U. S. Securities and Exchange Commission
WASHINGTON, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
Commission file number 0-33345
GAMES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 75-2926440
(State of Incorporation) (I.R.S. Employer Identification Number)
425 Walnut Street, Suite 2300
Cincinnati, Ohio 45202
(Address of principal executive office)
(513) 721-3900
(Issuer’s telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or15 (d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes (X)
No ( )
As of November 10, 2003 there were 17,364,855 shares of the issuer’s Common Stock, $.001 par value per share, outstanding.
Transitional Small Business Disclosure Format (check one)
Yes ( )
No (X)
#
GAMES, INC.
Form 10-QSB Quarterly Report
INDEX
PART 1 - FINANCIAL INFORMATION
3
ITEM 1. FINANCIAL STATEMENTS
3
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
14
ITEM 3. CONTROLS AND PROCEDURES
17
PART II. OTHER INFORMATION
17
ITEM 1. LEGAL PROCEEDINGS
18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER
19
ITEM 5. OTHER INFORMATION
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-k
19
SIGNATURES
20
#
PART 1 – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Games, Inc. and Subsidiary |
| ||
Condensed Consolidated Balance Sheet |
| ||
Assets | September 30, 2003 |
| |
(unaudited) |
| ||
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|
|
|
Current assets | |||
|
|
|
|
Accounts receivable – trade | $ 11,012 |
| |
Prepaid expenses | 2,111 |
| |
Total current assets | 13,123 |
| |
|
|
| |
Property, equipment and software |
|
| |
Equipment | 294,248 |
| |
Furniture and fixtures | 77,075 |
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Leasehold improvements | 2,137 |
| |
Software | 2,916,122 |
| |
| 3,289,582 |
| |
Less accumulated depreciation and amortization | (2,761,972) | ||
Net property, equipment and software | 527,610 |
| |
|
|
| |
Intangibles, net of amortization | 341,995 |
| |
Total assets | $ 882,728 ========= |
| |
|
|
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|
The accompanying notes are an integral part of these condensed consolidated financial statements.
#
Games, Inc. and Subsidiary | ||
Condensed Consolidated Balance Sheet | ||
| ||
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|
|
September 30, 2003 | ||
(unaudited) | ||
Liabilities and stockholders' deficit |
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|
|
|
|
Current liabilities |
|
|
Bank overdraft | $ 41,183 | |
Current maturities of long-term debt | 555,619 | |
Accounts payable and accrued liabilities | 1,081,866 | |
Accrued litigation settlements | 181,942 | |
Capital lease obligations | 50,264 | |
Accrued officer salaries | 786,063 | |
Due to related parties | 97,328 | |
Total current liabilities | 2,794,265 | |
|
| |
Loan payable | 111,358 | |
Convertible promissory notes | 639,000 | |
| 3,544,623 | |
Commitments and contingencies (Notes D and H) |
| |
|
| |
Stockholders' deficiency |
| |
Preferred stock, $.001 par value, 10,000,000 shares |
| |
authorized, none issued and outstanding | -- | |
Common stock, $.001 par value; 40,000,000 shares authorized | ||
16,964,855 and 6,870,680 shares issued |
| |
at September 30, 2003 and June 30, 2002, respectively | 16,966 | |
Additional paid-in capital | 32,270,631 | |
Accumulated deficit | (34,906,188) | |
Less treasury stock, at cost, 14,500 shares | (43,304) | |
Total stockholders’ deficiency | (2,661,895) | |
Total liabilities and stockholders’ deficiency | $ 882,728 ========== | |
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|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
#
Games, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
| Three months ended | ||||||
September 30, | |||||||
2003 | 2002 | ||||||
| (unaudited) | (unaudited) | |||||
|
|
|
|
| |||
Revenues |
| $91,173 |
| $ 46,582 | |||
Cost of goods sold |
| 21,881 |
| 14,561 | |||
Gross profit |
| 69,292 |
| 32,021 | |||
|
|
|
|
| |||
Operating expenses |
|
|
|
| |||
Sales, general and administrative |
| 442,914 |
| 570,478 | |||
Depreciation of property, equipment |
|
| |||||
and software |
| 176,106 |
| 157,552 | |||
Amortization of intangibles |
| 107,343 |
| 111,082 | |||
Total operating expenses |
| 726,363 |
| 839,112 | |||
|
|
|
|
| |||
Operating loss |
| (657,071) |
| (807,091) | |||
|
|
|
|
| |||
Interest expense |
| (29,778) |
| (12,981) | |||
Net loss |
| ($686,849) ========== |
| ($820,072) ========== | |||
Weighted average common shares |
|
|
|
| |||
outstanding -basic and diluted |
| 16,565,556 ========== |
| 13,118,294 ========== | |||
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|
|
|
| |||
Net loss per share - basic and diluted |
| ($0.04) ========== |
| ($0.06) ========== |
The accompanying notes are an integral part of these condensed consolidated financial statements.
#
Games, Inc. and Subsidiary |
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Condensed Consolidated Statements of Cash Flows |
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| Three months ended |
| Three months ended |
|
September 30, 2003 | September 30, 2002 | ||||
|
| (unaudited) |
| (unaudited) |
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Net cash flows from operating activities: |
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|
|
|
|
Net loss |
| ($686,849) |
| ($820,072) |
|
Adjustments to reconcile net loss to net cash used in operating activities: | |||||
Depreciation and amortization |
| 283,449 |
| 268,634 |
|
Amortization of debt discount |
| 4,971 |
| 11,240 |
|
Common stock issued for services |
| -- |
| 45,000 |
|
Changes in assets and liabilities: |
|
|
|
|
|
Accounts receivable-trade |
| 613 |
| 23,068 |
|
Interest beneficial conversion feature |
| 13,500 |
|
| |
Prepaid expenses and other assets |
| (2,111) |
| (12) |
|
Accounts payable and accrued liabilities |
| 43,541 |
| 123,211 | |
Accrued officers salaries |
| 121,250 |
| 47,083 |
|
Net cash used in operating activities |
| (221,636) |
| (301,848) |
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|
|
|
|
|
|
|
|
|
|
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Cash flows from financing activities: |
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|
|
|
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Increase in bank overdraft | 41,183 | 24,039 | |||
Capital lease obligations | (50,251) | (50,260) | |||
Borrowings (repayments) on long-term debt |
| 200,619 |
| 20,260 |
|
Proceeds from issuance of convertible notes |
| 35,000 |
|
| |
Increase (decrease) in due to related parties |
| (29,915) |
| 87,513 |
|
Proceeds from issuance of stock |
| 25,000 |
| 204,000 |
|
Net cash provided by financing activities |
| 221,636 |
| 285,552 |
|
|
|
|
|
|
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Net increase (decrease) in cash |
| -- |
| (16,296) |
|
Cash at beginning of period |
| -- |
| 16,513 |
|
Cash at end of period |
| $ 0 ======== | $ 217 ======= |
The accompanying notes are an integral part of these condensed consolidated financial statements.
#
Games, Inc. and Subsidiary |
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Condensed Consolidated Statements of Cash Flows – continued |
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| Three months ended |
| Three months ended |
| |
|
| September 30, 2003 |
| September 30, 2002 |
| |
|
| (unaudited) |
| (unaudited) |
| |
|
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| |
NON-CASH INVESTING AND FINANCING ACTIVITIES: |
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Common stock issued to settle litigation | $ 165,000 ======== | $ -- ========= | ||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
#
Games, Inc. and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Games, Inc. and Subsidiary
(formerly Colley Corporation)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND NATURE OF OPERATIONS
Games, Inc. formerly Colley Corporation, (Colley), ("the Company") was initially incorporated as Super Shops, Inc. under the laws of the State of Arizona. In October 2000, the Company changed its State of Incorporation from Arizona to Delaware by means of a merger with and into a Delaware corporation formed on October 13, 2000 solely for the purpose of effecting a re-incorporation.
On June 3, 2002, Chicago West Pullman, LLC ("CWP"), an Ohio limited liability company, purchased the 525,000 unregistered common stock or 51.19% of the outstanding common stock of Colley for cash payment of $25,000. On June 25, 2002, the Board of Directors approved an exchange of shares of Colley for shares of common stock of Gamebanc Corporation ("Gamebanc"), formerly The Lottery Channel, Inc., held by CWP and its members on a one share for one share basis, (the First Exchange”). On the date of this exchange Colley had no assets or liabilities. As of June 30, 2002, shareholders of Gamebanc had exchanged 7,417,618 shares of Gamebanc common stock for 7,417,618 newly issued common stock of Colley. Colley acquired a majority interest in Gamebanc as a result of this First Exchange.
On July 23, 2002, Colley offered to exchange up to 8,906,866 shares of its common stock for the remaining outstanding shares of common stock and preferred stock of Gamebanc, (the Second Exchange). The Second Exchange offer was conducted on the basis of one share of Colley's common stock for one share of Gamebanc common stock, and 50 shares of Colley's common stock for one share of preferred stock of Gamebanc. The Second Exchange offer remained open until August 6, 2002. Colley issued 7,539,582 shares of its common stock issued through the Second Exchange. Additionally, all holders of Gamebanc stock options and warrants were offered to exchange their stock options and warrants for Colley stock options and warrants with identical terms. Effective September 16, 2002, the Company changed its name from Colley Corporation to Games, Inc.
As a result of the First and Second Exchanges Gamebanc became a majority-owned subsidiary of the Company and Gamebanc’s directors and officers became the directors and officers of the Company. The stockholders of Gamebanc were issued 14,957,200 of the Company’s shares of common stock, in exchange for their shares, or 97.9% of the Company’s total outstanding common stock. Accordingly, a change in control of the Company occurred in connection with the acquisition, and the acquisition was deemed a "reverse acquisition” for accounting purposes. At the acquisition, Colley had no assets or liabilities. The reverse acquisition was accounted for as a recapitalization of GameBanc and the stockholders' equity was retroactively restated to July 1, 2001. The financial statements are those of Gamebanc prior to June 23, 2002.
The Company operates in three allied areas of interactive entertainment: government sponsored lotteries, internet games, and digital greetings. The Company's principal business is providing subscribers with access to entertaining proprietary content via the internet.
NOTE B - BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements and notes to the financial statements for the interim periods as of September 30, 2003 and for the three months ended September 30, 2003 and 2002, are unaudited. The accompanying interim unaudited financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States for interim financial statements and Item 310(b) of Regulation S-B. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. The condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Form 10-KSB of the Company as of and for the year ended December 31, 2002. All amounts and share totals have been restated to account for the one-for-twenty reverse stock split effective April 24, 2002.
NOTE C – GOING CONCERN UNCERTAINTY
As shown in the accompanying condensed consolidated financial statements, the Company incurred a net loss of $686,849 for the three months ended September 30, 2003. Current liabilities at September 30, 2003 of $2,794,265 exceed current assets of $13,123. Total liabilities at September 30, 2003 of $3,544,623 exceed total assets of $882,728.
Management of the Company is developing a plan to license the sale of lottery tickets online. In addition, the Company is seeking to raise equity capital to fund and expand its operations in addition to fund acquisitions.
Management believes that by obtaining a license to sell lottery tickets online and if they are successful in obtaining additional equity capital to fund acquisitions, the cash flows would be sufficient to fund operations through June 30, 2004. However, there can be no assurance that the Company will be successful in its attempts to obtain a license to sell lottery tickets online, or to generate positive cash flows or raise sufficient capital essential to its survival. To the extent that the Company is unable to generate or raise the necessary operating capital, it will become necessary to curtail operations. Additionally, even if the Company does raise operating capital, there can be no assurance that the net proceeds will be sufficient to enable it to develop its business to a level where it will generate profits and positive cash flows.
These matters raise substantial doubt about the Company’s ability to continue as a going concern. However, the accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
Total revenues for the three months ended September 30, 2003 and September 30, 2002 are as follows.
Three Months Ended September 30, 2003 | Three Months Ended September 30, 2002 | |||
Revenue Source | Amount | Percent of Total | Amount | Percent of Total |
1. Internet advertising | $77,331 | 85% | $46,082 | 99% |
2. Digital Greetings | -- | -% | -- | -% |
3. Lotteries | 13,842 | 15% | 500 | 1% |
Total | $91,173 | 100% | $46,582 | 100% |
Loss Per Share
The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128 requires the presentation of basic and diluted earnings per share ("EPS"). Basic EPS is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS includes the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted. The Company's outstanding
options and warrants are not reflected in diluted earnings per share because their effects would be anti-dilutive. Accordingly, basic and diluted earnings per share are identical.
Reclassifications
Certain accounts in the prior years’ financial statements have been reclassified for comparative purposes to conform with the presentation in the current year’s financial statements. These reclassifications had no effect on previously reported net loss.
New Accounting Pronouncements
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123” which is effective for financial statements issued for fiscal years ending after December 15, 2002. This Statement amends FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The Company continues to follow the pro-forma disclosures for stock-based compensation as permitted in SFAS 123. The fol lowing table illustrates the effect on net (loss) and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation:
September 30, | ||
2003 | 2002 | |
Net loss as reported | $686,849 | $820,072 |
Less: stock-based employee compensation expense determined under the intrinsic value method | -- | 12,500 |
Add: stock-based employee compensation expense determined under fair value-based methods for all awards | -- | 21,900 |
Compensation for variable stock options | -- | -- |
Pro forma loss | $686,849 | $829,472 |
Pro forma loss per share- Basic and diluted | $(0.04) | $(0.06) |
Pro forma Information
The fair value for the 2003 and 2002 options issued was estimated at the date of grant using a Black-Scholes option-pricing model to be $0.36 and $0.00 respectively per share with the following weighted-average assumptions:
Assumptions | 2003 | 2002 | |
Risk-free rate | 4.5% | 4.8% | |
Dividend yield | 0.0% | 0.0% | |
Volatility factor of the expected market price of the Company's Common Stock | 176.7% | 0.0% | |
Average life | 1.2 years | 2.5 years |
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The Company's employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 provides guidance on the identification of entities for which control is achieved through means other than through voting rights, variable interest entities, and how to determine when and which business enterprises should consolidate variable interest entities. This interpretation applies immediately to variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company is currently evaluating the effect that the adoption of FIN 46 will have on its consolidated financial position and results of operations.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133). Except for the provisions of SFAS No. 149 that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 is not expected to have a material effect on the Company’s consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for classification and measurement in the statement of financial position of certain financial instruments with characteristics of both liabilities and equity. It requires classification of a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.
NOTE C - CONVERTED PROMISSORY NOTES
From July 2003 through September 2003, the Company issued $35,000 5% and 6% convertible promissory notes (the “Promissory Notes”) in varying amounts due October 31, 2004. A portion of the proceeds raised from the placement has been used to fund the Company's working capital and capital expenditure requirements.
The Promissory Notes including accrued interest are convertible into five (5) shares of Common Stock for each dollar of debt, at the option of the holder, subject to certain adjustments and conditions.
NOTE D- STOCK OPTIONS
In December 2000 Gamebanc extended the expiration date of 430,600 stock options from dates ranging from April 2002 through November 2002 to January 2004. In December 2000, the Company re-priced options to purchase approximately 2,800,000 shares of the Company’s common stock from an exercised price of $10 per share to $1.00 per share. Pursuant to FIN 44 such options became subject to variable accounting treatment. At September 30, 2003, the fair value of the Company’s common stock was less than the exercise price and accordingly the Company recognized no stock based compensation for variable accounting treatment.
The following summarizes the Gamebanc stock option transactions for the three months ended September 30, 2003 and 2002:
Weighted | ||||
Average | ||||
Exercise | ||||
Options | Price | |||
Options outstanding at June 30, 2002 | 3,295,100 | $ 1.08 | ||
Granted | 110,000 | $2.54 | ||
Exercised | -- | |||
Terminated | -- | |||
Options outstanding at September 30, 2002 | 3,405,100 | $1.13 | ||
Options outstanding at June 30, 2003 | 3,291,100 | $ .098 | ||
Granted | -- | |||
Exercised | -- | |||
Terminated | -- | |||
Options outstanding at September 30, 2003 | 3,291,100 | $0.98 |
Options Outstanding | Options Exercisable | ||||||||
Weighted | |||||||||
Average | Weighted | ||||||||
Range of | Remaining | Average | |||||||
Exercise | Number | Contractual | Number | Exercise | |||||
Prices | Outstanding | Life | Exercisable | Price | |||||
$1.00 - $3.00 | 3,291,100 | 1.9 years | 2,967,600 | $0.98 |
NOTE E- LITIGATION AND CONTINGENCIES
Company has entered into a settlement agreement with Bingo on October 8, 2003, whereby Bingo has agreed to relinquish all of its rights and ownership of the domain name Lottery.com in exchange for a fifty (50) year royalty agreement whereby the Company will pay Bingo a 4% royalty on gross revenue (as defined) on online lottery ticket sales. Pursuant to the royalty agreement the Company must pay minimum royalties of $72,000 per annum.
A former employee and manager of Gamebanc's Gameland.com site sued Gamebanc in Virginia District Court for bonus payments under his employment agreement. The employee obtained a default judgment against Gamebanc in the amount $99,000. This amount was recorded in accrued liabilities at June 30, 2002 and remains in accrued liabilities in the accompanying consolidated balance sheet at June 30, 2003. On August 27, 2003 the Company filed a law suit against Toadgames, Inc. case number A0304323 a company incorporated by Chris Hunter. The Company alleges Toadgames, Inc. has misappropriated the Company’s trade secrets, including its games, data codes, designs, gameplay, format, scoring systems, instructions, marketing and promotional strategies.
In the ordinary course of conducting its business, the Company has become subject to additional litigation and claims regarding various matters. There exists a reasonable possibility that the Company will not prevail in all cases. However, sufficient uncertainty exists in these cases to prevent the Company from determining the amount of its liability, if any.
NOTE F – SUBSEQUENT EVENTS
As discussed in Note E, on October 8, 2003, the Company has entered into a settlement agreement with Bingo.com, whereby Bingo.com has agreed to relinquish all of its rights and ownership of the domain name Lottery.com in exchange for a fifty (50) year royalty agreement whereby the Company will pay Bingo.com a 4% royalty on gross revenue (as defined) on online lottery ticket sales. Bingo,Inc. relinquished 850,000 warrants to purchase GameBanc stock in exchange for 175,000 shares of Games, Inc. common stock. Pursuant to the royalty agreement the Company must pay minimum royalties of $72,000 per annum.
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following discussion and analysis in this Form 10-QSB contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from anticipated results, including those set forth under “Cautionary Statement” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report. The following discussion should be read in conjunction with the Company’s Consolidated Financial Statements and notes thereto included elsewhere in this report.
RESULTS OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2002
OVERVIEW AND RECENT DEVELOPMENTS
We are a leading online media and value-added information service providing subscribers with access to entertaining proprietary content via the Internet. The Company and its subsidiaries operate a branded network of web sites targeting three allied areas of interactive entertainment: government sponsored lotteries, Internet games, and digital greetings. In addition, we continue to develop and manage a large opt-in e-mail database of over 12 million subscribers. We currently own and operate leading games and entertainment sites that include:
-Lottery.com
-GameLand.com
-SkillMoney.com
-Cards.com
The Company has traditionally derived its revenues from advertising sources. Advertising revenues are derived principally from online advertising arrangements under which we receive revenues on fixed payment over a contract period, a cost-per-thousand impression basis and design of advertising campaigns to be placed on our network. We are currently developing programs to expand our revenue generating sources through non-advertising revenues. These non-advertising revenues will be primarily derived from subscription fee-based services and software sales.
RESULTS OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2002
REVENUE
Revenue of $91,173 for the three months ended September 30, 2003 was $44,591 or approximately 96% more than the same period in the prior year. The increase is due to new revenues earned from the sale of lottery subscriptions and increased advertising revenues mainly in response to over all activities in the Internet advertising market in the U.S.
COSTS AND EXPENSES
During the three months ended September 30, 2003, the cost of goods sold of $21,881 was approximately 50% more than the three months ended September 30, 2002. The cost of goods sold increased due to increased hosting and bandwidth cost, gross margins increased by approximately 116% due to increased primarily due to increased sales of lottery subscriptions.
The Company incurred operating expenses of $726,363 for the three months ended September 30, 2003. This represents a decrease of $112,749 or approximately 13% compared to the operating expenses in the three months ended September 30, 2002. The decrease was primarily attributed to a decrease in Selling, General and Administrative expenses by approximately $128,000 as a result of fewer offices and reduced travel and reduced employee costs working in those functions.
Depreciation and amortization increased approximately $15,000 or 6% during the three months ended September 30, 2003 compared to the three months ended September 30, 2002. The increase is due primarily to reclassifying some assets to a shorter expected useful life of some assets.
Interest expense increased from $12,981 to $29,778 or approximately 129% due to increased debt, principally due to the addition of notes payable and convertible notes payable.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s success is highly dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing from related parties as may be required, and ultimately to attain profitability. Management expects to need and be able to attract additional capital for its operations. However, there can be no assurance that management’s plans will be executed as anticipated.
At September 30, 2003, the Company had a bank overdraft of $41,183 compared to $24,039 at September 30, 2002. Current liabilities at September 30, 2003 of $2,794,265 current assets of $13,123. Total liabilities at September 30, 2003 of $3,544,623 exceed total assets of $882,728.
Net cash used by operating activities was $221,636 for the three months period ended September 30, 2003 compared to $301,848 net cash used by operating activities for the three month period ended September 30, 2002, an decrease of $80,212. The cash used by operating activities during the three months ended September 30, 2003 was primarily related to a net loss of $686,849 partially offset by depreciation and amortization of $283,449 an increase in officers accrued salaries of $121,250 and accounts payable and accrued liabilities of $43,541. The cash used by operating activities during the three months ended September 30, 2002 was primarily related to a net loss of $820,072, partially offset by depreciation and amortization of $268,634, an increase in accounts payable and accrued liabilities of $123,211.
Cash provided by financing activities of $221,636 for the three months ended September 30, 2003 included proceeds from the issuance of common stock of $25,000 and issuance of $35,000 6% interest convertible notes, issuance of notes payable of $200,619 at 6%, an increase of bank overdraft of $41,183, offset by repayments of capital lease obligations of $50,251 and a decrease in due to related parties of $29,915. Cash provided by financing activities of $285,552 for the three months ended September 30, 2002 included proceeds from the issuance of common stock of $204,000 an increase in bank overdraft of $24,039 and an increase in due to related parties of $87,513 partially offset by repayments of $20,260 on notes payable.
Unless and until its revenue stream matures, the Company recognizes that it will likely not have sufficient cash resources to fund its operations through the end of fiscal 2003. The Company must be able to close on additional financing transactions to fund ongoing operations. The Company might be required to obtain financing on terms that are not favorable to it and its shareholders. The Company received a going concern opinion on its June 30, 2003 audited financial statements.
If the Company is unable to obtain additional financing when needed, it may be required to shutdown, delay or scale back product development and marketing programs in order to meet its short-term cash requirements, which could have a material adverse effect on its business, financial condition and results of operations.
The Company operates in a highly competitive environment that involves a number of risks, some of which are beyond the Company’s control. The following statement highlights some of these risks.
Statements contained in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” which are not historical facts are or might constitute forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although the Company believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, its expectations might not be attained. Forward-looking statements involve known and unknown risks that could cause the Company’s actual results to differ materially from expected results. Factors that could cause actual results to differ materially from the Company’s expectations include, among others: we have incurred significant operating losses and we cannot predict whether we will become profitable; we have changed our business focus and we may not achieve our plan; we have cap ital requirements to fund our operations, and if we do not obtain sufficient additional funds our ability to grow may be limited; our growth strategy, including acquisitions, may not succeed and may adversely effect our financial condition, results of operations and cash flows; if we are unable to introduce new products and services and incorporate rapidly developing technologies into our products and services, our business may be adversely affected; we depend on the continued growth in use of the Internet; intense competition may adversely affect our operating results; and other risks. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this report to reflect any change in our expectations or any changes in events, conditions or circumstances upon which any forward-looking statement is based.
ITEM 3. CONTROLS AND PROCEDURES
An evaluation was performed, as of September 30, 2003, under the supervision and with the participation of our management, including our President, Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on such evaluation, our management has concluded that our disclosure controls and procedures were effective as of September 30, 2003. There have been no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to September 30, 2003.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Current Litigation
Games, Inc. None.
Current litigation of Games, Inc. subsidiary GameBanc Corporation or its predecessor Lottery Channel, Inc.
Bingo Inc. v. The Lottery Channel, Inc.
Case Number C-1-02-002, United States District Court, Southern District of Ohio at Cincinnati, Suit filed January 2, 2002.
The settlement agreement dated October 8, 2003 where Bingo has agreed to relinquish all of its rights and ownership of the domain name Lottery.com in exchange for a fifty-year (50) royalty agreement whereby the Company will pay Bingo a 4% royalty on gross revenue (as defined) on online lottery ticket sales. Pursuant to the royalty agreement the Company must pay minimum royalties of $72,000 per annum.
Christopher Hunter v. The Lottery Channel, Inc.
Case Number 3:01CV390, United States District Court, Eastern District of Virginia, Richmond Division Suit filed June 25, 2001
This is an action by a former employee and manager of Gameland.com site who sued us in Virginia District Court for bonus payments under his employment agreement. Mr. Hunter obtained a default judgment against The Lottery Channel, Inc. at a time when the Company was attempting to negotiate and resolve his claims. Currently, approximately $99,000 remains unpaid and accrued on the Company’s liabilities at September 30, 2003. On August 27, 2003 the Company filed a law suit against Toadgames, Inc., case number A0304323 a company incorporated by Chris Hunter. The Company alleges Toadgames, Inc. has misappropriated the Company’s trade secrets, including its games, data codes, designs, gameplay, format, scoring systems, instructions, marketing and promotional strategies.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Exhibit 31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
None
(B) REPORTS ON FORM 8-K
On September 11, 2003 the Company reported on Form 8-K that on September 9, 2003, the Board of Directors of Games, Inc. issued a press release announcing the appointment of George R. Blake as independent director to the Board of Directors and also that on September 2, 2003, Chad Wick resigned from the Board of Directors of Games, Inc. Mr. Wick was appointed to the Board of Directors on September 3, 2002. Mr. Wick resigned from the Board for personal reasons.
On August 18, 2003, the Company reported on Form 8-K, that the Company approved Marcum & Kliegman LLC (MK) as the Company’s new accountants for the year ended June 30, 2003 effective August 15, 2003.
On May 16, 2003, the Company reported on Form 8-K, that the Company’s independent auditors King Griffin & Adamson P.C. (KGA), resigned effective May 14, 2003.
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GAMES, INC.
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 each of the undersigned thereunto duly authorized, who certify to their knowledge that this report fully complies with the requirements of Section 13(a) or 15(d) of that Act and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of the registrant as of and for the period ended September 30, 2003 .
GAMES, INC.
By: Roger W. Ach, II
Roger W. Ach, II
Chief Executive Officer
By: /s/ Myles S. Cairns
Myles S. Cairns
Chief Financial Officer
Date: November 24, 2003
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Certifications
I, Roger W. Ach, II, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Games, Inc. and Subsidiary;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
(a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 24, 2003
/s/ Roger W. Ach, II
Roger W. Ach, II
Chief Executive Officer
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I, Myles S. Cairns, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Games, Inc. and Subsidiary;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
(b)
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
(c)
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
(a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 24, 2003
/s/ Myles S. Cairns
Myles S. Cairns
Chief Financial Officer
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Exhibit 31.1
CERTIFICATION 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 filing of Games, Inc. and Subsidiary (the "Company") Quarterly Report on Form 10-QSB for the period ending September 30, 2003 with the Securities and Exchange Commission on the date hereof (the "Report"), I, Roger W. Ach, II, Chief Executive Officer of the Company, certify, pursuant to the 18 U.S.C. (SS) 1350, as adopted pursuant to (SS) 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Roger W. Ach, II
Roger W. Ach, II
Chief Executive Officer
November 24, 2003
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Exhibit 31.2
CERTIFICATION 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 filing of Games, Inc. and Subsidiary (the "Company") Quarterly Report on Form 10-QSB for the period ending September 30, 2003 with the Securities and Exchange Commission on the date hereof (the "Report"), I, Myles S. Cairns, Chief Financial Officer of the Company, certify, pursuant to the 18 U.S.C. (SS) 1350, as adopted pursuant to (SS) 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Myles S. Cairns
Myles S. Cairns
Chief Financial Officer
November 24, 2003
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