UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X]
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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| For the fiscal year ended December 31, 2009 | ||
| [ ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT | |
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For the transition period from _________ to ________
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| Commission file number: 000-30653 |
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Galaxy Gaming Inc.
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(Exact name of registrant as specified in its charter)
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Nevada
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20-8143439
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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6980 O’Bannon Drive,
Las Vegas, Nevada
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89117
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number: 702-939-3254
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Securities registered under Section 12(b) of the Exchange Act:
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Title of each class
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none
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Securities registered under Section 12(g) of the Exchange Act:
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Title of each class
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Common Stock, par value $0.001
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 232.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [ ] No [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. [ ]
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed fiscal quarter. N/A
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 34,524,758 as of April 9, 2010.
TABLE OF CONTENTS
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Page
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PART I
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PART II
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PART III
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PART IV
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| Item 15. | Exhibits, Financial Statement Schedules | 31 |
2
PART I
Item 1. Description of Business
Introduction
We are engaged in the business of developing proprietary casino table games and electronically enhanced table game products. We license and/or lease our products to land-based and cruise ship casinos in the United States and internationally. Currently, we have an installed base of our products on over 1,700 gaming tables. Casinos use our products and services to enhance their gaming floor operations and improve their profitability, productivity and security, as well as offer popular cutting-edge gaming entertainment content and technology to their players. We group our products into two business segments we call “Proprietary Table Games” and advanced table game platforms known as the “Bonus Jackpot System.” These two business segments are summarized as follows:
Products
Proprietary Table Games.
We develop and deliver proprietary titles that enhance our casino clients’ table game operations. Products in this segment are grouped into two categories which include ”Premium Games” as well as proprietary features added to public domain games such as poker, baccarat, pai gow poker and blackjack table games, also known as “Side Bets”. Casinos use our proprietary table games in lieu of those games in the public domain (e.g. Blackjack, Craps, Roulette, etc.) because of their popularity with players and the increased profitability for casinos.
We are continuously developing new table games to complement our existing offerings and to extend our penetration of proprietary table games on the casino floor. By developing and offering additional game titles, we hope to increase our domestic and international market penetration.
Our Proprietary Table Games are listed below. Additional information regarding our games may be found on our web site, www.galaxygaming.com. Information found on the web site should not be considered part of this report.
Premium Games. We currently offer several stand-alone premium Proprietary Table Games. Typically these premium games generate more revenue per unit than the Side Bet games. Our Premium Games include:
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Texas Shootout
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Emperor’s Challenge
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Three Card Split
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Triple Attack Blackjack.
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Side Bets. We currently offer several Side Bet games. Typically these are used to enhance public domain games. Our Side Bets include:
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Lucky Ladies
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Bonus Blackjack
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Suited Royals
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Super Pairs
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Lucky 8 Baccarat
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Bonus Jackpot System
In 2008 we began deployment of a research and development project to create an electronically enhanced table game platform known as the “Bonus Jackpot System.” We developed our Bonus Jackpot System to compete with our competitors’ progressive jackpot systems. Early in the its design, we decided to not simply emulate the standard progressive jackpot system, but instead we decided to design, engineer and manufacture a system to further enhance the table game player’s experience beyond their current experiences and likewise further improve the casino’s profit from table games. We have committed a significant portion of our revenues to the research and development of this system. We have planned the development of our Bonus Jackpot System for at least the next several years and have labeled each major release after the name of a known galaxy.
In early 2009, we completed development and manufacturing of the initial version of the Bonus Jackpot System, labeled the “Milky Way Series.” We installed our first Bonus Jackpot System – Milky Way into a casino in March 2009. Since its release, we continued further development of enhancements and improvements to the Milky Way Series. Simultaneously, we began development of our next major version of the Bonus Jackpot System which we have labeled the “Andromeda Series.”
As of this report, internal testing of the Andromeda Series is complete and we anticipate we will be installing this new version into a casino soon. Whereas the Milky Way Series of the Bonus Jackpot System collects and displays information within the confines of the casino, the Andromeda Series was designed to transmit data to and from any table, in any casino, anywhere in the world to one or more data processing centers. The availability of the data processing centers is the result of an agreement we entered into with Amazon Web Services, a unit of Amazon.com. We continue to develop enhancements and improvements to our Andromeda Series and concurrently, we have begun development of our next major version which we have code-named the “Triangulum Series.” Triangulum is scheduled for release in 2011.
Besides the data center(s), the Bonus Jackpot System basically consists of two independent sub-systems known as the Bet Tabulator System and TableVision. The Bet Tabulator System is an advanced system installed on gaming tables used to detect players’ wagers. Casinos use this system to evaluate game play, determine dealer efficiency and to assist in calculating jackpots and bonusing offerings. TableVision is an electronic display system used on gaming tables to display game information to the players in lieu of traditional static paper or plastic displays. Casinos use TableVision as an enhanced display to generate additional player interest and to promote various aspects of the game offered such as jackpots and bonusing programs. When the Bet Tabulator System and TableVision are used together, the Bonus Jackpot System allows the casino to seamlessly collect and process data and in turn, offer jackpots and other bonusing schemes to their players as determined by them using the data collected and processed.
History and Development of the Proprietary Table Game Industry
Up until approximately twenty years ago, casino-operated table games consisted mainly of public domain games such as Blackjack, Craps, and Roulette. That began to change, however, in 1988 when a game called Caribbean Stud was invented and first played in an Aruban casino. Caribbean Stud is a variation of stud poker, designed to be house-banked in a casino and played directly against a dealer, rather than between players as is the traditional style in poker games. Not only was the game of Caribbean Stud new, but its launch also introduced to casino table games a new concept - the progressive jackpot platform. This platform would facilitate casinos to offer progressively growing jackpots which could reach several hundred thousands of dollars.
The inventors applied for and obtained various U.S and international patents. They then leased their game, the progressive jackpot platform and the associated intellectual property to other casinos. The game quickly proved its popularity in U.S. and foreign markets. The popularity and financial success of Caribbean Stud led to the birth of the proprietary table game industry.
Numerous other proprietary table games have been invented by other individuals during the last twenty years as the industry has grown. The low overhead costs and steady revenue stream associated with maintaining successful proprietary table games have spurred the industry forward. The popularity of electronically enhanced table game platforms such as Caribbean Stud’s progressive jackpot system initially peaked approximately a decade ago. The patent allegedly protecting progressive jackpot systems expired in 2008 and the popularity of these electronic bonusing and jackpot systems, such as the Company’s Bonus Jackpot System, has re-emerged and is now enjoying a significant come-back.
Gaming, in general, continues to expand both domestically and internationally. In certain jurisdictions (most notably Asia), the table game segment continues to increase in greater proportions to other forms of gaming. In other markets, such as North America, the ratio between table games and other segments of gaming appears to have stabilized. However, universally the ratio between proprietary table games and those table games found in the public domain has been steadily increasing in favor of proprietary games. Current estimates of the international, live table game market are depicted in the following table:
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Live Table Games
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The Americas
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Europe & Africa
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Asia Pacific
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Total
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Public Domain Games
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17,000
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9,000
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12,000
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38,000
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Proprietary Table Games
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9,000
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500
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1,500
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11,000
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Live Poker Tables
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7,000
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2,000
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100
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9,100
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Total Table Games
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33,000
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11,500
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13,600
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58,100
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Source: Company estimates, various gaming analyst reports and other industry sources.
History and Development of Galaxy Gaming
In 1997, Galaxy’s founder and President, Robert Saucier, was an investor in a small casino in Washington State. The casino had ten table games, primarily Blackjack. During his tenure at this casino, Mr. Saucier invented a Side Bet for Blackjack known as “Horseshoe Blackjack.” The side bet became very popular and the casino’s winnings from the games increased significantly. On October 7, 1997, a predecessor company, Galaxy Gaming Corporation, was formed and Mr. Saucier exchanged all of his rights, title and interest in his invention for stock in the corporation. Other Washington casinos recognized the popularity and profitability of this side bet and requested intellectual property licenses to offer the Horseshoe Blackjack side bet at their casinos. The side bet was modified and its name was later changed to “Lucky Ladies”.
Lucky Ladies remained Galaxy’s only product until late 2002, when we debuted a new casino poker game called “Texas Shootout”. This game quickly became popular with casinos and their customers. Also in 2002, Galaxy Gaming Corporation was replaced by Galaxy Gaming, LLC and the Company increased its sales force and expanded distribution into new jurisdictions. Since then, we have grown methodically and intentionally by reinvesting earnings and introducing new products at a regular pace. In anticipation of becoming a public company Galaxy Gaming, Inc. was formed in 2006 and in 2007, the assets and business operations of Galaxy Gaming LLC were acquired by Galaxy Gaming, Inc.
We have grown to become the second largest provider of casino table games (1,700+ tables) in the world behind industry giant Shuffle Master Gaming (4,500± tables). Whereas a significant portion of Shuffle Master’s growth has been through acquisitions of competitive companies and products, we have previously been unable to compete for these acquisitions due to a limited capital structure. Accordingly, most our growth has been through direct sales leading to placements of our installed base of games.
In 2008, we released three new games, “Emperor’s Challenge Pai Gow Poker”, “Three Card Split” and “Lucky 8 Baccarat.” These games are now generating additional revenues for us. Also in 2008, we began the research and development of our Bonus Jackpot System. In 2010, we released a new Premium Game entitled “Triple Attack Blackjack.” We have begun marketing Triple Attack Blackjack to casinos in select jurisdictions and anticipate increasing our sales efforts as other jurisdictional approvals are obtained.
In February 2009, we executed a reverse merger with Secured Diversified Investment, Ltd., which resulted in us obtaining our public company status. Also in March, 2009 we began the first installations of our Bonus Jackpot System – Milky Way Series into casinos and began the development of our Bonus Jackpot System – Andromeda series which we expect to release in 2010.
Competition
We compete with other gaming products and supply companies for space on the casino floor, as well as for our client’s capital spending. Our competition for casino placement and players comes from a variety of sources, including companies that design and market proprietary table games, proprietary side bets and other gaming products. With respect to our Proprietary Table Games segment, we compete with several companies which primarily develop and license proprietary table games. Competition in this segment is particularly based on price, brand recognition, player appeal and the strength of underlying intellectual property. Smaller developers and vendors are more able to participate in developing and marketing table games, compared to other gaming products, because of the lower cost and complexity associated with the development of these products and a generally less stringent regulatory environment. Larger competitors have superior capital resources, distribution and product inventory than we do. We compete on these bases, as well as on the strength of our extensive sales, service and distribution channels. We have been able to increase our placements of table games not only because of the general growth of table games, but also by displacing other table game products. In the future, table game competitors as well as slot machine companies could market table games that might displace our products.
The following table is our estimate of the most significant competitors in our industry and their prominent proprietary games, side bets and electronic platforms. For comparative purposes, we have included our products in the table.
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Company
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Premium Games
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Side Bets
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Electronic Platform
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Galaxy Gaming*
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Texas Shootout; Three Card Split; Emperor's Challenge; Triple Attack Blackjack
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Lucky Ladies; Bonus Blackjack; Super Pairs; Suited Royals; Lucky 8 Baccarat
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Bonus Jackpot System
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Shuffle Master Gaming
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3 Card Poker; 4 Card Poker; Play Four Poker; Caribbean Stud; Let-it-Ride; Ultimate Texas Hold 'em; Texas Hold 'em Bonus; Casino War; Blackjack Switch
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Bet-the-Set; Fortune Pai Gow Poker; Royal Match; Dragon Bonus; King’s Bounty
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Progressive Bet System
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DEQ Systems
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Caribbean Stud (Nevada only); EZ Bacarrat; EZ Pai Gow
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G3 System
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TCS / John Huxley
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Casino Hold 'em
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Perfect Pairs
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Masque Publishing
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Spanish 21
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Match the Dealer
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Prime Table Games
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3 Card Poker; Two Way Hold 'em
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21+3
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Hop Bet
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Fire Bet (Craps)
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Gaming Entertainment
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Pai Gow Plus; Mini Pai Gow Poker
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High Tie Bonus
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Canadian 21 Stook
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Lucky Lucky
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Paltronics / AC Coin
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Wheel of Madness; 21 Madness
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* We have included our products for comparative purposes.
Many of our competitors have longer operating histories, significantly greater resources, greater brand recognition and more firmly established supply relationships. Moreover, we expect additional competitors to emerge in the future. We believe that the principal competitive factors in our market include products that appeal to casinos and players, jurisdictional approvals and a well-developed sales and distribution network. Although we plan to compete effectively in this market, we recognize that this market is relatively new and is evolving rapidly, and accordingly, there can be no assurance that we will be able to compete effectively.
As is common with most new industries as they mature, there has been significant consolidation of competitors in the proprietary table game industry. During the past decade our leading competitor, Shuffle Master Gaming, has actively pursued and consummated the acquisition of numerous smaller companies. As a result, the number of significant competitors has dwindled, and in the process, Shuffle Master has become the dominant competitor.
Recently, new competition in the traditional table game space has been introduced by all-inclusive electronic table games. These are games that typically use digital facsimiles of cards, chips and sometimes a human dealer. Although not yet a significant factor in directly competitive markets, their popularity is growing and it is anticipated that these new fully automated and hybrid electronic table games will increasingly become a competitive factor. Companies now competing for this market include Shuffle Master Gaming, Inc., DigiDeal Corporation, PokerTek, Inc. and TableMax, Inc. In 2008, we entered into a royalty agreement with Table Max to license our game content whereby we would receive royalties for the use of our products if placed on their electronic platform. As of this report, we have not earned any royalties from this agreement.
We believe that our success will depend upon our ability to remain competitive in our field. We compete with others in efforts to obtain or create innovative products, obtain financing, acquire other gaming companies, and license and distribute products. The failure to compete successfully in the market for proprietary table games, side bets, electronic table game platforms and for resources could have a material adverse effect on our business.
Strategy
Our long-term business strategy is designed to capitalize on the current opportunity we perceive within the gaming industry. Our goal is to grow the Company by expanding the products we offer, by increasing our sales and distribution network, and to a lesser extent, acquiring other products and companies who have innovative products.
We are currently the second largest provider of proprietary table games in the world and a relative newcomer to developing and providing advanced table game platforms. We are actively seeking to expand both our product lines and the placement of our products among casinos.
Our plan is to grow by: (1) creating or acquiring new Proprietary Table Game content; (2) further developing our Bonus Jackpot System product line; (3) expanding our global distribution network; and (4). operating and maintaining a universal jackpot fund which we refer to as the “Manufacturer’s Gambling Promotion.” For additional information on our strategy, see “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Form 10-K.
Intellectual Property
We invent and fully develop Proprietary Table Games for casinos. These game concepts and the intellectual property associated with them are typically protected by patents, trademarks and copyrights.
There can be no assurance that the steps we have taken to protect our intellectual property will be sufficient. In addition, the laws of some foreign countries do not protect intellectual property to the same extent as the laws of the United States, which could increase the likelihood of infringement. Furthermore, other companies could develop similar or superior trademarks without violating our intellectual property rights. If we resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome, disruptive and expensive, and distract the attention of management, and there can be no assurance that we would prevail.
Bilski
In re Bilski, 545 F.3d 943, 88 U.S.P.Q.2d 1385 (Fed. Cir. 2008), is an en banc decision of the United States Court of Appeals for the Federal Circuit (CAFC) on the patenting of method claims, particularly business methods. The Federal Circuit court affirmed the rejection of the patent claims involving a method of hedging risks in commodities trading. The court also reiterated the machine-or-transformation test as the applicable test for patent-eligible subject matter, and stated that the test in State Street Bank v. Signature Financial Group should no longer be relied upon.
The Supreme Court of the United States granted certiorari on June 1, 2009 and oral argument on the patent applicants' appeal was heard on November 9, 2009. If the Supreme Court affirms the lower court decision it could call into question the validity of many already issued business method patents and further restrict or prevent the issuance of new business method patents. Moreover, affirmation of the Circuit Court’s decision could severely affect many business method patents, such as those patents that currently protect the Company’s and its competitors’ proprietary table games .
Government Regulation
We are subject to regulation by governmental authorities in most jurisdictions in which we offer our products. Gaming regulatory requirements vary from jurisdiction to jurisdiction, and obtaining licenses, registrations, findings of suitability for our officers, Directors, and principal stockholders and other required approvals with respect to us, our personnel, and our products are time consuming and expensive. Generally, gaming regulatory authorities have broad discretionary powers and may deny applications for or revoke approvals on any basis they deem reasonable. We have approvals that enable us to conduct our business in numerous jurisdictions, subject in each case to the conditions of the particular approvals. These conditions may include limitations as to the type of game or product we may sell or lease, as well as limitations on the type of facility, such as riverboats, and the territory within which we may operate, such as tribal nations.
In addition to jurisdictions in which we, and specific personnel, were required to have authorizations with respect to some or all of our products and activities, we have authorizations with respect to certain Native American tribes throughout the United States that have compacts with the states in which their tribal dominions are located or operate or propose to operate casinos. These tribes generally require suppliers of gaming and gaming-related equipment to obtain authorizations.
Gaming Devices and Equipment. We sell or lease products that are considered to be “gaming devices’’ or “gaming equipment’’ in jurisdictions in which gaming has been legalized. Although regulations vary among jurisdictions, each jurisdiction requires various licenses, findings of suitability, registrations, approvals, or permits for companies and their key personnel in connection with the manufacture and distribution of gaming devices and equipment.
Regulation of Officers, Directors, and Stockholders. In many jurisdictions, any officer or Director is required to file an application for a license, finding of suitability, or other approval and, in the process, subject himself or herself to an investigation by those authorities. As for stockholders, any beneficial owner of our voting securities or other securities may, at the discretion of the gaming regulatory authorities, be required to file an application for a license, finding of suitability, or other approval and, in the process, subject himself or herself to an investigation by those authorities. The gaming laws and regulations of most jurisdictions require beneficial owners of more than 5% of our outstanding voting securities to file certain reports and may require our key employees or other affiliated persons to undergo investigation for licensing or findings of suitability.
In the event a gaming jurisdiction determines that an officer, Director, key employee, stockholder, or other personnel of our company is unsuitable to act in such a capacity, we will be required to terminate our relationship with such person or lose our rights and privileges in that jurisdiction. This may have a materially adverse effect on us. We may be unable to obtain all the necessary licenses and approvals or ensure that our officers, Directors, key employees, affiliates, and certain other stockholders will satisfy the suitability requirements in each jurisdiction in which our products are sold or used. The failure to obtain such licenses and approvals in one jurisdiction may affect our licensure and approvals in other jurisdictions. In addition, a significant delay in obtaining such licenses and approvals could have a material adverse effect on our business prospects.
Gaming Jurisdictions. Gaming jurisdictions that have legalized gaming typically require various licenses, registrations, findings of suitability, permits, and approvals of manufacturers and distributors of gaming devices and equipment as well as licensure provisions related to changes in control. In general, such requirements involve restrictions and approvals. We now offer our products in the following gaming jurisdictions:
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United States
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Canada
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California
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New Mexico
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Alberta
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Indiana
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North Dakota
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British Columbia
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Minnesota
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Oklahoma
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Manitoba
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Mississippi
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South Dakota
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Nova Scotia
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Missouri
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Washington
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Ontario
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Nevada
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West Virginia
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New Jersey
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Additionally we license and/or lease our products through licensed distributors in Arizona, Illinois, Iowa and Kansas.
Native American Gaming Regulation Gaming on Native American lands within the United States is governed by the Federal Indian Gaming Regulatory Act of 1988 ("IGRA") and specific tribal ordinances and regulations. Class III gaming, as defined under IGRA, also requires a Tribal-State Compact, which is a written agreement between a specific tribe and the respective state. This compact authorizes the type of Class III gaming activity and the standards, procedures and controls under which the Class III gaming activity must be conducted. The National Indian Gaming Commission ("NIGC") has oversight authority over gaming on Native American lands and generally monitors tribal gaming including the establishment and enforcement of required minimum internal control standards. Each Tribe is sovereign and must have a tribal gaming commission or office established to regulate tribal gaming activity to ensure compliance with IGRA, NIGC, and its Tribal-State Compact. We have complied with each of the numerous vendors licensing and specific product approval and shipping notification requirements imposed by Tribal-State Compacts and enforced by tribal and/or state gaming agencies under IGRA in the Native American lands in which we do business.
Application of Future or Additional Regulatory Requirements In the future, we intend to seek the necessary registrations, licenses, approvals, and findings of suitability for us, our products, and our personnel in other jurisdictions throughout the world where significant sales of our products are expected to be made. However, we may be unable to obtain these registrations, licenses, approvals, or findings of suitability, which if obtained may be revoked, suspended, or conditioned. In addition, we may be unable to obtain on a timely basis, or to obtain at all, the necessary approvals of our future products as they are developed, even in those jurisdictions in which we already have existing products licensed or approved. If a registration, license, approval or finding of suitability is required by a regulatory authority and we fail to seek or do not receive the necessary registration, license, approval or finding of suitability, we may be prohibited from selling our products in that jurisdiction or may be required to sell our products through other licensed entities at a reduced profit.
Employees
We have sixteen employees, including executive officers, management personnel, accounting personnel, office staff, and sales staff. Our employees are co-employed by Advantstaff, Inc. a professional employer organization used by us to provide payroll and human resource services. As needed from time to time, we also pay for the services of independent contractors.
Research and Development Expenditures
We have incurred approximately $197,530 and $120,529 in research and development expenditures during the years ended December 31, 2009 and 2008 respectively. This cost, which includes personnel related costs, was incurred primarily in the development of our Bonus Jackpot System and continuing enhancements to the system. We anticipate that research and development expenditures will increase in connection with our efforts to continually develop and enhance the Bonus Jackpot System.
Subsidiaries
We currently have six wholly-owned subsidiaries, which have been utilized to divide its business operations into geographic regions. We are currently in the process of transferring all assets and operations from these subsidiaries to the Company. When this process is complete, the Company’s subsidiaries will be dissolved. All subsidiaries are limited liability companies and include:
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Galaxy Gaming of British Columbia, LLC
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Galaxy Gaming of Manitoba, LLC
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Galaxy Gaming of Nova Scotia, LLC
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Galaxy Gaming of Ontario, LLC
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Galaxy Gaming of Oregon, LLC
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Galaxy Gaming of Washington, LLC
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Historical Information of Secured Diversified Investment, Ltd.
In 2009, Galaxy Gaming, Inc. then a privately held Nevada corporation, merged with Secured Diversified Investment, Ltd. (“SDI”), a publically traded Nevada corporation which engaged in real estate investments. Prior to the merger, SDI was served with an involuntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Nevada, Case No. 08-16332. The Bankruptcy Court’s Order for Relief was entered on July 30, 2008. By order entered January 27, 2009, the Bankruptcy Court confirmed SDI’s Plan of Reorganization (“Plan”) and on February 10, 2009, Galaxy Gaming, Inc. entered into a Share Exchange Agreement with SDI (“Share Exchange”). As a result, Galaxy Gaming, Inc. became a wholly-owned subsidiary of SDI in exchange of obtaining 25,000,000 shares of SDI’s common stock which was issued pro-rata to the former shareholders of Galaxy Gaming, Inc. In addition, SDI issued 4,000,006 shares of new common stock on a pro rata basis to its creditors in exchange for the discharge of its outstanding debts under Chapter 11 of the U.S. Bankruptcy Code. After the Share Exchange, the former business of SDI ceased and the business of its wholly-owned subsidiary, Galaxy Gaming, Inc. continued.
On September 1, 2009, the Company’s Board of Directors approved a merger with the SDI’s wholly-owned subsidiary, Galaxy Gaming, Inc., pursuant to Nev. Rev. Stat. §92A.180 (“Short Form Merger”). As part of the merger, the Board authorized a change in the name of the company formerly known as SDI to “Galaxy Gaming, Inc.”
Description of Property
We do not own any real property used in the operation of our current business. We maintain our corporate office at 6980 O’Bannon Drive, Las Vegas, NV. We currently pay rent to a related party in the amount of $18,565 per month as a result of an assumption of a prior lease entered into by Galaxy Gaming, LLC. Our President, Robert Saucier is a member of and the Manager of Galaxy Gaming, LLC. The lease is set to expire in August of 2010, but there are provisions for renewals. We expect that our present corporate office provides facilities suited to our current operations. As our business operations grow, it may be necessary for us to seek additional or alternative office space.
Item 1A. Risk Factors.
A smaller reporting company is not required to provide the information required by this Item.
Item 1B. Unresolved Staff Comments
A smaller reporting company is not required to provide the information required by this Item.
Item 2. Properties
SDI previously owned a 25% tenant-in-common interest in three buildings located at 5203 - 5205 East Lincoln Drive in Paradise Valley, Maricopa County, Arizona 85253. This interest was associated to SDI’s previous business as a real estate company. In April 2009, we entered into an arrangement to transfer this property to SDI’s former CFO and CEO, Munjit Johal in exchange for the return and cancellation of 50,000 of our common shares held by Mr. Johal.
Item 3. Legal Proceedings
For information on Legal Proceeding, see Note 9 in “Item 8 Financial Statements and Supplementary Data” included in this Form 10-K.
In the ordinary course of conducting its business, the Company is, from time to time, involved in other litigation, administrative proceedings and regulatory government investigations including but not limited to those in which the Company is a plaintiff.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's shareholders during the fiscal year ended December 31, 2009.
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Prior to the Share Exchange, Galaxy Gaming, Inc. was a privately-held company and there was no public market for the securities of Galaxy. Our common stock has been quoted on the OTC Bulletin Board (“OTCBB”), which is sponsored by the Financial Industry Regulatory Authority (“FINRA”). Prior to the effective date of the Plan, the stock was quoted under the symbol SDFD.OB. A few months after the Plan was effective, FINRA reissued the stock ticker symbol as SECD.OB. After the Short Form Merger, we requested a new symbol from FINRA and was issued the symbol GLXZ.OB. The OTCBB is a network of security dealers who buy and sell stock. The dealers are connected by a computer network that provides information on current "bids" and "asks", as well as volume information.
The following table sets forth the range of high and low bid quotations for our post-bankruptcy common stock for each of the periods indicated as reported by the OTCBB. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. We have also note n/a in periods where no actual trading had occurred.
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Fiscal Year Ending December 31, 2009
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Quarter Ended
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High $
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Low $
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December 31, 2009
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1.01
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0.31
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September 30, 2009
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0.50
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0.45
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June 30, 2009
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n/a
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n/a
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March 31, 2009
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n/a
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n/a
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Penny Stock
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.
The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer's account.
In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.
These disclosure requirements may have the effect of reducing the trading activity for our common stock. Therefore, stockholders may have difficulty selling our securities.
Holders of Our Common Stock
As of April 9, 2010, we had 34,524,758 shares of our common stock issued and outstanding, held by 49 shareholders of record. All of the pre-Share Exchange issued and outstanding equity interests, preferred and common stock, previously issued by SDI were extinguished and rendered null and void upon approval of SDI’s Bankruptcy Plan.
Dividends
There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring dividends where after giving effect to the distribution of the dividend:
1. we would not be able to pay our debts as they become due in the usual course of business, or;
2. our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.
We have not declared any dividends and we do not plan to declare any dividends in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
In anticipation of establishing an equity compensation plan the Company:
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(1)
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granted options to our CFO to purchase 37,500 shares of the Company’s common stock at a price of $0.55 per share, exercisable for three years. Additional grants of options to our CFO to purchase 22,500 shares of the Company’s common stock at a price of $0.55 per share, exercisable for three years, will be made at the beginning of each additional year of service.
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(2)
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agreed that our outside Board member, Dan Scott, will receive immediately-vested options to purchase 46,250 shares of our common stock per quarter.
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Recent Sales of Unregistered Securities
On June 23, 2009, we closed a private offering of common stock. A total of 138,750 shares were sold to thirteen purchasers for a total purchase price of $55,500. Of this total, 37,500 shares were purchased for cash proceeds in the amount of $15,000. Additionally 86,000 shares were sold to Company employees in exchange for promissory notes in the aggregate amount of $34,400. The notes are secured by the shares purchased, bear interest at a rate of six percent (6%) per year, and are payable over the course of two years. Finally 15,250 shares were issued in exchange for services rendered by a Company executive valued at $6,100. The Company issued 100,000 shares of common stock in settlement of accounts payable. Convertible notes payable in the amount of $200,000, plus accrued interest, were converted to equity resulting in the issuance of 1,042,989 common shares. In July of 2009 we began a private offering of common stock to raise approximately $400,000. Investor demand for the offering prompted our Board of Directors to extend the amount offered. As a result of the over-subscription, a total of 1,722,858 shares and 861,429 warrants were purchased for cash proceeds of $603,000. The offering was closed in December, 2009. During the year ended December 31, 2009, the Company issued 1,101,583 share of common stock for services to be performed in non-cash transactions pursuant to various service agreements. On April 1, 2010 the Company sold a total of 1,428,572 shares of common stock and 714,286 warrants to two principals of a competitor for total cash proceeds of $500,000.
The offering and sale of the Company’s shares were exempt from registration under rule 506 of Regulation D. The shares were offered exclusively to accredited and/or sophisticated investors and there was no solicitation or advertising.
Item 6. Selected Financial Data
A smaller reporting company is not required to provide the information required by this Item.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.
Plan of Operation
We are currently seeking to expand our business. We are now the second largest company in the proprietary table games industry as measured by total tables under contract in casinos. We intend to close the gap between us and our number one competitor while simultaneously expand the gap between us and our smaller competitors. Currently, distribution of our products are limited to casinos in North America and on cruise ships internationally. The vast majority of our income is derived from high margin recurring licensing and lease fees that we earn on a monthly basis. Our plan is to increase our recurring revenues through the expansion of our installed base of our products and by increasing the recurring revenue per table placement average, by employing the following strategies:
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1.
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Develop and/or acquire new products and game content.
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2.
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Enhance our portfolio of games with the Bonus Jackpot System.
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3.
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Expand our distribution network.
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4.
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Offer Manufacturer’s Gambling Promotions.
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Develop and/or Acquire New Products and Game Content
During 2008, Galaxy introduced three new table game products, Emperor’s Challenge, Three Card Split and Lucky 8 Baccarat which are contributing to our current growth trend. During 2009, we suspended development of our table games due to our focus on developing our Bonus Jackpot System (described below). In early 2010, we re-emphasized development of new table games and in February, we released “Triple Attack Blackjack,” the first of several new anticipated Premium Games. Our current focus is to expand the number of Premium Games in favor of Side Bets due to the higher revenue per unit we receive from Premium Games. We expect other products scheduled to be released in 2010 will positively impact our revenues.
In November 2009, we entered into a letter of intent to acquire all of a long standing competitor’s proprietary table game business and other assets. Upon execution of that agreement, we performed our due diligence and reached agreement pertaining to all of the terms of the asset purchase. Although there can be no assurances that this transaction will ultimately be completed, we anticipate it will close in April 2010.
We are currently at a disadvantage to our leading competitor, Shuffle Master, in terms of the number and variety of products offered. Due to the numerous game titles in their possession, they have the ability to control 100% of the proprietary table mix in many casinos. Therefore, we intend to increase the number of table games in our portfolio. We have numerous new games in various stages of development which, when fully released, we believe will overcome this disadvantage.
Currently, the majority of our product development is led by our founder and CEO, Mr. Saucier. Our future growth plans include the expansion of our research and development team to lessen our dependency on our CEO for this important element.
Enhance Our Portfolio of Games with the Bonus Jackpot System
Competitor’s games such as Caribbean Stud and Let it Ride benefitted from electronic enhancements. Previously, only our Bonus Blackjack game utilized electronics. In 2008, we set out to overcome this disadvantage and initiated the development of our Bonus Jackpot System. In March 2009, we installed the first Bonus Jackpot System into a casino. Since then we have installed over 130 more. We receive a fee casinos based upon the amount of wagers placed by their players via the Bonus Jackpot System. Since its first installation, the Bonus Jackpot System has now recorded over 10,000,000 wagers.
We continue to develop our Bonus Jackpot System from the Milky Way Series to the Andromeda Series and then the Triangulum Series. We intend to modify and adapt all of our Premium Games to benefit from the Bonus Jackpot System. Additionally, we expect that all of our new Premium Game titles will include the Bonus Jackpot System component.
We expect each of these products to generate additional revenue for us in 2010 and beyond. In 2009 the Bonus Jackpot System contributed additional revenue and made our previous non-electronic casino table games more popular and more profitable for both our clients and for us.
Expand Our Distribution Network
We intend to increase our recurring revenues and market share not only in North America, but throughout all available international markets. Expanding our distribution network requires that we first seek and obtain registration or licensing in most additional gaming jurisdictions. In regulated gaming jurisdictions, this is not always a simple task. Accordingly, our plan is to selectively choose jurisdictional expansion opportunities whereby we believe we can obtain the greatest results compared against the cost and duration of the regulatory approval process.
Offer Manufacturer’s Gambling Promotions
In 2009, we identified an opportunity to offer gambling promotions to our casino clients which in turn they would offer to their customers. We intend to collect a fee from the casino based upon their player’s participation in the gambling promotion. The purpose of these gambling promotions is to stimulate play thereby increasing the profitability for the casino and for us. We expect the offering of our gambling promotion plan will commence and add revenues for us in 2010.
Results of Operations of Galaxy Gaming, Inc. for the Years Ended December 31, 2009 and 2008
For the year ended December 31, 2009 our continuing operations generated gross revenues of $2,765,674, an increase of 34% from gross revenues of $2,067,445 for the year ended December 31, 2008. The increase in revenue was driven by all of our product categories: Premium Games, Side Bets and Bonus Jackpot Systems. Our Cost of Goods Sold for the year was $223,717, compared to $119,248 for the prior year. Much of this increase was related to the installations of our Bonus Jackpot System. Sales of this product were initiated in the first quarter of 2009 and was not present in the prior year. Our Operating Expenses were $2,742,312 for the year ended December 31, 2009 compared to $2,359,459 for the year ended December 31, 2008. The increase primarily relates to payroll and outside services and legal expenses related to the bankruptcy and reverse merger transaction. Additionally the Company incurred greater research and development expenses associated with the development of our Bonus Jackpot System and continuing enhancements to the system. Other Expenses for the year ended December 31, 2009 were $147,406 vs. $92,942 for the year ended December 31, 2008. The increase was due to higher interest expense on various notes payable.
The increase in revenue was instrumental in reducing the net loss from operations to $200,355 in 2009 vs. a loss of $411,262 in 2008
During the year end December 31, 2009, the Company experienced a net loss from discontinued operations in the amount of $99,950. This transaction represented disposal of a real estate investment related to the former business of Secured Diversified Investment, Ltd. that remained after the confirmation of the Chapter 11 Plan of Reorganization of SDI.
Liquidity and Capital Resources
As of December 31, 2009, Galaxy had total current assets of $1,008,994 and total assets in the amount of $1,725,661. Galaxy’s total current liabilities as of December 31, 2009 were $1,031,936.
Galaxy’s operating activities used $421,587 in cash for the year ended December 31, 2009 and $36,830 in cash for the year ended December 31, 2008. The primary components of our negative operating cash flow for the year ended December 31, 2009 were our Net Loss of $347,761, increases in accounts receivable of $191,005, inventory of $77,494 and a decrease in accrued expenses and taxes of $133,981 offset by depreciation and amortization expenses of $23,080, interest expense from a stock warrant issuance of $29,966, common stock issued for services totaling $67,233 and a $188,472 increase in Accounts Payable. Cash flows provided by financing activities during the year ended December 31, 2009 were $784,623, consisting of Proceeds from Convertible Notes ($200,000) and issuance of Common Stock ($632,534) offset by Payments on Notes Payable (related party) of $27,251 and Payments on Notes Payable of $20,660. Investing Activities provided $19,918 in cash during the year ended December 31, 2009, consisting of $44,885 in Payment Received on Note Receivable offset by $24,967 in purchases of property and equipment.
We intend to fund operations through increased sales and debt and/or equity financing arrangements, which may be insufficient to fund expenditures or other cash requirements. In April 2009, we closed an issuance of $200,000 in convertible promissory notes that were due in October 2009. The funds generated from this short-term debt financing assisted us in meeting our cash needs in the near term. All of the notes were converted into common stock of the Company in 2009.
We sought additional financing in the amount of $402,500 through a private equity offering beginning July, 2009 to secure additional funding for operations. The offering fully funded and our Board of Directors amended the offering to permit additional equity investment up to a maximum of $630,000. The offering was closed in December 2009. A total of 1,722,858 shares and 861,429 warrants were purchased for cash proceeds of $603,000.
On April 1, 2010 the Company sold a total of 1,428,572 shares of common stock and 714,286 warrants for total cash proceeds of $500,000.
Despite this prior funding, there can be no assurance that we will be successful in raising additional funding, if required. If we are not able to secure additional funding, the implementation of our business plan may be impaired. There can be no assurance that such additional financing will be available to us on acceptable terms or at all. We will from time to time acquire products and businesses complementary to our business. As a public entity, we may issue shares of our common stock and preferred stock in private or public offerings to obtain financing, capital or to acquire other businesses that can improve our performance and growth. To the extent that we seek to acquire other businesses in exchange for our common stock, fluctuations in our stock price could have a material adverse effect on our ability to complete acquisitions.
Going Concern
In the December 31, 2008 auditor’s report of Galaxy Gaming, Inc. our auditors stated that they had substantial doubt that we were able to continue as a going concern. The auditor’s report for December 31, 2009 did not contain the “going concern” qualification.
Off Balance Sheet Arrangements
As of December 31, 2009, there were no off balance sheet arrangements.
Significant Equipment
We do not anticipate the purchase of any significant equipment for the next twelve months.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
A smaller reporting company is not required to provide the information required by this Item.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements Required by Article 8 of Regulation S-X:
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Audited Financial Statements for Galaxy Gaming, Inc.:
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