Add
GMEI.OB to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| GMEI.OB > SEC Filings for GMEI.OB > Form 10QSB on 16-Aug-2004 | All Recent SEC Filings |
16-Aug-2004
Quarterly Report
Certain information included herein contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act, such as statements relating to plans for product development, product placement, capital spending and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include, but are not limited to, those relating to our liquidity requirements, our ability to locate necessary sources of capital to sustain our operations, the continued growth of the gaming industry, the success of our product development activities, the acceptance of our products in the marketplace, vigorous competition in the gaming industry, our dependence on existing management, changes in gaming laws and regulations (including actions affecting licensing), our leverage and debt service (including sensitivity to fluctuations in interest rates) and domestic or global economic conditions.
On or about January 12, 2004, NorStar Group, Inc., a publicly-held company
that was not conducting or developing any commercial operations ("NorStar"),
consummated a series of transactions, including: (i) a 1-for-24.852732 reverse
split of its outstanding shares of common stock; (ii) the issuance of 14,600,000
post-split shares of common stock in exchange for all of the outstanding shares
of common stock of Gaming & Entertainment Group, Inc., a Nevada corporation
("G&EG Nevada"), a developer of central server gaming systems, game content and
gaming devices for the land-based gaming markets located in USA and Canada;
(iii) the issuance of options and warrants to purchase 4,257,937 post-split
shares of common stock in exchange for all of the outstanding options and
warrants to purchase shares of G&EG Nevada; and (iv) a change in the name of
NorStar to Gaming & Entertainment Group, Inc. ("G&EG"). As a result of the
exchange, G&EG Nevada became a subsidiary of G&EG and the former stockholders of
G&EG Nevada became the holders of 91.25% of the then outstanding shares of
common stock of the combined companies. In addition, the former directors and
officers of G&EG Nevada became the controlling members of the board of directors
and management of the combined companies. Since G&EG Nevada was the only
operating company in the exchange and the former stockholders of G&EG Nevada
received a substantial majority of the voting securities of the combined
companies, the exchange was accounted for as a "reverse acquisition" and,
effectively, as a recapitalization, in which G&EG Nevada was the accounting
acquirer (and the legal acquiree) and NorStar was the accounting acquiree (and
the legal acquirer). Since the exchange was accounted for as a "reverse
acquisition," the accompanying consolidated financial statements reflect the
historical financial statements of G&EG Nevada, the accounting acquirer, as
adjusted for the effects of the exchange of shares on its equity accounts, the
inclusion of the net liabilities of the accounting acquiree as of January 12,
2004 on their historical basis and the inclusion of the accounting acquiree's
results of operations from that date.
In this report, the references to "we," "us" or "our" relate to G&EG Nevada prior to January 12, 2004 and to G&EG, G&EG Nevada and their other subsidiaries from that date.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect reported amounts and disclosures, some of which may require revision in future periods. The most sensitive estimates affecting our financial statements include, or will include in subsequent periods, future volatility used in valuing equity instruments, allowances for bad debts, depreciable lives of gaming equipment in service and other equipment, amortization periods for certain technology, deferred revenues, accrued liabilities and deferred tax valuation allowances. By their nature, these judgments are subject to an inherent degree of uncertainty. Our judgments are based on our historical experience, our observance of industry trends, information provided by or gathered from our customers and information available from other outside sources, as appropriate. There can be no assurance that actual results will not differ from our estimates. The most critical policies relate to revenue recognition. The following is a description of our revenues and our revenue recognition policies. The application of these policies, in some cases, requires our management to make subjective judgments regarding the effect of matters that are inherently uncertain.
Through June 30, 2004, we have received substantially all of our revenues from maintenance and technical support from contracts relating to Internet gaming sites in regulated gaming markets, other than in the United States. We expect to continue to provide such services to major groups.
Our current focus is the provision of our central server gaming system and substantive suite of games in the North American land-based gaming market in the United States, in Canada and in Europe. Our business model is primarily based upon recurring revenue to be derived from the placement of our products. Specifically, we will offer our central server gaming system in the foregoing markets on a license basis, whereby we will receive a recurring license fee. Gaming machines will primarily be placed on a revenue sharing or participation basis with the Company generally realizing 15%-30% of the net win (i.e., coin inserted into a machine less the coin paid out) from each of such gaming machines, depending upon the market. Although not our specific focus, from time to time we will sell our gaming machines on an outright sale basis. Alternatively, we will occasionally deploy gaming machines on the basis of part cash payment and a lower revenue sharing percentage. We will also generate some revenues from maintenance and technical support services in connection with the placement of our central server gaming system and gaming machines. In all cases, we will outsource the manufacture of our gaming machines through one of several turnkey third party manufacturing sources with which we have an alliance.
The placement of gaming equipment on a revenue sharing basis is capital intensive. In this regard, we are currently negotiating with several financiers to establish a credit facility sufficient to finance the manufacture and deployment of our projected roll-out of gaming machines placed on a revenue sharing basis, as well as the interim manufacturing period where gaming machines are placed on an outright sale basis.
When we install our gaming machines on a revenue-sharing basis, there will generally be no cost to our casino clients as we will share in the recurring revenues generated from the gaming machines. We will, however, retain ownership of the gaming machines and the central server gaming system throughout the term of the revenue-sharing and licensing agreements, respectively, and will maintain the right to refurbish and redeploy gaming machines returned to us either upon the expiration or early termination of the revenue-sharing agreements. We believe that by placing gaming machines on a revenue-sharing basis we will maximize the amount of placements of our products; however, there is no assurance that we will be successful in this effort given our current cash position, not having yet established a credit facility with a third-party financier, and given that we have not previously deployed products, or provided services, to gaming operators in the land-based gaming markets in which we are entering.
Historically, we have experienced substantial fluctuations in revenues from period-to-period as a result of our revenues being derived solely from software development contracts which consisted of periodic payments as opposed to steady recurring revenues. Moreover, since March 2002, we have been intensely focused on the finalization of our central server gaming system for the Class II gaming market, and the licensed betting shop and arcade market in the U.K. and Europe, as well as development of a wide array of electronic bingo, keno, instant lottery, video poker and roulette products, among others, for deployment in the U.S., Canada and Europe.
Revenues from contracts relating to the maintenance and technical support of Internet gaming sites in regulated gaming markets are recognized as the services are performed or pro rata over the service period.
Revenues from the placement of our gaming machines on a revenue-sharing basis, as well as the placement of our central server gaming system on a license basis, will be accounted for similar to an operating lease, with the revenues recognized as earned over the term of the agreement. If we sell gaming machines outright, revenues will be recognized upon completion of installation and acceptance by the casino, provided collectibility is reasonably assured. We will negotiate our portion of the revenues generated under our revenue-sharing contracts based upon the cost of the equipment installed, the location of a particular casino, and the estimated daily net win per gaming machine for each casino client.
RESULTS OF OPERATIONS
During the three months ended June 30, 2004, we generated revenues from maintenance and technical support services of $46,667, compared to revenues from services of $202,782, during the three months ended June 30, 2003. The $156,115, or 77% decrease in revenues from services was due primarily to our transition from solely focusing on the sale and marketing of online gaming systems in regulated gaming markets to the development of land-based gaming systems and a suite of electronic bingo, keno, instant lottery, video poker and roulette games using our central server gaming system platform. We anticipate an increase in revenue and sales volume during the remainder of the year ending December 31, 2004 as we complete the development of our products. We recently released our range of video-based roulette games and the completion of our slot operating system for the Amusement With Prizes (AWP) arcade market and Licensed Betting Offices (LBOs) in the United Kingdom and Republic of Ireland. We intend to deploy AWP and roulette machines in the United Kingdom on both outright sale and revenue-sharing placements.
During the three months ended June 30, 2004, we had no significant costs of revenues, compared to costs of $65,097 during the three months ended June 30, 2003. During the three months ended June 30, 2003, our costs of revenues related only to services. The $65,097 decrease in the costs of revenues was attributable to the fact that no significant efforts were required by the Company in connection with the maintenance and technical support contracts which still generate revenues over the service period.
For the three months ended June 30, 2004, we incurred total operating expenses of $1,194,474, compared to $561,471 for the three months ended June 30, 2003, an increase of $633,003, or 112.7% . The increase in total operating expenses related primarily to a $100,320 increase in research and development expenses and a $532,683 increase in selling, general and administrative expenses.
During the three months ended June 30, 2004, we incurred research and development expenses of $252,213, compared to $151,893 during the three months ended June 30, 2003, an increase of $100,320, or 66%. The increase in our research and development expenses was due primarily to the additional resources spent towards developing our central server gaming system platform and related games and other products for deployment in land-based casinos. We anticipate a decrease in our research and development expenses in the future as we complete the development of our products regarding Class II and Class III gaming markets in the U.S., the LBO and AWP markets in the U.K., Ireland and Europe and our next generation Internet gaming platform. Research and development expenses to obtain the necessary certifications and approvals for each of the foregoing cannot be quantified at this time given the nature of this process. There are always risks and uncertainties associated with the development, certification and commercialization of new products or services. The Company is making its initial deployment of products into the land-based gaming markets in the second half of 2004. While this is new territory for the Company, it has previously been through the development and lab certification process on a number of occasions with respect to its Internet gaming platform. The Company anticipates that, as with the Internet gaming platform submissions, it will be successful in obtaining certification from the gaming labs on its various hardware and software products. To reduce the risk associated with its initial entry into the land-based gaming market, the Company is utilizing well established third party turnkey manufacturing sources for its gaming devices and will utilize industry veterans for the installation and ongoing maintenance of the gaming machines.
During the three months ended June 30, 2004, we incurred selling, general and administrative expenses of $942,261, compared to $409,578 during the three months ended June 30, 2003, an increase of $532,683, or 130.1% . The increase in our selling, general and administrative expenses was due primarily to the costs related to travel expenses, the increased costs related to the retention of professionals, including securities, gaming and intellectual property counsel, and non cash compensation expense relating to shares issued to consultants in consideration of strategic services. We had costs of $432,390 for the fair value of shares of restricted common stock issued to consultants in consideration for strategic advisory, investment banking and research services during the three months ended June 30, 2004. The Company does not expect to incur similar charges for the remainder of the year and, accordingly, we anticipate that our selling, general and administrative expenses will be lower during the remainder of the year.
For the three months ended June 30, 2004, other expense was $12,698, compared to other income of $1,820 for the three months ended June 30, 2003, an increase of other expenses of $14,518. The increase in other expenses related primarily to $14,170 of foreign currency transaction losses primarily the result of fluctuations between the Australian dollar, the functional currency of one of the subsidiaries, and the U.S. dollar (USD), $3,209 of interest expense, offset, in part, by $4,681 of interest and other income.
For the three months ended June 30, 2004, we experienced a net loss of $1,160,505, compared to a net loss of $421,966 for the three months ended June 30, 2003, an increased loss of $738,539, or 175%. The increase in net loss was due to a $156,115 decrease in revenues, a $633,003 increase in operating expenses and a $14,518 increase in other expenses, offset by a $65,097 decrease in costs of revenues. As previously noted, the increased loss and trends related to our revenues and operating expenses relate directly to our transition from solely marketing and placing online gaming systems to the development of land-based gaming systems and products using our central server gaming system platform. As our research and development projects are completed, and commercialization of the products relating thereto occurs, we anticipate that our revenues will improve considerably.
During the six months ended June 30, 2004, we generated revenues from maintenance and technical support services of $75,340, compared to revenues from services of $408,462, during the six months ended June 30, 2003. The $333,122, or 81.6% decrease in revenues from services and the absence of any revenues from product sales in the six months ended June 30, 2004 compared to product sales revenues of $297,432 in the six months ended June 30, 2003 was due primarily to our transition from the sale and marketing of online gaming systems in regulated gaming markets to the development of land-based gaming systems and a suite of electronic bingo, keno, instant lottery, video poker and roulette games using our central server gaming system platform. We anticipate an increase in revenue and sales volume during the remainder of the year ending December 31, 2004 as we complete the development of our products. We recently released our range of video-based roulette games and the completion of our slot operating system for the Amusement With Prizes (AWP) arcade market and Licensed Betting Offices (LBOs) in the United Kingdom and Republic of Ireland. We intend to deploy AWP and roulette machines in the United Kingdom on both outright sale and revenue-sharing placements.
During the six months ended June 30, 2004, we had no significant costs of revenues, compared to $367,965 during the six months ended June 30, 2003. During the six months ended June 30, 2003, our costs of revenues consisted of $125,401 attributable to services, and $242,564 attributable to product sales. The $125,401 decrease in the costs of revenues was attributable to the fact that no significant efforts were required by the Company relating to maintenance and technical support contracts. We did not incur any costs related to product sales during the six months ended June 30, 2004 as we did not record any revenues from product sales during this period.
In terms of gross margin, we experienced a gross margin of $75,340 during the six months ended June 30, 2004, compared to a gross margin of $337,929 during the six months ended June 30, 2003. The $262,589, or 77.7% decrease in gross margin related primarily to the significant research and development undertaken with respect to our land-based gaming systems and suite of games using our central server gaming system platform.
For the six months ended June 30, 2004, we incurred total operating expenses of $2,146,545, compared to $960,458 for the six months ended June 30, 2003, an increase of $1,186,087, or 123.5% . The increase in total operating expenses related primarily to a $211,666 increase in research and development expenses and a $997,449 increase in selling, general and administrative expenses.
During the six months ended June 30, 2004, we incurred research and development expenses of $504,269, compared to $292,603 during the six months ended June 30, 2003, an increase of $211,666, or 72.3% . The increase in our research and development expenses was due primarily to the additional resources spent towards developing our central server gaming system platform and related games and other products for deployment in land-based casinos. We anticipate a decrease in our research and development expenses in the future as we complete the development of our products regarding Class II and Class III gaming markets in the U.S., the LBO and AWP markets in the U.K., Ireland and Europe and our next generation Internet gaming platform. Research and development expenses to obtain the necessary certifications and approvals for each of the foregoing cannot be quantified at this time given the nature of this process. There are always risks and uncertainties associated with the development, certification and commercialization of new products or services. The Company is making its initial deployment of products into the land-based gaming markets in the second half of 2004. While this is new territory for the Company, it has previously been through the development and lab certification process on a number of occasions with respect to its Internet gaming platform. The Company anticipates that, as with the Internet gaming platform submissions, it will be successful in obtaining certification from the gaming labs on its various hardware and software products. To reduce the risk associated with its initial entry into the land-based gaming market, the Company is utilizing well established third party turnkey manufacturing sources for its gaming devices and will utilize industry veterans for the installation and ongoing maintenance of the gaming machines.
During the six months ended June 30, 2004, we incurred selling, general and administrative expenses of $1,642,276, compared to $644,827 during the six months ended June 30, 2003, an increase of $997,449, or 154.7% . The increase in our selling, general and administrative expenses was due primarily to the costs related to travel expenses, the increased costs related to the retention of professionals, including securities, gaming and intellectual property counsel, our exhibition at five industry shows and conventions, the salaries related to new additional employees and non cash compensation expense of $607,478 relating to shares, options and warrants issued to consultants in consideration of strategic services. We had additional costs of $432,390 for the fair value of shares of restricted common stock issued to consultants in consideration for strategic advisory, investment banking and research services during the six months ended June 30, 2004. The Company does not expect to incur similar charges for the reminder of the year and, accordingly, we anticipate that our selling, general and administrative expenses will be lower during the remainder of the year.
For the six months ended June 30, 2004, other expense was $30,721, compared to other income of $4,376 for the six months ended June 30, 2003, an increase of other expenses of $35,097. The increase in other expenses related primarily to $14,170 of foreign currency transaction losses primarily the result of fluctuations between the Australian dollar, the functional currency of one of the subsidiaries, and the USD, $26,760 of interest expense, offset, in part, by $10,209 of interest and other income.
For the six months ended June 30, 2004, we experienced a net loss of $2,101,926, compared to a net loss of $618,153 for the six months ended June 30, 2003, an increased loss of $1,483,773. The increase in net loss was due to a $630,554 decrease in revenues, a $1,186,087 increase in operating expenses and a $35,097 increase in other expenses, offset by a $367,965 decrease in costs of revenues. As previously noted, the increased loss and trends related to our revenues and operating expenses relate directly to our transition from the marketing and placement of online gaming systems to the development of land-based gaming systems and products using our central server gaming system platform. As our research and development projects are completed, and commercialization of the products relating thereto occurs, we anticipate that our revenues will improve considerably.
As of June 30, 2004, we had cash of $214,932, prepaid expenses of $21,790 and current liabilities of $494,922. Accordingly, as of June 30, 2004, we had a working capital deficiency of $258,200. During the six months ended June 30, 2004, cash increased by $128,617 from $86,315 to $214,932. The increase in cash reflected $1,684,792 of net cash provided by financing activities, offset by $1,494,897 of net cash used in operating activities, $44,007 of net cash used in investing activities and $17,271 used as a result of exchange rate changes.
Operating activities used net cash of $1,494,897 during the six months ended June 30, 2004, whereas operating activities used net cash of $412,223 during the six months ended June 30, 2003. The net cash used in operating activities during the six months ended June 30, 2004 related primarily to net loss of $2,101,926, an increase in accounts payable of $90,936, a decrease in accrued expenses of $33,325, a decrease in accrued expenses - employees of $59,190, and a decrease in prepaid expenses of $11,790, offset, in part, by non-cash costs of investment banking, strategic advisory and research services of $607,478 paid through the issuance of restricted shares of common stock with a fair value of $432,390 and the issuance of options and warrants with a fair value of $175,088. Issuances of equity securities as payments for services and compensation result in non-cash charges to expense. During the six months ended June 30, 2003, our operating activities used net cash of $412,223, reflecting our net loss of $618,153, offset, in part, by the non-cash charges for the impairment of intellectual property of $23,028 and the increase in accounts receivable of 63,715.
Investing activities used $44,007 during the six months ended June 30, 2004, compared to using $33,393 during the six months ended June 30, 2003. The increased use of cash in investing activities reflects the costs related to the build-out and relocation of our principal offices to Las Vegas, Nevada. We anticipate that for the twelve month period ending June 30, 2005, we will need up to $3,000,000 for ongoing research and development, gaming lab certification of our products, gaming licensing, advertising and marketing and the manufacture of gaming machines to be deployed on a recurring revenue basis in the U.S. and in the U.K. The manufacturing cost associated with all gaming machines sold by us on an outright sale basis will likely be financed through the purchase terms.
Our financing activities provided net cash of $1,684,792 during the six . . .
|
|