147,434	172,711
Cash paid for income taxes	$ 795,818	$ 150,000

XML

NATURE OF OPERATIONS

9 Months Ended

Sep. 30, 2018

Organization Consolidation And Presentation Of Financial Statements [Abstract]

NATURE OF OPERATIONS

NOTE 1. NATURE OF OPERATIONS

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

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. Casinos use our proprietary products and services 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 and services to land-based, riverboat, cruise ship and internet gaming companies located in North America, the Caribbean, Central America, the British Isles, Europe and Africa and to cruise ships and internet gaming sites worldwide.

XML

SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2018

Accounting Policies [Abstract]

SIGNIFICANT ACCOUNTING POLICIES

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation.The accompanying condensed 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.

In the opinion of management, the accompanying unaudited interim condensed 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 our 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, 2017, filed with the SEC on April 2, 2018 (the “2017 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 (such as wages, consulting expenses, legal, regulatory and professional fees and rent)are recognized when they are incurred. We do not have significant categories of cost of revenue, as most of our revenue is derived from the licensing of intellectual property.

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, including the addition of restricted cash to cash and cash equivalents on the consolidated statements of cash flows as a result of the adoption of ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash.  See below for further detail.

Other Significant Accounting Policies. See Note 3 in Item 8. “Financial Statements and Supplementary Data” included in our 2017 10-K.

Recently adopted accounting standards

Revenue Recognition.  Effective January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), which is a comprehensive new revenue recognition standard that supersedes virtually all existing revenue guidance, including industry-specific guidance.  Under the new standard, revenue is 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 generally requires companies to use more judgment and make more estimates than under the previous 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. We adopted ASC 606 using the modified retrospective approach (reporting the cumulative effect as of the date of adoption).  See Note 3 for further detail.

Restricted Cash. Effective January 1, 2018, we adopted 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. We adopted this guidance on a retrospective basis, which resulted in the inclusion of restricted cash within cash and cash equivalents on our balance sheets and statements of cash flows. Such restricted cash represents reserves set side in a restricted bank account in accordance with the requirements of gaming regulations to be used for the purpose of funding payments to winners of jackpots at one of our client locations and was $60,996 and $95,062 at September 30, 2018 and December 31, 2017, respectively. Cash flows from operating activities for the nine months ended September 30, 2017 increased by $8,693 as a result of the adoption of this guidance.

Compensation - Stock Compensation.  Effective January 1, 2018, we adopted ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. The adoption did not have a material impact on our financial statements.

New accounting standards not yet adopted

Leases.  In February 2016, the Financial Accounting Standards Board (“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 guidance requires lessees and lessors to recognize and 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 will adopt the new standard effective January 1, 2019 and expect to recognize a portion of our operating leases as right-of-use assets and operating lease liabilities on our balance sheets upon adoption, which will increase our total assets and liabilities.

Goodwill Impairment. In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the current two-step goodwill impairment test by eliminating Step 2 of the test. This guidance requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of adopting this guidance and will adopt this guidance for the annual test to be performed for the year ended December 31. 2018.

Fair Value Measurement.  In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 addresses the required disclosures around fair value measurement, removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The standard is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted. We do not believe the adoption of this guidance will have a material impact on our financial statements.

Internal-Use Software. In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15. This new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption (including early adoption in any interim period) permitted. We do not believe the adoption of this guidance will have a material impact on our financial statements.

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REVENUE RECOGNITION

9 Months Ended

Sep. 30, 2018

Revenue From Contract With Customer [Abstract]

REVENUE RECOGNITION

NOTE 3. REVENUE RECOGNITION

Adoption of ASC 606, Revenue from Contracts with Customers

On January 1, 2018, we adopted ASC 606 and applied it to all contracts using the modified retrospective method. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts have not and will not be adjusted and continue to be reported in accordance with our historical accounting treatment under Topic 605, Revenue Recognition.

The adoption of ASC 606 had the following impact on our balance sheet and statement of operations: (i) we reported higher product leases and royalty revenue and selling, general and administrative expense for the three and nine months ended September 30, 2018 as a result of the assessment of our distributor relationships.  We have entered into agreements with certain distributors in Europe, which sublicense our intellectual property to gaming establishments in Europe. We have historically recorded net revenues (gross revenue generated minus distributor fees paid) as product leases and royalty revenue. However, after applying principal vs. agent considerations to these distributor relationships in accordance with ASC 606, we have determined that revenues earned from gaming establishments in Europe should now be recorded as gross revenue and fees earned by such distributors should be recorded as selling, general and administrative expenses as we had control of the sub-licensed intellectual property prior to the licensing of such intellectual property to the gaming establishments; and (ii) prepayments from customers in advance of the period that the revenue is recognized were historically recorded under the caption “deferred revenue” in the accompanying balance sheet. This caption has now been renamed “revenue contract liability” in accordance with the requirements of ASC 606.

For the three months ended September 30, 2018, the adoption of ASC 606 had the following impact on our statement of operations:

	Three Months Ended September 30, 2018
	As reported		Balance without the adoption of ASC 606		Impact of the adoption
Product leases and royalties	$	4,775,754	$	4,544,912	$	230,842
Selling, general and administrative expense	$	2,559,056	$	2,328,214	$	230,842

For the six months ended September 30, 2018, the adoption of ASC 606 had the following impact on our statement of operations:

	Nine Months Ended September 30, 2018
	As reported		Balance without the adoption of ASC 606		Impact of the adoption
Product leases and royalties	$	13,672,459	$	12,968,848	$	703,611
Selling, general and administrative expense	$	7,741,213	$	7,037,602	$	703,611

Revenue Recognition

We generate revenue primarily from the licensing of our intellectual property. We also, occasionally, receive a one-time sale of certain products and/or reimbursement of our manufactured equipment.

License Fees. We derive product lease and royalty revenue from negotiated recurring fee license agreements and the performance of our products. We account for these agreements as month-to-month contracts for the purposes of ASC 606 and recognize revenue each month as we satisfy our performance obligations by granting access to intellectual property to our clients. In addition, revenue associated with performance-based agreements is recognized during the month that the usage of the product or intellectual property occurs.  We believe it is inappropriate to use the input method as the inputs do not correlate to the satisfaction of our performance obligations. Intellectual property requires significant upfront investment in the form of human resources required for their development and/or capital resources for acquisition from third parties. However, limited maintenance is required once the games have been placed on casino floors. The output method, on the other hand, recognizes revenue based on direct measurements of the value to our customers of the licensed intellectual property, which we believe is more appropriate. We have further applied the “as invoiced” practical expedient under the output method by recognizing product lease and royalty revenue in proportion to the amount for which we have the right to invoice.

Some of our intellectual property requires the installation of certain equipment and both the intellectual property and the related equipment are licensed in one bundled package. We have determined that the equipment is not distinct from the intellectual property and, therefore, we have only one performance obligation and, as a result, the allocation of the transaction price to different performance obligations is not necessary.

Product Sales.  Occasionally, we sell certain incidental products or receive reimbursement of our manufactured equipment after the commencement of the new license agreement. Revenue from such sales is recognized as a separate performance obligation when we ship the items.  

Disaggregation of Revenue.  The following table disaggregates our revenue by major source for the three and six months ended September 30, 2018 and 2017:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Table games	$	4,666,150	$	3,720,987	$	13,273,184	$	10,596,140
Other		109,634		109,433		399,466		368,384
Total revenue	$	4,775,784	$	3,830,420	$	13,672,650	$	10,964,524

The following table disaggregates our revenue by geographic location for the three and six months ended September 30, 2018 and 2017:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
North America and Caribbean	$	3,622,729	$	3,177,942	$	10,568,129	$	9,049,494
Europe		1,153,055		652,478		3,104,521		1,915,030
Total revenue	$	4,775,784	$	3,830,420	$	13,672,650	$	10,964,524

Revenue Contract Asset and Liability.  Upon the adoption of ASC 606, we have applied the practical expedient of expensing incremental commissions paid to sales representatives directly related to the acquisition and fulfilment of new contracts, when the amortization period of the contract asset that we otherwise would have recognized is one year or less.

We invoice our clients monthly in advance for unlimited use of our intellectual property licenses. Upon the adoption of ASC 606, we recognized a revenue contract liability that represents such advanced billing to our clients for unsatisfied performance.  We reduce the revenue contract liability and recognize revenue when we transfer those goods or services and, therefore, satisfy our performance obligation.

The table below summarizes changes in the revenue contract liability during the nine months ended September 30, 2018:

	Revenue Contract liability
Beginning balance – January 1, 2018	$	1,083,639
Increase (advanced billings)		10,234,834
Decrease (revenue recognition)		(10,097,215	)
Ending balance – September 30, 2018	$	1,221,258

Revenue recognized during the nine months ended September 30, 2018 that was included in the beginning balance of revenue contract liability above was $1,083,639.

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INVENTORY

9 Months Ended

Sep. 30, 2018

Inventory Disclosure [Abstract]

INVENTORY

NOTE 4. INVENTORY

Inventory, net consisted of the following at September 30, 2018 and December 31, 2017: 

	2018			2017
Raw materials and component parts	$	333,068		$	235,673
Finished goods		391,602			318,453
Inventory, gross		724,670			554,126
Less: inventory reserve		(30,000	)		(30,000	)
Inventory, net	$	694,670		$	524,126

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PROPERTY AND EQUIPMENT

9 Months Ended

Sep. 30, 2018

Property Plant And Equipment [Abstract]

PROPERTY AND EQUIPMENT

NOTE 5. PROPERTY AND EQUIPMENT

Property and equipment, net consisted of the following at September 30, 2018 and December 31, 2017: 

	2018			2017
Furniture and fixtures	$	312,639		$	280,694
Automotive vehicles		215,127			215,127
Leasehold improvements		156,843			156,843
Computer equipment		157,096			121,992
Office equipment		53,485			53,483
Property and equipment, gross		895,190			828,139
Less: accumulated depreciation		(664,217	)		(564,272	)
Property and equipment, net	$	230,973		$	263,867

Property and equipment, net included $156,843 of leasehold improvements acquired under capital leases as of September 30, 2018 and December 31, 2017.  Accumulated depreciation of leasehold improvements totaled $135,414 and $113,035 as of September 30, 2018 and December 31, 2017, respectively (Note 9).

For the nine months ended September 30, 2018 and 2017, depreciation expense related to property and equipment was $99,944 and $115,117, respectively.

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ASSETS DEPLOYED AT CLIENT LOCATIONS

9 Months Ended

Sep. 30, 2018

Leases Operating [Abstract]

ASSETS DEPLOYED AT CLIENT LOCATIONS

NOTE 6. ASSETS DEPLOYED AT CLIENT LOCATIONS

Assets deployed at client locations, net consisted of the following at September 30, 2018 and December 31, 2017:

	2018			2017
Enhanced table systems	$	806,955		$	638,981
Less: accumulated depreciation		(431,290	)		(265,331	)
Assets deployed at client locations, net	$	375,665		$	373,650

For the nine months ended September 30, 2018 and 2017, depreciation expense related to assets deployed at client locations was $145,419 and $84,674, respectively.

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GOODWILL AND OTHER INTANGIBLE ASSETS

9 Months Ended

Sep. 30, 2018

Goodwill And Intangible Assets Disclosure [Abstract]

GOODWILL AND OTHER INTANGIBLE ASSETS

NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and finite-lived intangible assets, net consisted of the following at September 30, 2018 and December 31, 2017:

	2018			2017
Goodwill	$	1,091,000		$	1,091,000
Finite-lived intangible assets:
Patents		13,475,000			13,475,000
Customer relationships		3,400,000			3,400,000
Trademarks		2,880,967			2,880,967
Non-compete agreements		660,000			660,000
Internally-developed software		136,015			102,968
Other intangible assets, gross		20,551,982			20,518,935
Less: accumulated amortization		(11,284,514	)		(10,157,126	)
Other intangible assets, net		9,267,468			10,361,809
Goodwill and other intangible assets, net	$	10,358,468		$	11,452,809

For the nine months ended September 30, 2018 and 2017 amortization expense related to the finite-lived intangible assets was $1,127,389 and $1,123,980, respectively.

Estimated future amortization expense is as follows:

Twelve months Ending September 30,	Total
2019	$	1,508,864
2020		1,491,702
2021		1,401,025
2022		1,392,984
2023		253,507
Thereafter		3,219,386
Total amortization	$	9,267,468

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ACCRUED EXPENSES

9 Months Ended

Sep. 30, 2018

Payables And Accruals [Abstract]

ACCRUED EXPENSES

NOTE 8. ACCRUED EXPENSES

Accrued expenses consisted of the following at September 30, 2018 and December 31, 2017:

	2018		2017
Payroll and related	$	1,077,907	$	712,584
Commissions and royalties		77,768		65,380
Professional fees		19,426		63,488
Other		48,533		46,344
Total accrued expenses	$	1,223,634	$	887,796

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CAPITAL LEASE OBLIGATIONS

9 Months Ended

Sep. 30, 2018

Leases [Abstract]

CAPITAL LEASE OBLIGATIONS

NOTE 9. CAPITAL LEASE OBLIGATIONS

Capital lease obligations consisted of the following at September 30, 2018 and December 31, 2017:

	2018			2017
Capital lease obligation	$	22,563		$	47,002
Less: Current portion		(22,563	)		(32,785	)
Total capital lease obligations – long-term	$	—		$	14,217

The capital leases consist of improvements located at our corporate headquarters in Las Vegas, Nevada.

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LONG-TERM DEBT

9 Months Ended

Sep. 30, 2018

Debt Disclosure [Abstract]

LONG-TERM DEBT

NOTE 10. LONG-TERM DEBT

Long-term debt consisted of the following at September 30, 2018 and December 31, 2017:

	2018			2017
Nevada State Bank Term Loan and Revolver	$	10,361,600		$	—
Breakaway Term Loan		—			9,450,000
Equipment notes payable		94,977			124,311
Insurance notes payable		—			73,734
Notes payable, gross		10,456,577			9,648,045
Less:
Unamortized debt issuance costs		(101,983	)		(480,397	)
Warrants issued		—			(584,261	)
Notes payable, net		10,354,594			8,583,387
Less: Current portion		(1,360,823	)		(1,163,002	)
Long-term debt, net	$	8,993,771		$	7,420,385

Nevada State Bank Credit Agreement.  On April 24, 2018, we entered into a credit agreement with ZB, N.A. dba Nevada State Bank (“NSB” and the “NSB Credit Agreement”), which provides for a $11.0 million five-year term loan (the “NSB Term Loan”) and a $1.0 million one-year revolving credit facility (the “NSB Revolver”).  

Outstanding balances under the NSB Term Loan and the NSB Revolver accrue interest based on one-month US dollar London interbank offered rate (“LIBOR”) plus an Applicable Margin of 3.50%, or 4.00%, depending on our Leverage Ratio (as defined in the NSB Credit Agreement).  

We are required to make monthly principal and interest payments, both of which are calculated over a seven-year term, with a balloon payment due on April 24, 2023.  Borrowings under the NSB Credit Agreement are secured by a lien on substantially all of our assets.

Effective May 1, 2018, we entered into an interest rate swap agreement with an affiliate of NSB (the “Swap Agreement”) to fix the interest rate on the NSB Term Loan at 6.43% (assuming a Leverage Ratio less than 2.0) for three years. The notional amount of the Swap Agreement is initially $10.9 million but will decrease over time as a result of the anticipated principal paydowns.

The NSB Credit Agreement contains affirmative and negative financial covenants and other restrictions customary for borrowings of this nature.  In particular, we are required to maintain a minimum trailing-four-quarters Fixed Charge Coverage Ratio (as defined in the NSB Credit Agreement) of 1.25 and a maximum Leverage Ratio of 3.00.  The NSB Credit Agreement allows us to make share repurchases and to incur up to an additional $1.0 million of unsecured indebtedness provided that we are in compliance with the covenants in the NSB Credit Agreement on a pro forma basis. We were in compliance with the financial covenants of the NSB Credit Agreement as of September 30, 2018.

Upon execution of the NSB Credit Agreement, we borrowed $11.0 million under the NSB Term Loan and $0.1 million under the NSB Revolver. Borrowings under the NSB Revolver were repaid in full in July 2018 and $1.0 million was available at September 30, 2018 and the filing date of this Quarterly Report on Form 10-Q.

Breakaway Term loan.  In August 2016, we entered into a term loan agreement (the “Breakaway Term Loan Agreement”) for an aggregate principal amount of $10,500,000 (the "Breakaway Term Loan").  In conjunction with the Breakaway 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”).

The outstanding principal initially accrued interest at the rate of 14.0% per annum, which decreased to 12.5% per annum for any quarterly period in which we achieved a specified leverage ratio.  Beginning October 1, 2017, the interest rate per annum decreased to 12.5% due to the achievement of such ratio.

On April 24, 2018, we used the proceeds from the NSB Term Loan and the NSB Revolver to repay in full the remaining principal amount under the Breakaway Term Loan, together with accrued but unpaid interest, an early redemption premium and associated legal fees.  In addition, we redeemed the Warrants at $1,333,333.  The early redemption of the Breakaway Term Loan resulted in approximately $1.3 million of loss on extinguishment of debt.

As of September 30, 2018, future maturities of our long-term debt obligations are as follows:    

Twelve months Ending September	Total
2019	$	1,360,823
2020		1,437,950
2021		1,530,149
2022		1,616,655
Thereafter		4,511,000
Total notes payable		10,456,577
Less:
Unamortized debt issuance costs		(101,983	)
Notes payable, net	$	10,354,594

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COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2018

Commitments And Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

NOTE 11. COMMITMENTS AND CONTINGENCIES

Concentration of risk. We are exposed to risks associated with a client who represent a significant portion of total revenues. For the nine months ended September 30, 2018 and 2017, respectively, we had the following client revenue concentration:

	Location	2018 Revenue	2017 Revenue
Client A	North America	11.0%	13.6%

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 $6,484,265 or 47.4% of our revenue for the nine months ended September 30, 2018, as compared to $5,370,094 or 49.0% of our revenue for the nine months ended September 30, 2017. We continue to generate higher revenue from these products despite the expiration of the underlying patents and, accordingly, we do not expect the expiration of these patents to have a significant adverse impact on our future 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 an approximately 24,000 square foot space, 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 and expires on June 30, 2019. 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 Spencer Lease, the landlord agreed to finance tenant improvements of $150,000 (“TI Allowance”). 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 condensed balance sheet (Note 9).

Total rent expense was $222,296 and $217,650 for the nine months ended September 30, 2018 and 2017, respectively.

Estimated future minimum operating lease payment obligations total $179,190, which are all due within the twelve months ending September 30, 2019.  

Legal proceedings.In the ordinary course of conducting our business, we are, from time to time, involved in various legal and 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.  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 U.S. GAAP, 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 11 in Item 8. “Financial Statements and Supplementary Data” included in our 2017 10-K.

In September 2018, we were served with a complaint by TableMax Gaming, Inc. (“TMax”) regarding an Operation and License Agreement executed between TMax and us in February 2011 (the “TMAX Agreement”).  The complaint, filed in the Eighth Judicial District Court in Clark County, Nevada, alleges that we breached the TMAX Agreement, among other allegations. We filed an answer denying the allegations and counterclaimed for breach of contract, Abuse of Process and Fraud in the Inducement, among other counterclaims.  We believe the TMax complaint lacks any merit and intend to aggressively pursue dismissal of the complaint while pursuing our counterclaims.

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STOCKHOLDERS' EQUITY

9 Months Ended

Sep. 30, 2018

Equity [Abstract]

STOCKHOLDERS' EQUITY

NOTE 12. STOCKHOLDERS’ EQUITY

On March 31, 2018, we issued 13,000 restricted shares of our common stock valued at $13,520, to each of Messrs. Norm DesRosiers, Bryan Waters and William Zender, who are members of our Board of Directors (the “Board”), in consideration of their service on the Board during the three months ended March 31, 2018.  These shares vested immediately on the grant date.

On June 30, 2018, we issued 13,000 restricted shares of our common stock valued at $15,600, to each of Messrs. DesRosiers, Waters and Zender, in consideration of their service on the Board during the three months ended June 30, 2018.  These shares vested immediately on the grant date.

On September 30, 2018, we issued 13,000 restricted shares of our common stock valued at $16,770, to each of Messrs. DesRosiers, Waters and Zender, in consideration of their service on the Board during the three months ended September 30, 2018.  These shares vested immediately on the grant date.

On April 24, 2018, our Board authorized the repurchase of shares of our common stock in an amount not to exceed $1.0 million. Such repurchases may be made from time to time based on market conditions and may be completed in the open market or in privately-negotiated transactions. Repurchase transactions will be executed only when we believe that we will remain in compliance with the covenants of the NSB Credit Agreement.  Finally, execution of share repurchases may require regulatory approval in one or more jurisdictions. We have not repurchased any of our common stock as of September 30, 2018.

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INCOME TAXES

9 Months Ended

Sep. 30, 2018

Income Tax Disclosure [Abstract]

INCOME TAXES

NOTE 13. INCOME TAXES

Our forecasted annual effective tax rate at September 30, 2018 was 17.5%, as compared to 56.6% at September 30, 2017.  For the nine months ended September 30, 2018 and 2017, our effective tax rate was 17.5% and 61.4%, respectively.  The decrease in both rates was primarily due to a reduction in the federal statutory rate as a result of the Tax Cuts and Jobs Act signed in December 2017 (the “Tax Act”).  As of September 30, 2018, we had completed our preliminary assessment for the tax effects resulting from the enactment of the Tax Act and made a reasonable estimate of the effect on our annual effective tax rate and existing deferred tax balances. We will continue to make and refine our calculations as additional analysis is completed. In addition, our estimates may also be affected as we gain a more thorough understanding of the Tax Act.

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STOCK WARRANTS, OPTIONS AND GRANTS

9 Months Ended

Sep. 30, 2018

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

STOCK WARRANTS, OPTIONS AND GRANTS

NOTE 14. STOCK WARRANTS, OPTIONS AND GRANTS

On May 10, 2018, the Board ratified and confirmed the 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan is a broad-based plan under which 5,550,750 shares of our common stock are authorized for issuance for awards, including stock options, stock appreciation rights, restricted stock, and cash incentive awards to members of our Board, executive officers, employees and independent contractors. As of September 30, 2018, 689,000 shares remained available for issuance as new awards under the 2014 Plan.

Stock options. During the nine months ended September 30, 2018 and 2017, we issued 270,000 and 1,390,000 options to purchase our common stock, respectively, to members of our Board, executive officers, employees and independent contractors.  

The fair value of all stock options granted for the nine months ended September 30, 2018 and 2017 was determined to be $169,807 and $652,895, respectively, using the Black-Scholes option pricing model with the following assumptions:

	Nine Months Ended September 30, 2018		Nine Months Ended September 30, 2017
Dividend yield		0%		0%
Expected volatility	78%		80 - 87%
Risk free interest rate	2.46% - 2.73%		1.73 - 1.94%
Expected life (years)		5.00		5.00

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, 2017		2,811,250	$	0.54	$	1,849,517		3.65
Issued		270,000		0.98		—		—
Exercised		—		—		—		—
Expired		—		—		—		—
Outstanding – September 30, 2018		3,081,250	$	0.58	$	2,186,179		3.05
Exercisable – September 30, 2018		2,317,916	$	0.52	$	1,775,996		2.78

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, 2017		825,557		$	0.63	$	467,379		4.27
Granted		270,000			0.98		—		—
Vested		(332,223	)		0.64		—		—
Forfeited or expired		—			—		—		—
Unvested – September 30, 2018		763,334		$	0.75	$	410,184		3.82

As of September 30, 2018, our unrecognized stock-based compensation expense associated with the stock options issued was $299,788, which will be amortized over a weighted-average of 1.81 years.

Warrants.  On August 29, 2016, in connection with the Breakaway Term Loan Agreement, we issued the lenders the Warrants to purchase 1,965,780 shares of our common stock at an initial exercise price of $0.30 per share. On April 24, 2018, we paid $1,333,333 to redeem the Warrants in full upon extinguishment of the Breakaway Term Loan (Note 10).

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FAIR VALUE OF FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2018

Fair Value Disclosures [Abstract]

FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 15. 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.

• 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 their carrying amount 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 September 30, 2018,the interest rate swap agreement wasthe only financial instrument measured at estimated fair value on a recurring basis based on valuation reports provided by counterparties, which are classified as level 2 inputs.

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SUBSEQUENT EVENTS

9 Months Ended

Sep. 30, 2018

Subsequent Events [Abstract]

SUBSEQUENT EVENTS

NOTE 16. SUBSEQUENT EVENTS

On October 12, 2018, we granted the following stock options to purchase our restricted common stock: (i) 250,000 to Todd Cravens, our President and Chief Executive Officer; (ii) 180,000 to Harry Hagerty, our Chief Financial Officer; and (iii) 45,000 to our general counsel. The stock options were issued with a strike price of $1.187, have a contractual term of five years, contain customary change-of-control provisions, and vest in equal installments on each of the first three anniversaries from the grant date.

On November 5, 2018, we issued a press release and filed a related Form 8-K announcing that (i) Robert B. Saucier submitted his resignation as a member of our Board effective immediately and his resignation as Executive Vice President of Business Development effective on December 31, 2018; and (ii) that we have retained Macquarie Capital (USA) Inc. to assist it in evaluating strategic alternatives, including the potential sale of the shares of our common stock held by Triangulum Partners LLC, an entity controlled by Mr. Saucier.

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SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2018

Accounting Policies [Abstract]

Basis of presentation and Basis of accounting

Basis of presentation.The accompanying condensed 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.

In the opinion of management, the accompanying unaudited interim condensed 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 our 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, 2017, filed with the SEC on April 2, 2018 (the “2017 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 (such as wages, consulting expenses, legal, regulatory and professional fees and rent)are recognized when they are incurred. We do not have significant categories of cost of revenue, as most of our revenue is derived from the licensing of intellectual property.

Use of estimates and assumptions

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

Reclassifications. Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period financial statement presentations, including the addition of restricted cash to cash and cash equivalents on the consolidated statements of cash flows as a result of the adoption of ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash.  See below for further detail.

Recently adopted accounting standards

Recently adopted accounting standards

Revenue Recognition.  Effective January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), which is a comprehensive new revenue recognition standard that supersedes virtually all existing revenue guidance, including industry-specific guidance.  Under the new standard, revenue is 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 generally requires companies to use more judgment and make more estimates than under the previous 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. We adopted ASC 606 using the modified retrospective approach (reporting the cumulative effect as of the date of adoption).  See Note 3 for further detail.

Restricted Cash. Effective January 1, 2018, we adopted 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. We adopted this guidance on a retrospective basis, which resulted in the inclusion of restricted cash within cash and cash equivalents on our balance sheets and statements of cash flows. Such restricted cash represents reserves set side in a restricted bank account in accordance with the requirements of gaming regulations to be used for the purpose of funding payments to winners of jackpots at one of our client locations and was $60,996 and $95,062 at September 30, 2018 and December 31, 2017, respectively. Cash flows from operating activities for the nine months ended September 30, 2017 increased by $8,693 as a result of the adoption of this guidance.

Compensation - Stock Compensation.  Effective January 1, 2018, we adopted ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. The adoption did not have a material impact on our financial statements.

New accounting standards not yet adopted

New accounting standards not yet adopted

Leases.  In February 2016, the Financial Accounting Standards Board (“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 guidance requires lessees and lessors to recognize and 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 will adopt the new standard effective January 1, 2019 and expect to recognize a portion of our operating leases as right-of-use assets and operating lease liabilities on our balance sheets upon adoption, which will increase our total assets and liabilities.

Goodwill Impairment. In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the current two-step goodwill impairment test by eliminating Step 2 of the test. This guidance requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of adopting this guidance and will adopt this guidance for the annual test to be performed for the year ended December 31. 2018.

Fair Value Measurement.  In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 addresses the required disclosures around fair value measurement, removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The standard is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted. We do not believe the adoption of this guidance will have a material impact on our financial statements.

Internal-Use Software. In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15. This new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption (including early adoption in any interim period) permitted. We do not believe the adoption of this guidance will have a material impact on our financial statements.

Revenue Recognition

Adoption of ASC 606, Revenue from Contracts with Customers

On January 1, 2018, we adopted ASC 606 and applied it to all contracts using the modified retrospective method. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts have not and will not be adjusted and continue to be reported in accordance with our historical accounting treatment under Topic 605, Revenue Recognition.

The adoption of ASC 606 had the following impact on our balance sheet and statement of operations: (i) we reported higher product leases and royalty revenue and selling, general and administrative expense for the three and nine months ended September 30, 2018 as a result of the assessment of our distributor relationships.  We have entered into agreements with certain distributors in Europe, which sublicense our intellectual property to gaming establishments in Europe. We have historically recorded net revenues (gross revenue generated minus distributor fees paid) as product leases and royalty revenue. However, after applying principal vs. agent considerations to these distributor relationships in accordance with ASC 606, we have determined that revenues earned from gaming establishments in Europe should now be recorded as gross revenue and fees earned by such distributors should be recorded as selling, general and administrative expenses as we had control of the sub-licensed intellectual property prior to the licensing of such intellectual property to the gaming establishments; and (ii) prepayments from customers in advance of the period that the revenue is recognized were historically recorded under the caption “deferred revenue” in the accompanying balance sheet. This caption has now been renamed “revenue contract liability” in accordance with the requirements of ASC 606.

For the three months ended September 30, 2018, the adoption of ASC 606 had the following impact on our statement of operations:

	Three Months Ended September 30, 2018
	As reported		Balance without the adoption of ASC 606		Impact of the adoption
Product leases and royalties	$	4,775,754	$	4,544,912	$	230,842
Selling, general and administrative expense	$	2,559,056	$	2,328,214	$	230,842

For the six months ended September 30, 2018, the adoption of ASC 606 had the following impact on our statement of operations:

	Nine Months Ended September 30, 2018
	As reported		Balance without the adoption of ASC 606		Impact of the adoption
Product leases and royalties	$	13,672,459	$	12,968,848	$	703,611
Selling, general and administrative expense	$	7,741,213	$	7,037,602	$	703,611

Revenue Recognition

We generate revenue primarily from the licensing of our intellectual property. We also, occasionally, receive a one-time sale of certain products and/or reimbursement of our manufactured equipment.

License Fees. We derive product lease and royalty revenue from negotiated recurring fee license agreements and the performance of our products. We account for these agreements as month-to-month contracts for the purposes of ASC 606 and recognize revenue each month as we satisfy our performance obligations by granting access to intellectual property to our clients. In addition, revenue associated with performance-based agreements is recognized during the month that the usage of the product or intellectual property occurs.  We believe it is inappropriate to use the input method as the inputs do not correlate to the satisfaction of our performance obligations. Intellectual property requires significant upfront investment in the form of human resources required for their development and/or capital resources for acquisition from third parties. However, limited maintenance is required once the games have been placed on casino floors. The output method, on the other hand, recognizes revenue based on direct measurements of the value to our customers of the licensed intellectual property, which we believe is more appropriate. We have further applied the “as invoiced” practical expedient under the output method by recognizing product lease and royalty revenue in proportion to the amount for which we have the right to invoice.

Some of our intellectual property requires the installation of certain equipment and both the intellectual property and the related equipment are licensed in one bundled package. We have determined that the equipment is not distinct from the intellectual property and, therefore, we have only one performance obligation and, as a result, the allocation of the transaction price to different performance obligations is not necessary.

Product Sales.  Occasionally, we sell certain incidental products or receive reimbursement of our manufactured equipment after the commencement of the new license agreement. Revenue from such sales is recognized as a separate performance obligation when we ship the items.  

Disaggregation of Revenue.  The following table disaggregates our revenue by major source for the three and six months ended September 30, 2018 and 2017:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Table games	$	4,666,150	$	3,720,987	$	13,273,184	$	10,596,140
Other		109,634		109,433		399,466		368,384
Total revenue	$	4,775,784	$	3,830,420	$	13,672,650	$	10,964,524

The following table disaggregates our revenue by geographic location for the three and six months ended September 30, 2018 and 2017:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
North America and Caribbean	$	3,622,729	$	3,177,942	$	10,568,129	$	9,049,494
Europe		1,153,055		652,478		3,104,521		1,915,030
Total revenue	$	4,775,784	$	3,830,420	$	13,672,650	$	10,964,524

Revenue Contract Asset and Liability.  Upon the adoption of ASC 606, we have applied the practical expedient of expensing incremental commissions paid to sales representatives directly related to the acquisition and fulfilment of new contracts, when the amortization period of the contract asset that we otherwise would have recognized is one year or less.

We invoice our clients monthly in advance for unlimited use of our intellectual property licenses. Upon the adoption of ASC 606, we recognized a revenue contract liability that represents such advanced billing to our clients for unsatisfied performance.  We reduce the revenue contract liability and recognize revenue when we transfer those goods or services and, therefore, satisfy our performance obligation.

The table below summarizes changes in the revenue contract liability during the nine months ended September 30, 2018:

	Revenue Contract liability
Beginning balance – January 1, 2018	$	1,083,639
Increase (advanced billings)		10,234,834
Decrease (revenue recognition)		(10,097,215	)
Ending balance – September 30, 2018	$	1,221,258

Revenue recognized during the nine months ended September 30, 2018 that was included in the beginning balance of revenue contract liability above was $1,083,639.

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.

• 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 their carrying amount 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 September 30, 2018,the interest rate swap agreement wasthe only financial instrument measured at estimated fair value on a recurring basis based on valuation reports provided by counterparties, which are classified as level 2 inputs.

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REVENUE RECOGNITION (Tables)

9 Months Ended

Sep. 30, 2018

Revenue Recognition [Line Items]

Summary of Disaggregation of Revenue by Major Source and Geographic Location

The following table disaggregates our revenue by major source for the three and six months ended September 30, 2018 and 2017:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Table games	$	4,666,150	$	3,720,987	$	13,273,184	$	10,596,140
Other		109,634		109,433		399,466		368,384
Total revenue	$	4,775,784	$	3,830,420	$	13,672,650	$	10,964,524

The following table disaggregates our revenue by geographic location for the three and six months ended September 30, 2018 and 2017:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
North America and Caribbean	$	3,622,729	$	3,177,942	$	10,568,129	$	9,049,494
Europe		1,153,055		652,478		3,104,521		1,915,030
Total revenue	$	4,775,784	$	3,830,420	$	13,672,650	$	10,964,524

Summary of Changes in Revenue Contract Liability

The table below summarizes changes in the revenue contract liability during the nine months ended September 30, 2018:

	Revenue Contract liability
Beginning balance – January 1, 2018	$	1,083,639
Increase (advanced billings)		10,234,834
Decrease (revenue recognition)		(10,097,215	)
Ending balance – September 30, 2018	$	1,221,258

ASC 606

Revenue Recognition [Line Items]

Summary of Adoption of ASC 606 had Impact on Statement of Operations

For the three months ended September 30, 2018, the adoption of ASC 606 had the following impact on our statement of operations:

	Three Months Ended September 30, 2018
	As reported		Balance without the adoption of ASC 606		Impact of the adoption
Product leases and royalties	$	4,775,754	$	4,544,912	$	230,842
Selling, general and administrative expense	$	2,559,056	$	2,328,214	$	230,842

For the six months ended September 30, 2018, the adoption of ASC 606 had the following impact on our statement of operations:

	Nine Months Ended September 30, 2018
	As reported		Balance without the adoption of ASC 606		Impact of the adoption
Product leases and royalties	$	13,672,459	$	12,968,848	$	703,611
Selling, general and administrative expense	$	7,741,213	$	7,037,602	$	703,611

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INVENTORY (Tables)

9 Months Ended

Sep. 30, 2018

Inventory Disclosure [Abstract]

Schedule of Inventory, Net

Inventory, net consisted of the following at September 30, 2018 and December 31, 2017: 

	2018			2017
Raw materials and component parts	$	333,068		$	235,673
Finished goods		391,602			318,453
Inventory, gross		724,670			554,126
Less: inventory reserve		(30,000	)		(30,000	)
Inventory, net	$	694,670		$	524,126

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PROPERTY AND EQUIPMENT (Tables)

9 Months Ended

Sep. 30, 2018

Property Plant And Equipment [Abstract]

Schedule of Property and Plant Equipment, Net

Property and equipment, net consisted of the following at September 30, 2018 and December 31, 2017: 

	2018			2017
Furniture and fixtures	$	312,639		$	280,694
Automotive vehicles		215,127			215,127
Leasehold improvements		156,843			156,843
Computer equipment		157,096			121,992
Office equipment		53,485			53,483
Property and equipment, gross		895,190			828,139
Less: accumulated depreciation		(664,217	)		(564,272	)
Property and equipment, net	$	230,973		$	263,867

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ASSETS DEPLOYED AT CLIENT LOCATIONS (Tables)

9 Months Ended

Sep. 30, 2018

Leases Operating [Abstract]

Schedule of Assets Deployed at Client Locations, Net

Assets deployed at client locations, net consisted of the following at September 30, 2018 and December 31, 2017:

	2018			2017
Enhanced table systems	$	806,955		$	638,981
Less: accumulated depreciation		(431,290	)		(265,331	)
Assets deployed at client locations, net	$	375,665		$	373,650

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GOODWILL AND OTHER INTANGIBLE ASSETS (Tables)

9 Months Ended

Sep. 30, 2018

Goodwill And Intangible Assets Disclosure [Abstract]

Schedule of Goodwill and Finite-lived Intangible Assets, Net

Goodwill and finite-lived intangible assets, net consisted of the following at September 30, 2018 and December 31, 2017:

	2018			2017
Goodwill	$	1,091,000		$	1,091,000
Finite-lived intangible assets:
Patents		13,475,000			13,475,000
Customer relationships		3,400,000			3,400,000
Trademarks		2,880,967			2,880,967
Non-compete agreements		660,000			660,000
Internally-developed software		136,015			102,968
Other intangible assets, gross		20,551,982			20,518,935
Less: accumulated amortization		(11,284,514	)		(10,157,126	)
Other intangible assets, net		9,267,468			10,361,809
Goodwill and other intangible assets, net	$	10,358,468		$	11,452,809

Schedule of Estimated Future Amortization Expense

Estimated future amortization expense is as follows:

Twelve months Ending September 30,	Total
2019	$	1,508,864
2020		1,491,702
2021		1,401,025
2022		1,392,984
2023		253,507
Thereafter		3,219,386
Total amortization	$	9,267,468

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ACCRUED EXPENSES (Tables)

9 Months Ended

Sep. 30, 2018

Payables And Accruals [Abstract]

Schedule of Accrued Expenses

Accrued expenses consisted of the following at September 30, 2018 and December 31, 2017:

	2018		2017
Payroll and related	$	1,077,907	$	712,584
Commissions and royalties		77,768		65,380
Professional fees		19,426		63,488
Other		48,533		46,344
Total accrued expenses	$	1,223,634	$	887,796

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CAPITAL LEASE OBLIGATIONS (Tables)

9 Months Ended

Sep. 30, 2018

Leases [Abstract]

Schedule of Capital Lease Obligations

Capital lease obligations consisted of the following at September 30, 2018 and December 31, 2017:

	2018			2017
Capital lease obligation	$	22,563		$	47,002
Less: Current portion		(22,563	)		(32,785	)
Total capital lease obligations – long-term	$	—		$	14,217

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LONG-TERM DEBT (Tables)

9 Months Ended

Sep. 30, 2018

Debt Disclosure [Abstract]

Schedule of Long-term Debt

Long-term debt consisted of the following at September 30, 2018 and December 31, 2017:

	2018			2017
Nevada State Bank Term Loan and Revolver	$	10,361,600		$	—
Breakaway Term Loan		—			9,450,000
Equipment notes payable		94,977			124,311
Insurance notes payable		—			73,734
Notes payable, gross		10,456,577			9,648,045
Less:
Unamortized debt issuance costs		(101,983	)		(480,397	)
Warrants issued		—			(584,261	)
Notes payable, net		10,354,594			8,583,387
Less: Current portion		(1,360,823	)		(1,163,002	)
Long-term debt, net	$	8,993,771		$	7,420,385

Schedule of Future Maturities

As of September 30, 2018, future maturities of our long-term debt obligations are as follows:    

Twelve months Ending September	Total
2019	$	1,360,823
2020		1,437,950
2021		1,530,149
2022		1,616,655
Thereafter		4,511,000
Total notes payable		10,456,577
Less:
Unamortized debt issuance costs		(101,983	)
Notes payable, net	$	10,354,594

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COMMITMENTS AND CONTINGENCIES (Tables)

9 Months Ended

Sep. 30, 2018

Commitments And Contingencies Disclosure [Abstract]

Schedule of Client Revenue Concentration

For the nine months ended September 30, 2018 and 2017, respectively, we had the following client revenue concentration:

	Location	2018 Revenue	2017 Revenue
Client A	North America	11.0%	13.6%

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STOCK WARRANTS, OPTIONS AND GRANTS (Tables)

9 Months Ended

Sep. 30, 2018

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Summary of Stock Options Pricing

	Nine Months Ended September 30, 2018		Nine Months Ended September 30, 2017
Dividend yield		0%		0%
Expected volatility	78%		80 - 87%
Risk free interest rate	2.46% - 2.73%		1.73 - 1.94%
Expected life (years)		5.00		5.00

Summary of Stock Option Activity

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, 2017		2,811,250	$	0.54	$	1,849,517		3.65
Issued		270,000		0.98		—		—
Exercised		—		—		—		—
Expired		—		—		—		—
Outstanding – September 30, 2018		3,081,250	$	0.58	$	2,186,179		3.05
Exercisable – September 30, 2018		2,317,916	$	0.52	$	1,775,996		2.78

Summary of Unvested Stock Option Activity

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, 2017		825,557		$	0.63	$	467,379		4.27
Granted		270,000			0.98		—		—
Vested		(332,223	)		0.64		—		—
Forfeited or expired		—			—		—		—
Unvested – September 30, 2018		763,334		$	0.75	$	410,184		3.82

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SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($)	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Significant Accounting Policies [Line Items]
Cash flows from operating activities	$ 2,806,957	$ 2,235,840
ASU No. 2016-18
Significant Accounting Policies [Line Items]
Restricted cash	$ 60,996		$ 95,062
ASU No. 2016-18 | Restatement Adjustment
Significant Accounting Policies [Line Items]
Cash flows from operating activities		$ 8,693

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REVENUE RECOGNITION - Summary of Adoption of ASC 606 had Impact on Statement of Operations (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Revenue Initial Application Period Cumulative Effect Transition [Line Items]
Product leases and royalties	$ 4,775,784	$ 3,830,420	$ 13,672,650	$ 10,964,524
Selling, general and administrative	2,559,056	2,362,601	7,741,213	6,808,659
Product leases and royalties
Revenue Initial Application Period Cumulative Effect Transition [Line Items]
Product leases and royalties	4,775,754	$ 3,830,351	13,672,459	$ 10,955,055
ASC 606 | Balance Without the Adoption of ASC 606
Revenue Initial Application Period Cumulative Effect Transition [Line Items]
Selling, general and administrative	2,328,214		7,037,602
ASC 606 | Impact of the Adoption
Revenue Initial Application Period Cumulative Effect Transition [Line Items]
Selling, general and administrative	230,842		703,611
ASC 606 | Product leases and royalties | Balance Without the Adoption of ASC 606
Revenue Initial Application Period Cumulative Effect Transition [Line Items]
Product leases and royalties	4,544,912		12,968,848
ASC 606 | Product leases and royalties | Impact of the Adoption
Revenue Initial Application Period Cumulative Effect Transition [Line Items]
Product leases and royalties	$ 230,842		$ 703,611

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REVENUE RECOGNITION - Summary of Disaggregation of Revenue by Major Source (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Disaggregation Of Revenue [Line Items]
Total revenue	$ 4,775,784	$ 3,830,420	$ 13,672,650	$ 10,964,524
Table Games
Disaggregation Of Revenue [Line Items]
Total revenue	4,666,150	3,720,987	13,273,184	10,596,140
Other
Disaggregation Of Revenue [Line Items]
Total revenue	$ 109,634	$ 109,433	$ 399,466	$ 368,384

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REVENUE RECOGNITION - Summary of Disaggregation of Revenue by Geographic Location (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Disaggregation Of Revenue [Line Items]
Total revenue	$ 4,775,784	$ 3,830,420	$ 13,672,650	$ 10,964,524
North America and Caribbean
Disaggregation Of Revenue [Line Items]
Total revenue	3,622,729	3,177,942	10,568,129	9,049,494
Europe
Disaggregation Of Revenue [Line Items]
Total revenue	$ 1,153,055	$ 652,478	$ 3,104,521	$ 1,915,030

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REVENUE RECOGNITION (Details Narrative)	9 Months Ended
	Sep. 30, 2018 USD ($)
Disaggregation Of Revenue [Line Items]
Revenue recognized included in revenue contract liability	$ 1,083,639
ASC 606 | Maximum
Disaggregation Of Revenue [Line Items]
Contract asset amortization period	1 year

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REVENUE RECOGNITION - Summary of Changes in Revenue Contract Liability (Details)	9 Months Ended
	Sep. 30, 2018 USD ($)
Revenue From Contract With Customer [Abstract]
Beginning balance – January 1, 2018	$ 1,083,639
Increase (advanced billings)	10,234,834
Decrease (revenue recognition)	(10,097,215)
Ending balance – September 30, 2018	$ 1,221,258

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INVENTORY - Schedule of Inventory, Net (Details) - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Inventory Disclosure [Abstract]
Raw materials and component parts	$ 333,068	$ 235,673
Finished goods	391,602	318,453
Inventory, gross	724,670	554,126
Less: inventory reserve	(30,000)	(30,000)
Inventory, net	$ 694,670	$ 524,126

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PROPERTY AND EQUIPMENT - Schedule of Property and Plant Equipment, Net (Details) - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Property Plant And Equipment [Line Items]
Property and equipment, net	$ 230,973	$ 263,867
Furniture and Fixtures
Property Plant And Equipment [Line Items]
Property and equipment, gross	312,639	280,694
Automotive Vehicles
Property Plant And Equipment [Line Items]
Property and equipment, gross	215,127	215,127
Leasehold Improvements
Property Plant And Equipment [Line Items]
Property and equipment, gross	156,843	156,843
Computer Equipment
Property Plant And Equipment [Line Items]
Property and equipment, gross	157,096	121,992
Office Equipment
Property Plant And Equipment [Line Items]
Property and equipment, gross	53,485	53,483
Property Plant and Equipment Excluding Assets Leased to Others
Property Plant And Equipment [Line Items]
Property and equipment, gross	895,190	828,139
Less: accumulated depreciation	(664,217)	(564,272)
Property and equipment, net	$ 230,973	$ 263,867

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PROPERTY AND EQUIPMENT (Details Narrative) - USD ($)	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Property Plant And Equipment [Line Items]
Capital Lease Assets	$ 156,843		$ 156,843
Capital Lease Assets, Accumulated depreciation	135,414		$ 113,035
Property Plant and Equipment Excluding Assets Leased to Others
Property Plant And Equipment [Line Items]
Depreciation expense	$ 99,944	$ 115,117

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ASSETS DEPLOYED AT CLIENT LOCATIONS - Schedule of Assets Deployed at Client Locations, Net (Details) - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Leases Operating [Abstract]
Enhanced table systems	$ 806,955	$ 638,981
Less: accumulated depreciation	(431,290)	(265,331)
Assets deployed at client locations, net	$ 375,665	$ 373,650

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ASSETS DEPLOYED AT CLIENT LOCATIONS (Details Narrative) - USD ($)	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Leases Operating [Abstract]
Depreciation expense related to assets deployed at client locations	$ 145,419	$ 84,674

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GOODWILL AND OTHER INTANGIBLE ASSETS - Schedule of Goodwill and Finite-lived Intangible Assets, Net (Details) - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Finite Lived Intangible Assets [Line Items]
Goodwill	$ 1,091,000	$ 1,091,000
Finite-lived intangible assets:
Other intangible assets, gross	20,551,982	20,518,935
Less: accumulated amortization	(11,284,514)	(10,157,126)
Other intangible assets, net	9,267,468	10,361,809
Goodwill and other intangible assets, net	10,358,468	11,452,809
Patents
Finite-lived intangible assets:
Other intangible assets, gross	13,475,000	13,475,000
Customer Relationships
Finite-lived intangible assets:
Other intangible assets, gross	3,400,000	3,400,000
Trademarks
Finite-lived intangible assets:
Other intangible assets, gross	2,880,967	2,880,967
Non-compete Agreements
Finite-lived intangible assets:
Other intangible assets, gross	660,000	660,000
Internally-developed Software
Finite-lived intangible assets:
Other intangible assets, gross	$ 136,015	$ 102,968

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GOODWILL AND OTHER INTANGIBLE ASSETS (Details Narrative) - USD ($)	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Goodwill And Intangible Assets Disclosure [Abstract]
Amortization expense	$ 1,127,389	$ 1,123,980

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GOODWILL AND OTHER INTANGIBLE ASSETS - Schedule of Estimated Future Amortization Expense (Details)	Sep. 30, 2018 USD ($)
Goodwill And Intangible Assets Disclosure [Abstract]
2019	$ 1,508,864
2020	1,491,702
2021	1,401,025
2022	1,392,984
2023	253,507
Thereafter	3,219,386
Total amortization	$ 9,267,468

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ACCRUED EXPENSES - Schedule of Accrued Expenses (Details) - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Payables And Accruals [Abstract]
Payroll and related	$ 1,077,907	$ 712,584
Commissions and royalties	77,768	65,380
Professional fees	19,426	63,488
Other	48,533	46,344
Total accrued expenses	$ 1,223,634	$ 887,796

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CAPITAL LEASE OBLIGATIONS - Schedule of Capital Lease Obligations (Details) - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Leases [Abstract]
Capital lease obligation	$ 22,563	$ 47,002
Less: Current portion	$ (22,563)	(32,785)
Total capital lease obligations – long-term		$ 14,217

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LONG-TERM DEBT - Schedule of Long-term Debt (Details) - USD ($)	Sep. 30, 2018	Dec. 31, 2017	Aug. 31, 2016
Debt Instrument [Line Items]
Notes payable, gross	$ 10,456,577	$ 9,648,045
Unamortized debt issuance costs	(101,983)	(480,397)
Warrants issued		(584,261)
Notes payable, net	10,354,594	8,583,387
Less: Current portion	(1,360,823)	(1,163,002)
Long-term debt, net	8,993,771	7,420,385
Breakaway Term Loan
Debt Instrument [Line Items]
Notes payable, gross		9,450,000	$ 10,500,000
Nevada State Bank | Term Loan | Revolver
Debt Instrument [Line Items]
Notes payable, gross	10,361,600
Equipment Notes Payable
Debt Instrument [Line Items]
Notes payable, gross	$ 94,977	124,311
Insurance Notes Payable
Debt Instrument [Line Items]
Notes payable, gross		$ 73,734

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LONG-TERM DEBT (Details Narrative) - USD ($)			1 Months Ended	3 Months Ended	9 Months Ended
	May 01, 2018	Apr. 24, 2018	Aug. 31, 2016	Sep. 30, 2018	Sep. 30, 2018	Dec. 31, 2017	Aug. 29, 2016
Debt Instrument [Line Items]
Aggregate principal amount				$ 10,456,577	$ 10,456,577	$ 9,648,045
Warrants redemption value					1,333,333
Loss on extinguishment of debt				1,765	$ 1,349,271
Warrant Agreement
Debt Instrument [Line Items]
Warrants issued, number of shares of common stock							1,965,780
Term Loan
Debt Instrument [Line Items]
Warrants redemption value		$ 1,333,333
Breakaway Term Loan
Debt Instrument [Line Items]
Debt instrument, interest rate during period					14.00%
Aggregate principal amount			$ 10,500,000			$ 9,450,000
Debt instrument, interest rate for quarterly period					12.50%
Breakaway Term Loan | Warrant Agreement
Debt Instrument [Line Items]
Warrants purchase period			6 years
Warrants issued, number of shares of common stock			1,965,780
NSB and NSB Credit Agreement | Term Loan
Debt Instrument [Line Items]
Borrowing capacity		$ 11,000,000
Debt instrument term		5 years
Proceeds to pay outstanding balance amount		$ 11,000,000
Available amount under borrowings				1,000,000	$ 1,000,000
NSB and NSB Credit Agreement | Revolving Credit Facility
Debt Instrument [Line Items]
Borrowing capacity		$ 1,000,000
Debt instrument term		1 year
NSB and NSB Credit Agreement | Revolving Credit Facility | Breakaway Term Loan
Debt Instrument [Line Items]
Proceeds to pay outstanding balance amount		$ 100,000
NSB
Debt Instrument [Line Items]
Debt instrument, interest rate terms					Outstanding balances under the NSB Term Loan and the NSB Revolver accrue interest based on one-month US dollar London interbank offered rate (“LIBOR”) plus an Applicable Margin of 3.50%, or 4.00%, depending on our Leverage Ratio (as defined in the NSB Credit Agreement).
Debt instrument, frequency of periodic payment		monthly
Debt instrument principal and interest term		7 years
Maturity date		Apr. 24, 2023
Notional amount	$ 10,900,000
Debt instrument, covenant, description		we are required to maintain a minimum trailing-four-quarters Fixed Charge Coverage Ratio (as defined in the NSB Credit Agreement) of 1.25 and a maximum Leverage Ratio of 3.00.
Fixed charge coverage ratio		125.00%
Additional amount of unsecured indebtedness		$ 1,000,000
Maximum leverage ratio		300.00%
Warrants redemption value		$ 1,333,333
NSB | Term Loan
Debt Instrument [Line Items]
Debt instrument interest rate payable term	3 years
NSB | Leverage Ratio Less Than 2.0
Debt Instrument [Line Items]
Debt instrument, interest rate during period	6.43%
NSB | Leverage Ratio Less Than 2.0 | LIBOR
Debt Instrument [Line Items]
Debt insturment, applicable margin rate		3.50%
NSB | Leverage Ratio 2.0 or Greater | LIBOR
Debt Instrument [Line Items]
Debt insturment, applicable margin rate		4.00%
NSB | Breakaway Term Loan
Debt Instrument [Line Items]
Loss on extinguishment of debt		$ 1,300,000
NSB | Revolving Credit Facility | Term Loan
Debt Instrument [Line Items]
Aggregate principal amount				$ 10,361,600	$ 10,361,600

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LONG-TERM DEBT - Schedule of Future Maturities (Details) - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Debt Instrument [Line Items]
Total notes payable	$ 10,456,577	$ 9,648,045
Unamortized debt issuance costs	(101,983)	(480,397)
Notes payable, net	10,354,594	$ 8,583,387
Promissory Note
Debt Instrument [Line Items]
2019	1,360,823
2020	1,437,950
2021	1,530,149
2022	1,616,655
Thereafter	4,511,000
Total notes payable	10,456,577
Unamortized debt issuance costs	(101,983)
Notes payable, net	$ 10,354,594

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COMMITMENTS AND CONTINGENCIES - Schedule of Client Revenue Concentration (Details)	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Customer Concentration Risk | Revenue | North America | Client A
Product Information [Line Items]
Concentration Risk	11.00%	13.60%

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COMMITMENTS AND CONTINGENCIES (Details Narrative)	9 Months Ended
	Sep. 30, 2018 USD ($)	Sep. 30, 2017 USD ($)	Feb. 28, 2014 ft²
Commitments And Contingencies [Line Items]
Rent expense	$ 222,296	$ 217,650
Estimated future minimum operating lease payment obligations due within twelve months	179,190
Spencer Lease
Commitments And Contingencies [Line Items]
Rental term			5 years
Area of building | ft²			24,000
Rent expense	$ 153,000
Annual rental increase	4.00%
Lease expiration date	Jun. 30, 2019
Tenant Improvement Allowance Option	$ 150,000
Interest rate	5.50%
Spencer Lease | Office
Commitments And Contingencies [Line Items]
Area of building | ft²			16,000
Spencer Lease | Warehouse
Commitments And Contingencies [Line Items]
Area of building | ft²			8,000
Credit Concentration Risk | Patents
Commitments And Contingencies [Line Items]
Accounts receivable from client account	$ 6,484,265	$ 5,370,094
Credit Concentration Risk | Revenue | Patents
Commitments And Contingencies [Line Items]
Concentration risk percentage	47.40%	49.00%

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STOCKHOLDERS' EQUITY (Details Narrative)					3 Months Ended			9 Months Ended
	Sep. 30, 2018 USD ($) shares	Jun. 30, 2018 USD ($) shares	Apr. 24, 2018 USD ($) Jurisdiction	Mar. 31, 2018 USD ($) shares	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2018 shares
NSB
Temporary Equity [Line Items]
Repurchase of shares of common stock | $			$ 1,000,000
Minimum required number of jurisdiction approval for execution of share repurchase | Jurisdiction			1
Repurchase of common stock | shares								0
Restricted Stock
Temporary Equity [Line Items]
Award vesting date					Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018
Restricted Stock | Norm DesRosiers
Temporary Equity [Line Items]
Restricted common stock, granted | shares	13,000	13,000		13,000
Restricted common stock granted, value | $	$ 16,770	$ 15,600		$ 13,520
Restricted Stock | Bryan Waters
Temporary Equity [Line Items]
Restricted common stock, granted | shares	13,000	13,000		13,000
Restricted common stock granted, value | $	$ 16,770	$ 15,600		$ 13,520
Restricted Stock | William Zender
Temporary Equity [Line Items]
Restricted common stock, granted | shares	13,000	13,000		13,000
Restricted common stock granted, value | $	$ 16,770	$ 15,600		$ 13,520

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INCOME TAXES (Details Narrative)	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Income Tax Contingency [Line Items]
Effective tax rate	17.50%	61.40%
Plan
Income Tax Contingency [Line Items]
Effective tax rate	17.50%	56.60%

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STOCK WARRANTS, OPTIONS AND GRANTS (Details Narrative) - USD ($)		9 Months Ended
	Apr. 24, 2018	Sep. 30, 2018	Sep. 30, 2017	May 10, 2018	Aug. 29, 2016
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Fair market value of shares granted		$ 169,807	$ 652,895
Unrecognized stock-based compensation expense		$ 299,788
Unrecognized stock-based compensation expense, weighted-average period of amortization		1 year 9 months 21 days
Amount paid to redeem warrants		$ 1,333,333
Term Loan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Amount paid to redeem warrants	$ 1,333,333
Common Stock
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock Options Issued		270,000	1,390,000
Common Stock | 2014 Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Shares authorized for issuance of awards				5,550,750
Shares available for issuance as new awards		689,000
Warrant Agreement
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Warrants issued, number of shares of common stock					1,965,780
Warrants to purchase common stock, exercise price per share					$ 0.30

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STOCK WARRANTS, OPTIONS AND GRANTS - Summary of Stock Options Pricing (Details) - Stock Option	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Dividend yield	0.00%	0.00%
Expected volatility	78.00%
Expected volatility, minimum		80.00%
Expected volatility, maximum		87.00%
Risk free interest rate, minimum	2.46%	1.73%
Risk free interest rate, maximum	2.73%	1.94%
Expected life (years)	5 years	5 years

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STOCK WARRANTS, OPTIONS AND GRANTS - Summary of Stock Option Activity (Details) - Common Stock - USD ($)	9 Months Ended	12 Months Ended
	Sep. 30, 2018	Dec. 31, 2017
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Beginning Balance, number of shares	2,811,250
Options Issued, number of shares	270,000
Ending Balance, number of shares	3,081,250	2,811,250
Ending Balance, Options Exercisable	2,317,916
Beginning Balance, Weighted-average exercise price	$ 0.54
Options Issued, Weighted-average exercise price	0.98
Ending Balance, Weighted-average exercise price	0.58	$ 0.54
Ending Balance, Options Exercisable, Weighted-average exercise price	$ 0.52
Options Outstanding, Aggregate intrinsic value	$ 2,186,179	$ 1,849,517
Options Exercisable, Aggregate intrinsic value	$ 1,775,996
Weighted-average remaining contractual term (years)	3 years 18 days	3 years 7 months 24 days
Weighted-average remaining contractual term (years), Exercisable	2 years 9 months 10 days

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STOCK WARRANTS, OPTIONS AND GRANTS - Summary of Unvested Stock Option Activity (Details) - Common Stock - USD ($)	9 Months Ended	12 Months Ended
	Sep. 30, 2018	Dec. 31, 2017
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Beginning Balance, number of shares	825,557
Options Granted, number of shares	270,000
Options Vested, number of shares	(332,223)
Ending Balance, number of shares	763,334	825,557
Beginning Balance, Weighted-average exercise price	$ 0.63
Granted, Weighted-average exercise price	0.98
Vested, Weighted-average exercise price	0.64
Ending Balance, Weighted-average exercise price	$ 0.75	$ 0.63
Aggregate intrinsic value	$ 410,184	$ 467,379
Weighted-average remaining contractual term (years)	3 years 9 months 25 days	4 years 3 months 7 days

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SUBSEQUENT EVENTS (Details Narrative) - Common Stock - $ / shares		9 Months Ended
	Oct. 12, 2018	Sep. 30, 2018	Sep. 30, 2017
Debt Instrument [Line Items]
Stock Options Issued		270,000	1,390,000
Subsequent Event
Debt Instrument [Line Items]
Stock option strike price	$ 1.187
Weighted-average remaining contractual term (years)	5 years
Stock options vesting description	vest in equal installments on each of the first three anniversaries from the grant date
Todd Cravens | Subsequent Event
Debt Instrument [Line Items]
Stock Options Issued	250,000
Harry Hagerty | Subsequent Event
Debt Instrument [Line Items]
Stock Options Issued	180,000
General Counsel | Subsequent Event
Debt Instrument [Line Items]
Stock Options Issued	45,000