UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Quarter ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to _________
Commission File No. 000-49723
IGAMES ENTERTAINMENT, INC.
-----------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Nevada 88-0501468
------ ----------
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
700 SOUTH HENDERSON ROAD, SUITE 210, KING OF PRUSSIA, PA 19406
--------------------------------------------------------------
(Address of Principal Executive Offices)
(610) 354-8888
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 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 February 12, 2004, the issuer had issued and outstanding
4,053,804 shares of its common stock, par value $0.004 per share. This amount
reflects a 4-for-1 reverse split of the issuer's common stock, which was
effective on December 10, 2003.
IGAMES ENTERTAINMENT, INC.
QUARTERLY PERIOD ENDED DECEMBER 31, 2003
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Balance Sheet at December 31, 2003 (unaudited)...............3
Statements of Operations for the Three and
Nine Months Ended December 31, 2003 and 2002 (unaudited).....4
Statements of Cash Flows for the Nine Months Ended
December 31, 2003 and 2002 (unaudited).......................5
Notes to Financial Statements................................6
Item 2. Management's Discussion and Analysis or Plan or Operation...11
Item 3. Controls and Procedures.....................................15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................16
Item 2. Changes in Securities and Use of Proceeds...................16
Item 3. Defaults Upon Senior Securities.............................16
Item 4. Submission of Matters to a Vote of Security Holders.........16
Item 5. Other Events................................................17
Item 6. Exhibits and Reports on Form 8-K............................17
Signatures...........................................................18
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
iGAMES ENTERTAINMENT, INC.
BALANCE SHEET
December 31, 2003
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 27,398
Certificate of deposit - restricted .......................... 150,000
Accounts receivable .......................................... 10,060
Inventory .................................................... 132,348
Deferred Acquisition Cost .................................... 160,000
-----------
TOTAL CURRENT ASSETS ........................................ 479,806
PROPERTY AND EQUIPMENT, net ..................................... 7,123
INTANGIBLE ASSETS, net .......................................... 426,085
DEPOSITS ........................................................ 4,865
-----------
TOTAL ASSETS ................................................ $ 917,879
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable ................................................. $ 18,500
Line of credit ............................................... 375,276
Accounts payable and accrued expenses ........................ 301,638
-----------
TOTAL CURRENT LIABILITIES ........................... 695,414
-----------
STOCKHOLDERS' EQUITY:
Preferred stock; no shares issued and outstanding ............ -
Common stock; $.004 par value, 12,500,000 shares authorized
3,966,291 shares issued and outstanding ..................... 15,865
Additional paid-in capital ................................... 4,746,554
Accumulated deficit .......................................... (4,533,704)
Deferred compensation ........................................ (6,250)
-----------
TOTAL STOCKHOLDERS' EQUITY .................................. 222,465
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................. $ 917,879
===========
See accompanying notes to financial statements
-3-
iGAMES ENTERTAINMENT, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
REVENUE .................................... $ 10,070 $ 74,309 $ 168,459 $ 100,307
COST OF GOODS SOLD ......................... 3,980 10,370 33,783 18,606
----------- ----------- ----------- -----------
6,090 63,939 134,676 81,701
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Salaries and benefits ................... 40,469 84,005 317,177 194,457
Noncash compensation .................... 313,837 369,250 671,014 851,330
Professional fees ....................... 114,649 43,321 179,764 152,163
Advertising ............................. 4,340 8,224 18,884 48,454
Research and development ................ 50 58,829 24,526 123,697
Travel and entertainment ................ 12,563 37,945 60,563 85,192
Rent .................................... 15,443 9,579 42,462 46,183
Loss on impairment of an intangible asset 110,000 - 110,000 -
Other general and administrative ........ 115,371 116,658 364,371 170,037
----------- ----------- ----------- -----------
726,722 727,811 1,788,761 1,671,513
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS ....................... (720,632) (663,872) (1,654,085) (1,589,812)
OTHER INCOME (EXPENSE):
Interest expense ........................ (6,397) (10,489) (13,427) (22,989)
Interest income ......................... 1,668 383 1,755 906
----------- ----------- ----------- -----------
(4,729) (10,106) (11,672) (22,083)
----------- ----------- ----------- -----------
NET LOSS ................................... $ (725,361) $ (673,978) $(1,665,757) $(1,611,895)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE-BASIC AND DILUTED $ (0.19) $ (0.25) $ (0.48) $ (0.67)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
-BASIC AND DILUTED ...................... 3,772,219 2,716,250 3,485,138 2,390,250
See accompanying notes to financial statements
-4-
iGAMES ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
December 31,
--------------------------
2003 2002
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..........................................$(1,665,757) $(1,611,895)
Adjustments to reconcile net loss to net cash
used in operations:
Common stock issued for services ................ 671,014 851,330
Depreciation and amortization ................... 28,782 36,035
Loss on impairment of intangible asset .......... 110,000 -
Changes in assets (increase) decrease:
Accounts receivable .............................. (5,307) (4,882)
Inventory ........................................ (112,717) (18,048)
Prepaid expenses ................................. 113,301 (57,414)
Deposits ......................................... - 2,331
Deferred Acquisition Cost ........................ (160,000) -
Changes in liabilities increase (decrease):
Accounts payable and accrued expenses ............ 261,804 27,078
Accounts payable related party ................... (20,495) -
Deferred revenue ................................. - -
Customer deposits ................................ (8,584) -
----------- -----------
NET CASH FLOWS USED IN OPERATING ACTIVITIES ...... (787,959) (775,465)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable ....................... (81,500) -
Purchase of certificate of deposit ................ (150,000) -
Net proceeds from line of credit .................. 375,895 -
Repayments of line of credit ...................... (620) -
Proceeds from the sale of common stock and warrants 277,500 750,000
Offering costs .................................... (15,000) (97,500)
----------- -----------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES .. 406,275 652,500
----------- -----------
NET DECREASE IN CASH ................................. (381,684) (122,965)
CASH AND CASH EQUIVALENTS - beginning of period ...... 409,082 436,972
----------- -----------
CASH AND CASH EQUIVALENTS- end of period .............$ 27,398 $ 314,007
=========== ===========
See accompanying notes to financial statements
-5-
IGAMES ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
NOTE 1 - BASIS OF PRESENTATION
iGames Entertainment, Inc.(the "Company" or "iGames") was originally
incorporated in the State of Florida on May 9, 2001 under the name Alladin
Software, Inc. On June 25, 2001, the Company changed its name to iGames
Entertainment, Inc. On July 10, 2001, iGames Entertainment, Inc. was
incorporated in Nevada, and iGames Entertainment, Inc., a Florida corporation,
became a wholly-owned subsidiary. The acquisition was accounted for as a
purchase between commonly controlled entities and the financial statements have
been combined for all periods presented.
On February 15, 2002, the Company purchased the world-wide patents, trademarks
and rights thereto for a "slot anti-cheating device," known as the Protector,
which is marketed to slot and gaming machine companies and their customers. In
January 2003, the Company purchased the worldwide patents, trademarks and rights
thereto for "Table-Slots," a new table game that the Company markets to casinos
worldwide. In October 2003, the Company purchased the worldwide patents,
trademarks and rights thereto for "Random X 21" another table game that the
Company markets to casinos worldwide.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). The accompanying financial statements for the interim
periods are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for the
periods presented. These financial statements should be read in conjunction with
the financial statements and related footnotes for the fiscal year ended March
31, 2003 contained in the annual report on Form 10-KSB as filed with the
Securities and Exchange Commission. The results of operations for the nine
months ended December 31, 2003 are not necessarily indicative of the results for
the full fiscal year ending March 31, 2004.
In January 2004, we merged with Money Centers of America, Inc. ("Money Centers")
and then acquired all of the outstanding capital stock of Available Money, Inc.
("Available Money"). For a discussion of these transactions, see Note 7 -
Subsequent Events. Money Centers and Available Money both provide cash access
services to the gaming industry, which is now our plan of business.
In furtherance of our acquisition strategy, in November 2003, we entered into a
definitive agreement with Equitex, Inc., a Delaware corporation, to acquire its
wholly-owned subsidiary, Chex Services, Inc., a Minnesota corporation ("Chex").
Chex provides comprehensive cash access services to casinos and other gaming
facilities throughout the United States. Much like Money Centers, Chex's cash
access services allow casino patrons to access cash through check cashing,
credit/debit card cash advances, automated teller machines and wire transfers
depending on the location.
NOTE 2 - NOTES PAYABLE
On March 1, 2002, the Company issued two convertible promissory notes from an
individual for $100,000 and $150,000, respectively. The notes bear interest at
10% per annum and were due on September 1, 2002. The notes are convertible, at
the option of the lender, into 200,000 and 300,000 shares of common stock at
$0.50 per share (pre-split amounts). Additionally, upon conversion, warrants
equal to the number of common shares issued will be granted. These warrants
shall be exercisable at $1.00 per share and expire on December 31, 2005. In
October 2002, the noteholder converted the $150,000 note into 300,000 shares of
the Company's common stock and received warrants to purchase 300,000 shares of
common stock at an exercise price of $1.00 per share. In addition, from July
2003 through December 2003, the Company repaid an additional $81,500 of this
debt. The remaining principal balance of this note of $18,500 continues to bear
interest at 10% per annum and is due upon demand. As of December 31, 2003, the
Company has paid all interest relating to this note.
6
IGAMES ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
(Continued)
NOTE 3 - LINES OF CREDIT
On April 4, 2002, the Company entered into a $150,000 one-year renewable line of
credit with a bank. This debt matures April 4, 2004 and bears interest at 6% per
annum, with interest payable monthly. This debt is collateralized by a $150,000
restricted certificate of deposit that matures on April 4, 2004 and pays
interest at 1.65% per annum. As of December 31, 2003, the balance of this line
of credit is $149,992.
On October 1, 2003, Jeremy Stein, our former chief executive officer, extended a
loan to the Company in the principal amount of $25,000. Mr. Stein received the
funds to provide this loan from a $25,000 revolving line of credit with American
Express. The terms of this loan are the same terms as his line of credit with
American Express. This debt bears interest at 8.49% per annum, with interest
payable monthly. As of December 31, 2003, the balance of this line of credit is
$24,388.
On December 1, 2003, the Company entered into a $250,000 line of credit with an
asset based lender. This debt bears interest at the prime rate of interest plus
10%, floating with daily resets, for the actual number of days that the loan
remains outstanding, provided that the minimum rate on this loan is 14.5% per
annum. The Company is obligated to pay the lender a collateral management fee
equal to one percent of the principal balance of the loan for each month that
the loan is outstanding. As of December 31, 2003, the balance of this line of
credit is $200,895. In order to secure the performance of the Company's
obligations under this loan, the Company granted the lender a continuing lien on
and security interest in and to 250,000 newly issued shares of the Company's
common stock. In addition, upon an event of default under the loan, the Company
is obligated to register the resale of these pledged shares of common stock.
Upon payment in full of all amounts due under the loan, the lender is obligated
to deliver all stock certificates evidencing the ownership of these shares to
the Company for cancellation.
NOTE 4 - STOCKHOLDERS' EQUITY
On October 24, 2003 we raised $25,000 through the issuance of 25,000 shares of
common stock.
In October 2003, the Company issued 81,750 shares of its common stock to three
consultants for services rendered. The Company valued the shares at a
contemporaneous sales price on the date of issuance and recorded consulting
expense of $147,690, or between $1.80 and $1.88 per share.
In October 2003, pursuant to the terms of an asset purchase agreement, the
Company purchased the Random X 21 product by issuing 75,000 restricted shares of
common stock to the seller as payment of 50% of the purchase price. The Company
valued the shares at a contemporaneous sales price on the date of issuance and
recorded an intangible asset of $135,000 or $1.80 per share. The remaining 50%
of the purchase price consisting of 75,000 restricted shares of common stock
will only be granted when the Company has placed at least 150 units of this
table game within casinos under standard licensing/leasing agreements.
Management determined that, as of December 31, 2003, a write-down of the
intangible asset was necessary as the Company's projection of future cash flows
indicated an impairment of $110,000. This amount is included in the Statement of
Operations under the caption (Loss on Impairment of Intangible Asset).
Also, in October 2003, the Company issued 4,542 shares of its common stock to
employees. The Company valued the shares at a contemporaneous sales price on the
date of issuance and recorded salary expense of $8,175 or $1.80 per share,
respectively.
In November 2003, in order to secure the performance of the Company's
obligations under a new line of credit, the Company granted the lender a
continuing lien on and security interest in 250,000 newly issued shares of its
common stock.
7
IGAMES ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
(Continued)
Also, in November 2003, the Company granted options to purchase 62,500 shares of
its common stock at an exercise price of $2.00 per share to its former chief
executive officer pursuant to the terms of his employment agreement.
In December 2003, the Company issued 25,000 shares of its common stock to a
consultant for services rendered. The Company valued the shares at a
contemporaneous sales price on the date of issuance and recorded consulting
expense of $37,000, or $1.48 per share.
Additionally, in December 2003, the Company issued 5,000 shares of its common
stock to a consultant for services rendered. The Company valued the shares at a
contemporaneous sales price on the date of issuance and recorded consulting
expense of $6,600, or $1.32 per share.
The amortization of deferred compensation resulted in a non-cash compensation
expense of $151,875 for the nine months ended December 31, 2003.
Stock option and warrant activity for the nine months ended December 31, 2003,
is summarized as follows:
Weighted Average
Number of Shares Exercise Price
---------------- ----------------
Outstanding at March 31, 2003 1,355,314 $ 4.32
Granted 362,500 2.86
Exercised (6,250) (0.40)
Canceled - -
--------- ----------
Outstanding at December 31, 2003 1,711,564 $ 4.03
The following table summarizes the Company's stock options and warrants
outstanding at December 31, 2003:
Options and Options and
warrants outstanding warrants exercisable
---------------------------------- ---------------------
Weighted Weighted Weighted
average average average
Range of remaining exercise exercise
exercise price Number life price Number price
-------------- --------- --------- -------- --------- --------
$2.00 - 2.40 237,500 4.50 2.25 237,500 $2.25
4.00 1,322,064 2.75 4.00 1,322,064 4.00
6.00 152,000 3.75 6.00 152,000 6.00
--------- ---------
1,711,564 1,711,564
========= =========
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the estimated fair value of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. The Company has
adopted the "disclosure only" alternative described in SFAS 123 and SFAS 148,
which require pro forma disclosures of net income and earnings per share as if
the fair value method of accounting had been applied.
8
IGAMES ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
(Continued)
NOTE 5 - GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has a net loss of
$1,665,757 for the nine months ended December 31, 2003, an accumulated deficit
of $4,533,704 at December 31, 2003, cash used in operations of $787,959 for the
nine months ended December 31, 2003, and requires additional funds to implement
its business plan. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.
With the recent acquisitions of Money Centers and Available Money, the Company
has improved its cash flow. In conjunction with the definitive agreement to
purchase Chex, management believes it has a solid plan to be cash flow positive
in the near future. Management believes the actions it is taking allow the
Company to continue as a going concern. The financial statements do not include
any adjustments that might be necessary if the Company is unable to continue as
a going concern.
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative Financial
Instruments and Hedging Activities," was issued and is effective for contracts
entered into or modified after June 30, 2003, except as stated below and for
hedging relationships designated after June 30, 2003. The changes in this
Statement improve financial reporting by requiring that contracts with
comparable characteristics be accounted for similarly. In particular, this
Statement (1) clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative discussed in paragraph 6(b)
of Statement 133, (2) clarifies when a derivative contains a financing
component, (3) amends the definition of an underlying guarantee to conform it to
language used in FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" and (4) amends certain other existing pronouncements.
The Company does not believe this Statement will have a material effect on its
results of operations or financial position.
In May 2003, SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity," was issued and 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, except for mandatory redeemable financial instruments of nonpublic
entities. This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. The Company does not
believe this Statement will have a material effect on its results of operations
or financial position.
9
IGAMES ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
(Continued)
NOTE 7 - SUBSEQUENT EVENTS
On January 2, 2004, pursuant to an Amended and Restated Agreement and Plan of
Merger (the "Merger Agreement") by and among Money Centers, Christopher M.
Wolfington, iGames, Michele Friedman, Jeremy Stein and Money Centers
Acquisition, Inc., a wholly-owned subsidiary of iGames, Money Centers
Acquisition, Inc. was merged with and into Money Centers and Money Centers, as
the surviving corporation, became a wholly-owned subsidiary of iGames (the
"Merger"). In connection with the Merger, all of the issued and outstanding
shares of capital stock of Money Centers were tendered to iGames and iGames
issued to the Money Centers stockholders an aggregate of 1,351,640 shares of
iGames Series A Convertible Preferred Stock, $.001 par value per share, and
warrants to purchase an aggregate of 2,500,000 shares of iGames common stock,
par value $.004 per share, at an exercise price of $.01 per share. Each share of
Series A Convertible Preferred Stock is entitled to ten votes in all matters
submitted to a vote of iGames shareholders and is convertible at the option of
the holders into ten shares of common stock at any time after the date on which
we amend our articles of incorporation to increase the number of authorized
shares of our common stock to at least 125,000,000. In addition, at the closing
of the Company's previously announced acquisition of Chex (the "Chex
Acquisition") each share of Series A Convertible Preferred Stock will
automatically be converted into ten shares of common stock. In addition, at the
closing of the Chex Acquisition, the Money Centers stockholders are entitled
(subject to certain limitations) to additional consideration equal to that
number of shares of iGames common stock necessary to ensure that they own an
aggregate of 30% of the issued and outstanding shares of iGames common stock
following such issuance, the issuance of shares of iGames common stock in the
Chex Acquisition and assuming full conversion of all shares of Series A
Convertible Preferred Stock.
The acquisition will be accounted for as a reverse acquisition under the
purchase method for business combinations. The combination of the two companies
will be recorded as a recapitalization of Money Centers, pursuant to which Money
Centers will be treated as the continuing entity.
Following the consummation of this merger, all of our existing officers resigned
from their positions and Christopher M. Wolfington was appointed President and
Chief Executive Officer of the Company and Chairman of its Board of Directors.
The Company's Board of Directors presently consists of four members, one of whom
is Mr. Wolfington , one of whom is Jeremy Stein, our former president, and two
of whom are independent directors. All other previous members of our Board of
Directors resigned upon consummation of this merger.
Pursuant to the terms of a Stock Purchase Agreement between iGames, Helene Regen
and Samuel Freshman dated January 6, 2004 (the "Stock Purchase Agreement"),
iGames acquired all of the issued and outstanding shares of capital stock of
Available Money, a provider of cash access services based in Los Angeles,
California. The purchase price of this transaction was $6,000,000, $2,000,000 of
which was paid in cash at closing, $2,000,000 of which is due in cash on or
before March 6, 2004, and $2,000,000 of which is due in cash or, at the election
of iGames, by issuance of 1,470,589 shares of iGames common stock, on the
earlier of (i) the closing of iGames' acquisition of Chex Services, Inc., (ii)
the termination of that proposed transaction or (iii) June 30, 2004. The Stock
Purchase Agreement provides for adjustment of the purchase price in the event
that certain of Available Money's customer contracts do not renew or that the
former stockholders of Available Money do not provide iGames with assistance in
obtaining renewals of such contracts. The primary assets acquired as a result of
this transaction are Available Money's contracts to provide automatic teller
machines to 18 customers, 15 of which are traditional casino operations. The
former stockholders of Available Money retain the right to receive all payments
subsequent to the closing date that relate to services provided by Available
Money through December 31, 2003 and are jointly and severally liable for all
costs and expenses incurred by Available Money relating to services rendered on
or before December 31, 2003.
The cash portion of the purchase price was and will be financed by a $4,000,000
loan to iGames from Chex Services, Inc.
10
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-QSB INCLUDES FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. WE HAVE BASED
THESE FORWARD-LOOKING STATEMENTS ON OUR CURRENT EXPECTATIONS AND PROJECTIONS
ABOUT FUTURE EVENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES AND ASSUMPTIONS ABOUT US THAT MAY CAUSE OUR ACTUAL
RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY
DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. IN SOME
CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS "MAY,"
"WILL," "SHOULD," "COULD," "WOULD," "EXPECT," "PLAN," ANTICIPATE," BELIEVE,"
ESTIMATE," CONTINUE," OR THE NEGATIVE OF SUCH TERMS OR OTHER SIMILAR
EXPRESSIONS. FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH A DISCREPANCY
INCLUDE, BUT ARE NOT LIMITED TO, OUR DEPENDENCE UPON CERTAIN KEY PERSONNEL, OUR
ABILITY TO MANAGE OUR GROWTH, OUR SUCCESS IN IMPLEMENTING OUR BUSINESS STRATEGY,
OUR SUCCESS IN ARRANGING FINANCING WHERE REQUIRED, OUR ABILITY TO COMPLETE THE
CHEX ACQUISITION AND THE RISK OF ECONOMIC AND MARKET FACTORS AFFECTING OUR
CUSTOMERS. MANY OF THESE RISKS ARE BEYOND OUR CONTROL.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of the results of operations, financial
condition and liquidity should be read in conjunction with iGames Entertainment,
Inc. financial statements and notes thereto for the fiscal year ended March 31,
2003 appearing in our most recent annual report on Form 10-KSB as filed with the
Securities and Exchange Commission on June 30, 2003.
OVERVIEW
iGames was incorporated in the State of Florida on May 9, 2001 under
the name Alladin Software, Inc. On June 25, 2001, it changed its name to iGames
Entertainment, Inc. On July 10, 2001, iGames Entertainment, Inc. was
incorporated in Nevada, and iGames Entertainment, Inc., a Florida corporation,
became a wholly-owned subsidiary. On January 2, 2004, iGames acquired Money
Centers pursuant to the merger of Money Centers with a wholly-owned subsidiary
of iGames formed for that purpose. In addition, on January 6, 2004, iGames
acquired the stock of Available Money, the operator of free-standing ATM
machines in casinos. The business operations of Available Money have been
combined with those of Money Centers.
From its inception until the acquisition of Money Centers, iGames was
engaged in developing, marketing, and distributing gaming and security
applications for the casino, hospitality, and entertainment industries. However,
with the acquisition of Money Centers and Available Money, iGames intends to
drastically curtail, if not cease, those activities and focus on the development
of Money Centers' business.
Money Centers was incorporated in the State of Delaware in 1997, but
was inactive until 1999, when it commenced development of an integrated PC-based
Point-of-sale ("POS") system for executing quasi-cash, cash advance, POS Debit,
merchant card, and check cashing transactions specifically for the gaming
industry. The Money Centers system was launched in March 2001. Money Centers'
business model is specifically focused on specialty transactions in the cash
access segment of the funds transfer industry. The funds transfer industry's
traditional business model is dependant on high transaction volume and low
margins in a highly fragmented and competitive market.
Money Centers is a single source provider of cash access services to
the gaming industry. Money Centers has combined state-of-the-art technology with
personalized customer services to deliver the best in ATM, Credit Card Advance,
POS Debit, Check Cashing Services, CreditPlus outsourced marker services, and
merchant card processing. As the top suppliers to the gaming industry have
consolidated service offerings, our acquisition of Money Centers will meet the
growing trend towards single source providers of products and services to
casinos and other gaming facilities worldwide. This trend supports our business
plan to identify fragmented segments of the market to capitalize on merger and
acquisition targets of synergistic companies that support our business model.
The combined companies will gain wider exposure within the casino and gaming
industry.
11
Money Centers has identified the gaming industry as a niche segment
within the funds transfer industry that has significant growth opportunities
historically high cash flow margins. Money Centers feels there is significant
sustainable value for it to have a proprietary position in each phase of the
transaction process in its niche markets.
From October 1999 until March 2001, Money Centers was a development
company focusing on the completion of a Point of Sale (POS) transaction
management system for the gaming industry. In March 2001, Money Centers
commenced operations with the launch of the POS system at the Paragon Casino in
Marksville, LA. Money Centers currently provides its services in five locations
across the United States. In addition, through Available Money, Money Centers
operates approximately 100 ATM machines at 18 locations.
As Money Centers and Available Money were acquired after December 31,
2003, the historical financial information discussed below does not reflect the
financial condition or results of operations of Money Centers or Available
Money.
Critical Accounting Policies
A summary of significant accounting policies is included in Note 2 to
the audited financial statements included in our Annual Report on Form 10-KSB
for the year ended March 31, 2003. We believe that the application of these
policies on a consistent basis enables us to provide useful and reliable
financial information about our operating results and financial condition.
In presenting our financial statements in conformity with accounting
principles generally accepted in the United States, we are required to make
estimates and assumptions that affect the amounts reported therein. Several of
the estimates and assumptions we are required to make relate to matters that are
inherently uncertain as they pertain to future events. However, events that are
outside of our control cannot be predicted and, as such, they cannot be
contemplated in evaluating such estimates and assumptions. If there is a
significant unfavorable change to current conditions, it will likely result in a
material adverse impact to our consolidated results of operations, financial
position and in liquidity. We believe that the estimates and assumptions we used
when preparing our financial statements were the most appropriate at that time.
Presented below are those accounting policies that we believe require subjective
and complex judgments that could potentially affect reported results.
Revenues from the sale or lease of products are recognized as earned
when the sale is completed, or over the lease term, as appropriate.
Revenues from the sale of the Company's table gaming units will be
recognized as the products are sold, any ongoing licensing revenues will be
recognized on a monthly ongoing basis. Additionally, revenues from any units
that are leased pursuant to operating leases will be recognized monthly as
earned.
We account for intangible assets as follows: licensing and patent
agreements are stated at cost. The recoverability of the license and patent
agreements is evaluated each year based upon management's expectations relating
to the life of the technology and current competitive market conditions.
We account for stock based compensation utilizing Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. We have chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the estimated fair market value of our stock at the date of the grant
over the amount an employee must pay to acquire the stock. We have adopted the
"disclosure only" alternative described in SFAS 123 and SFAS 148 (See New
Accounting Pronouncements), which require pro forma disclosures of net income
and earnings per share as if the fair value method of accounting had been
applied.
12
Results of Operations
Three Months Ended December 31, 2003 vs. Three Months Ended December 31, 2002
THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002 CHANGE CHANGE
($) ($) $ %
------------------ ------------------ -------- -------
Net Loss 725,361 673,978 51,383 7.6%
Net Loss Per Share 0.19 0.25 (.06) (24.0%)
Revenues 10,070 74,309 (64,239) (86.4%)
Cost of Goods Sold 3,980 10,370 (6,390) (62.0%)
Operating Expenses 726,722 727,811 (1,089) (0.2%)
Other Expense 4,729 10,106 (5,377) (53.2%)
Our net loss increased due to a $110,000 loss on impairment of the
recently acquired Random X 21 table game product offset by our deliberate
efforts to reduce or eliminate operating expenses in connection with a shift in
our efforts from developing and marketing our products to focusing on completing
the merger with Money Centers and the acquisitions of Available Money and Chex.
Our net loss per share decreased due to an increase in our weighted number of
shares of common stock outstanding.
Our revenues decreased due to a shift in our efforts from developing
and marketing our products to focusing on completing the merger with Money
Centers and the acquisitions of Available Money and Chex. As a result of this
shift in our focus, we sold less of our products during the three months ended
December 31, 2003 than we sold during the three months ended December 31, 2002.
Our cost of goods sold decreased due to our decline in revenues.
Our operating expenses were relatively stable from period to period. We
reduced operating expenses due to the elimination of our sales staff, the
curtailment of research and development activities, and the reduction of
advertising expenses all in connection with the change in our business plan.
These reductions in expenses were offset by increased professional fees for
lawyers, accountants and other professionals incurred in connection with the
merger with Money Centers and the acquisition of Available Money and negotiation
of the merger agreement that we entered into with Chex, as well as the
impairment charge recorded for the Random X 21 table game product.
Our other expenses decreased due to a decrease in interest expense,
which occurred as a result of the conversion of outstanding loans to equity by
one of our lenders.
Nine Months Ended December 31, 2003 vs. Nine Months Ended December 31, 2002
NINE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002 CHANGE CHANGE
($) ($) $ %
----------------- ----------------- -------- -------
Net Loss 1,665,757 1,611,895 53,862 3.3%
Net Loss Per Share 0.48 0.67 (.19) (28.4%)
Revenues 168,459 100,307 68,152 67.9%
Cost of Goods Sold 33,783 18,606 15,177 81.6%
Operating Expenses 1,788,761 1,671,513 117,248 7.0%
Other Expense 11,672 22,083 (10,411) (47.1%)
Our net loss increased due to a $110,000 loss on impairment of the
recently acquired Random X 21 table game product offset by our increase in
sales. Our net loss per share decreased due to an increase in our weighted
number of shares of common stock outstanding.
Our revenues increased due to commencement of the sale of the Protector
product, which experienced an increase of 300 additional units in the nine
months ended December 31, 2003 as compared to the nine months ended December 31,
2002.
Our cost of goods sold increased due to our increase in revenues. Our
gross profit margin was relatively stable from period to period at 80.0% as
compared to 81.4% during the nine months ended December 31, 2002.
13
Our operating expenses increased as a result of a $110,000 loss on
impairment of the recently acquired Random X 21 table game product, an increase
in salaries and benefits of approximately $123,000 related to the hiring of
additional sales and administrative personnel early in the period in an effort
to commence sales of the Protector product, an increase in other general and
administrative expenses of approximately $195,000 related to the execution of
our business plan and an increase of approximately $27,000 in professional fees
later in the period due to our acquisition activities, offset by a decrease of
approximately $99,000 in research and development expenses due to completion of
the development of the Protector product, a decrease in non-cash compensation of
approximately $176,000 due to a decrease in demand for outside consulting
services as a result of the completion of product development activities for the
Protector, a decrease of approximately $25,000 in travel and entertainment
expenses as a result of decreased use of consultants and a decrease in
advertising expenses of approximately $30,000 due to our efforts to more
efficiently market our products.
Our other expenses decreased due to a decrease in interest expense,
which occurred as a result of the conversion of outstanding loans to equity by
one of our lenders.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements during the quarter ended
December 31, 2003 that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to our investors.
Changes in Financial Position, Liquidity and Capital Resources
Our available cash equivalent balance at December 31, 2003 was
approximately $27,500, and was approximately $317,000 at January 31, 2004. From
inception through March 31, 2003, we raised an aggregate of approximately
$2,500,000 in capital through the sale of our securities pursuant to a private
placement offering made in accordance with Rule 506 under the Securities Act of
1933, as amended. In addition, we issued to two 10% convertible promissory notes
in the aggregate principal amount of $250,000 and a maturity date of September
1, 2002 to one investor pursuant to the exemption afforded by Section 4(2) of
the Securities Act of 1933. During October 2002, this investor converted a
$150,000 note into 300,000 shares of our common stock, and from July 2003
through December 2003, repaid an additional $81,500 of this debt. At the present
time, the investor has not indicated whether the remaining principal balance of
this note of $18,500 will be converted into equity or called for payment.
During the nine months ended December 31, 2003, we used net cash of
approximately $788,000 for operations. This consisted of a net loss of
$1,665,757 and increases in our operating assets of $4,723 offset by non-cash
compensation from the issuance of common stock for services of $671,014,
depreciation and amortization expense of $28,782, and increases in our
liabilities consisting of accounts payable and accrued expenses and customer
deposits of $232,725. Additionally, we had net cash flows from financing
activities of $406,275. This consisted of $277,500 in gross proceeds from a sale
of units of our common stock and stock purchase warrants offset by offering
costs of $15,000 and the proceeds from multiple lines of credit of $375,895
offset by the purchase of a certificate of deposit of $150,000 and repayments on
a note payable of $81,500.
In January 2004, we completed our merger with Money Centers and our
acquisition of Available Money. Each of Money Centers and Available Money have
established operations and are cash flow positive. In addition, Money Centers
has an existing vault cash line of credit of $3,000,000. All of this line of
credit is available to fund our vault cash needs. We must obtain the consent of
the lender to use any of this line to fund our other operating expenses. In
addition, if we are able to complete the Chex Acquisition, then we will have
additional cash flow from operations and the ability to increase our lines of
credit with our lenders. Management believes that these sources of cash flow
will be sufficient to fund our operations for at least the next twelve months.
14
ITEM 3 - CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2003 (the "Evaluation Date"), and,
based on their evaluation, our chief executive officer and chief financial
officer have concluded that these controls and procedures were effective as of
the Evaluation Date. There were no significant changes in our internal controls
or in other factors that could significantly affect these controls subsequent to
the Evaluation Date.
Disclosure controls and procedures (as defined in the Exchange Act
Rules 13a-14(c) and 15d-14(c)) are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act are recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in our reports filed under the Exchange Act is accumulated and
communicated to management to allow timely decisions regarding required
disclosure.
The Certifying Officers have also indicated that there were no
significant changes in our internal controls or other factors that could
significantly affect such controls subsequent to the date of their evaluation,
and there were no corrective actions with regard to significant deficiencies and
material weaknesses.
Our management, including each of the Certifying Officers, does not
expect that our disclosure controls or our internal controls will prevent all
error and fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. In addition, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people or by
management override of the control. The design of any systems of controls also
is based in part upon certain assumptions about the likelihood of future events,
and their can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, control may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of these inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
15
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
We know of no actual or pending legal proceedings to which we or any of
our subsidiaries are a party which are material or potentially material, either
individually or in the aggregate. We are from time to time, during the normal
course of our business operations, subject to various litigation claims and
legal disputes. We do not believe that the ultimate disposition of any of these
matters will have a material adverse effect on our consolidated financial
position, results of operations or liquidity.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
In October 2003, we sold 25,000 units consisting of one share of our
common stock and two warrants to purchase a share of our common stock at an
exercise price of $0.60 per share. The purchase price of these units was $.25
per unit and we received gross proceeds from this stock sale of $25,000. The
units, shares of common stock and warrants were sold pursuant to Section 4(2) of
the Securities Act.
In October 2003, we issued 81,750 shares of our common stock to three
consultants for services rendered. We valued the shares at a contemporaneous
sales price on the date of issuance and recorded consulting expense of $147,690
or between $1.80, and $1.88 per share. These shares were issued pursuant to
Section 4(2) of the Securities Act.
In October 2003, pursuant to the terms of an asset purchase agreement,
we purchased the Random X 21 product by issuing 75,000 restricted shares of
common stock to the seller as payment of 50% of the purchase price. The
remaining 50% of the purchase price consisting of 75,000 restricted shares of
common stock will only be granted when the Company has placed at least 150 units
of this table game within casinos under standard licensing/leasing agreements.
These shares were issued pursuant to Section 4(2) of the Securities Act.
Also, in October 2003, we issued 4,542 shares of our common stock to
employees. We valued the shares at a contemporaneous sales price on the date of
issuance and recorded salary expense of $8,175 or $1.80 per share, respectively.
These shares were issued pursuant to Section 4(2) of the Securities Act.
In November 2003, in order to secure the performance of the Company's
obligations under a new line of credit, the Company granted the lender a
continuing lien on and security interest in 250,000 newly issued shares of its
common stock. These shares were issued pursuant to Section 4(2) of the
Securities Act.
Also, in November 2003, the Company granted options to purchase 62,500
shares of its common stock at an exercise price of $2.00 per share to its former
chief executive officer pursuant to the terms of his employment agreement. These
shares were issued pursuant to Section 4(2) of the Securities Act.
In December 2003, we issued 25,000 shares of our common stock to a
consultant for services rendered. We valued the shares at a contemporaneous
sales price on the date of issuance and recorded consulting expense of $37,000
or $1.48 per share. These shares were issued pursuant to Section 4(2) of the
Securities Act.
Additionally, in December 2003, we issued 5,000 shares of our common
stock to a consultant for services rendered. The Company valued the shares at a
contemporaneous sales price on the date of issuance and recorded consulting
expense of $6,600 or $1.32 per share. These shares were issued pursuant to
Section 4(2) of the Securities Act.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
ITEM 5 - OTHER EVENTS
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-B
3.1 Articles of Incorporation of iGames Entertainment, Inc.
(incorporated by reference to Exhibit 3.1 of our Registration
Statement on Form SB-2 filed on January 18, 2002).
3.2 By-laws of iGames Entertainment, Inc. (incorporated by
reference to Exhibit 3.2 of our Registration Statement on Form
SB-2 filed on January 18, 2002).
3.3 Articles of Amendment to Articles of Incorporation
(incorporated by reference to Exhibit 3.3 of Amendment No. 1
to our Registration Statement on Form SB-2 filed on March 8,
2002).
4.1 Stock Pledge and Registration Rights Agreement by and between
iGames Entertainment, Inc. and Mercantile Capital, L.P. dated
as of November 26, 2003.
4.2 Form of Specimen Stock Certificate (incorporated by reference
to Exhibit 4.2 of our Registration Statement on Form SB-2
filed on January 18, 2002).
10.1 Loan and Security Agreement by and between iGames
Entertainment, Inc. and Mercantile Capital, L.P. dated
November 26, 2003.
10.2 Demand Note payable to the order of Mercantile Capital, L.P.
in the principal amount of $250,000 dated November 26, 2003.
31.1 Certification dated February 17, 2004 pursuant to Exchange Act
Rule 13a-14(a) or 15d-14(a) of the Principal Executive Officer
and Principal financial Officer as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, by Christopher M.
Wolfington, Chief Executive Officer and Chief Financial
Officer.
32.1 Certification dated February 17, 2004 pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, made by Christopher M. Wolfington,
Chief Executive Officer and Chief Financial Officer.
(b) Reports on Form 8-K
On December 12, 2003, we filed a Current Report on Form 8-K reporting
that we conducted an investor conference call regarding our merger with Money
Centers of America.
17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereto
duly authorized.
IGAMES ENTERTAINMENT, INC.
Date: February 17, 2004 By: /s/ Christopher M. Wolfington
-----------------------------
Christopher M. Wolfington
Chief Executive Officer and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
18